<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER -- 0-20490
----------
THE CARBIDE/GRAPHITE GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 25-1575609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Code)
One Gateway Center, 19th Floor
Pittsburgh, PA 15222
(412) 562-3700
(Address, including zip code, and
telephone number, including area code,
of principle executive offices)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of the close of business on December 11, 1998, there were 8,350,342 shares of
the Registrant's $0.01 par value Common Stock outstanding.
<PAGE> 2
THE CARBIDE/GRAPHITE GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
ITEM DESCRIPTION PAGE
- ---------------------------------------------------------------------------- ---------
<S> <C> <C>
PART I
------
1 Index to Financial Statements ................................... 2
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 12
3 Quantitative and Qualitative Disclosure
About Market Risk........................................... 16
PART II
-------
1 Legal Proceedings ............................................... 17
2 Changes in Securities and Use of Proceeds ....................... *
3 Defaults Upon Senior Securities ................................. *
4 Submission of Matters to a Vote of Security Holders ............. *
5 Other Information ............................................... *
6 Index to Exhibits and Reports on Form 8-K ....................... 19
Signatures ...................................................... 20
</TABLE>
- ----------
* Item not applicable to the Registrant for this filing on Form 10-Q.
1
<PAGE> 3
PART I
- ------
Item 1
- ------
<TABLE>
<CAPTION>
INDEX TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DESCRIPTION PAGE
- ---------------------------------------------------------------------------------------------- ------------
<S> <C>
Condensed Consolidated Balance Sheets
as of October 31, 1998 and July 31, 1998 ................................................ 3
Unaudited Consolidated Statements of Operations
for the Quarters Ended October 31, 1998 and 1997 ........................................ 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Quarter Ended October 31, 1998 .................................................. 5
Unaudited Consolidated Statements of Cash Flows for the
Quarters Ended October 31, 1998 and 1997 ................................................ 6
Footnotes to Unaudited Condensed Consolidated Financial Statements ........................... 7
</TABLE>
2
<PAGE> 4
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of October 31, 1998 and July 31, 1998
(in thousands, except share information)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998*
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable -- trade, net of allowance for doubtful
accounts: $2,025 at October 31 and July 31 ................. $ 51,248 $ 50,469
Inventories (Note 2) ............................................ 67,668 68,839
Other current assets ............................................ 25,161 25,073
-------- --------
Total current assets ........................................ 144,077 144,381
Property, plant and equipment, net .................................. 131,241 137,603
Other assets ........................................................ 6,942 7,115
-------- --------
Total assets ............................................ $282,260 $289,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses:
Antitrust claims reserve (Note 4) ............................. $ 35,567 $ 36,538
Other current liabilities ..................................... 38,433 37,714
-------- --------
Total current liabilities ................................... 74,000 74,252
Long-term debt ...................................................... 110,000 110,232
Other liabilities ................................................... 18,969 19,801
-------- --------
Total liabilities ......................................... 202,969 204,285
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 shares authorized;
none outstanding ................................................ -- --
Common stock, $0.01 par value; 18,000,000 shares authorized;
shares issued: 9,919,542 at October 31 and 9,884,542 at July 31;
shares outstanding: 8,362,342 at October 31 and 8,699,542 at
July 31 (Note 5) ................................................ 99 99
Additional paid-in capital, net of $1,398 equity issue costs .... 36,478 36,243
Retained earnings ............................................... 53,204 55,197
Other stockholders' equity items ................................ (10,490) (6,725)
-------- --------
Total stockholders' equity ............................... 79,291 84,814
-------- --------
Total liabilities and stockholders' equity ............... $282,260 $289,099
======== ========
</TABLE>
- ----------
* Summarized from audited fiscal 1998 balance sheet.
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
3
<PAGE> 5
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarters ended October 31, 1998 and 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Quarter Ended October 31,
-------------------------------
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales ...................................................... $69,352 $73,394
Operating costs and expenses:
Cost of goods sold ......................................... 59,332 59,336
Selling, general and administrative ........................ 3,584 3,747
Other expense (Note 5) ..................................... 8,043 --
----------- -----------
Operating income (loss) ................................ (1,607) 10,311
Other costs and expenses:
Interest expense, net ...................................... 1,458 1,473
----------- -----------
Income (loss) before income taxes and extraordinary loss (3,065) 8,838
Provision for (benefit from) income
taxes on operations (Note 3) ................................. (1,072) 3,185
----------- -----------
Income (loss) from operations .......................... (1,993) 5,653
Extraordinary loss on early extinguishment of debt,
net of $3,769 tax benefit (Note 5) ........................... -- (6,417)
----------- -----------
Net loss ........................................... $(1,993) $(764)
=========== ===========
Earnings per share information (Note 1):
- ---------------------------------------
Weighted average common shares outstanding ..................... 8,529,075 8,654,772
----------- -----------
Weighted average common and
common equivalent shares outstanding ......................... -- 8,897,976
----------- -----------
Income (loss) from operations:
Basic ........................................................ $(0.23) $0.65
Diluted ...................................................... $(0.23) $0.64
Extraordinary loss on early retirement of debt:
Basic ........................................................ -- (0.74)
Diluted ...................................................... -- (0.73)
----------- -----------
Net loss:
Basic ........................................................ ($0.23) ($0.09)
=========== ===========
Diluted ...................................................... ($0.23) ($0.09)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
4
<PAGE> 6
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the quarter ended October 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Other
Comprehensive ------------------------ Paid-In Retained Stockholders'
Income (Loss) Shares Amount Capital Earnings Equity Items
----------------- ------------ ---------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1998 *.......... 9,884,542 $99 $36,243 $55,197 ($6,725)
Net loss .......................... ($1,993) (1,993)
=================
Exercise of stock options ......... 35,000 235
Purchase of treasury stock ......... (3,765)
------------ ---------- ------------- ------------ ---------------
Balance at October 31,
1998 (Unaudited) ................ 9,919,542 $99 $36,478 $53,204 ($10,490)
============ ========== ============= ============ ===============
</TABLE>
- ----------
* Summarized from audited fiscal year 1998 statement of stockholders' equity.
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
5
<PAGE> 7
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the quarters ended October 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended October 31,
--------------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Net loss ................................................ ($ 1,993) ($ 764)
Adjustments for noncash transactions:
Depreciation and amortization ......................... 4,419 3,140
Amortization of debt issuance costs ................... 36 66
Amortization of intangible assets ..................... 21 84
Adjustments to deferred taxes ......................... (1,853) 13
Loss on the impairment of assets ...................... 5,742 --
Extraordinary loss on early extinguishment of debt .... -- 10,186
Increase (decrease) in cash from changes in:
Accounts receivable ................................... (779) 339
Inventories ........................................... 171 (2,413)
Income taxes .......................................... (832) (1,696)
Other current assets .................................. 550 (84)
Accounts payable and accrued expenses ................. 2,004 (9,994)
Net change in other non-current assets and liabilities 504 (154)
-------- --------
Net cash provided by (used for) operations ........ 7,990 (1,277)
-------- --------
Investing activities:
Capital expenditures .................................. (2,799) (16,406)
Proceeds from short-term investments .................. -- 15,750
-------- --------
Net cash used for investing activities ............ (2,799) (656)
-------- --------
Financing activities:
Repurchase of Senior Notes, including premium of $8,077 -- (88,030)
Funds from revolving credit facility .................. 18,470 83,800
Repayments on revolving credit facility ............... (18,620) (5,900)
Purchase of treasury stock ............................ (3,765) --
Other ................................................. (1,276) 4,128
-------- --------
Net cash used for financing activities ........... (5,191) (6,002)
-------- --------
Net change in cash and cash equivalents ................. -- (7,935)
Cash and cash equivalents, beginning of period .......... -- 7,935
-------- --------
Cash and cash equivalents, end of period ................ -- --
======== ========
</TABLE>
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
6
<PAGE> 8
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Carbide/Graphite Group, Inc. and Subsidiaries herein are referenced
as the "Company." The Company's current fiscal year ends July 31, 1999.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM ACCOUNTING
The Company's Annual Report on Form 10-K for its fiscal year ended July
31, 1998 includes additional information about the Company, its operations and
its consolidated financial statements, and contains a summary of significant
accounting policies followed by the Company in preparation of its consolidated
financial statements and should be read in conjunction with this quarterly
report on Form 10-Q. These policies were also followed in preparing the
Unaudited Condensed Consolidated Financial Statements included herein. The 1998
year-end consolidated balance sheet data contained herein were derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles.
In the opinion of management, all adjustments that are of a normal and
recurring nature necessary for a fair statement of the results of operations of
these interim periods have been included. The net loss for the quarter ended
October 31, 1998 is not necessarily indicative of the results to be expected for
the full fiscal year. The Management Discussion and Analysis that follows these
notes contains additional information on the results of operations and financial
position of the Company. These comments should be read in conjunction with these
financial statements.
EARNINGS PER SHARE
The following table provides a reconciliation of the income (loss) and
share amounts for the basic and diluted earnings per share computations for
income (loss) from operations for the quarters ended October 31, 1998 and 1997
(dollar amounts in thousands):
<TABLE>
<CAPTION>
For the quarters ended October 31,
----------------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------- --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share....... ($1,993) 8,529,075 ($0.23) $5,653 8,654,772 $0.65
======= =====
Effect of dilutive securities:
Options for common stock..... -- -- -- 243,204
------- --------- ------ ---------
Diluted earnings per share .... ($1,993) 8,529,075 ($0.23) $5,653 8,897,976 $0.64
======= ========= ====== ====== ========= =====
</TABLE>
Since the Company's results from operations were a net loss for the
quarter ended October 31, 1998, common equivalent shares were excluded from the
diluted earnings per share computation for the period as their effect would have
been anti-dilutive.
7
<PAGE> 9
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued several new
financial accounting and reporting standards that the Company will be required
to adopt in this and the coming fiscal years. The Company is required to adopt
SFAS #131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS #131) and SFAS #132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits - an amendment to FASB Statements #87, #88 and #106"
(SFAS #132) for fiscal year ending July 31, 1999. SFAS #131 will require the
Company to expand its disclosure of information on its reportable segments. SFAS
#132 standardizes the disclosure requirements for pensions and other
postretirement benefits.
The Company is also required to adopt SFAS #133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS #133) for its fiscal year
ending July 31, 2000. SFAS #133 establishes accounting and reporting standards
for derivatives and hedging activities. The Company has not yet evaluated the
financial accounting and reporting impact of SFAS #133.
2. INVENTORIES:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
--------- --------
<S> <C> <C>
Finished goods ............................. $ 18,206 $ 15,061
Work in process ............................ 36,467 36,672
Raw materials .............................. 15,907 18,545
-------- --------
70,580 70,278
LIFO reserve ............................... (13,132) (12,545)
-------- --------
57,448 57,733
Supplies ................................... 10,220 11,106
-------- --------
$ 67,668 $ 68,839
======== ========
</TABLE>
3. INCOME TAXES:
The provision for (benefit from) income taxes for the quarters ended
October 31, 1998 and 1997 are summarized by the following effective tax rate
reconciliations:
<TABLE>
<CAPTION>
Quarter ended October 31,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Federal statutory tax rate .................. (35.0)% 35.0%
Effect of:
State taxes, net of federal benefit .... 1.4 1.4
Foreign sales corporation benefit ...... (1.6) (1.6)
Other .................................. 0.2 1.2
----- ----
Effective tax rate ................... (35.0)% 36.0%
===== ====
</TABLE>
8
<PAGE> 10
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
The income tax benefit for the quarter ended October 31, 1998 was
recorded based on the Company's projected effective income tax rate for the
fiscal year ending July 31, 1999.
4. CONTINGENCIES:
In May 1997, the Company was served with a subpoena issued by a Grand
Jury empanelled by the United States District Court for the Eastern District of
Pennsylvania. The Company was advised by attorneys for the Department of Justice
(DOJ) that the Grand Jury is investigating price fixing by producers of graphite
products in the United States and abroad during the past five years. The Company
is cooperating with the DOJ in the investigation. The DOJ has granted the
Company and certain former and present senior executives the opportunity to
participate in its Corporate Leniency Program and the Company has entered into
an agreement with the DOJ under which the Company and such executives who
cooperate will not be subject to criminal prosecution with respect to the
investigation if charges are issued by the Grand Jury. Under the agreement, the
Company has agreed to use its best efforts to provide for restitution to its
domestic customers for actual damages if any conduct of the Company which
violated the Federal Antitrust Laws in the manufacture and sale of such graphite
products caused damage to such customers.
Subsequent to the initiation of the DOJ investigation, four civil cases
were filed in the United States District Court for the Eastern District of
Pennsylvania in Philadelphia asserting claims on behalf of a class of purchasers
for violations of the Sherman Act. These cases, which have been consolidated,
name the Company, UCAR International, Inc. (UCAR), SGL Carbon Corporation (SGL
Corp.) and SGL Carbon AG (SGL) as defendants (together, the Named Defendants)
and seek treble damages. On March 30, 1998, a number of purchasers who were
previously included in the purported class of plaintiffs covered by the
consolidated case initiated a separate action in the same District Court which
asserts substantially the same claims and seeks the same relief as the
consolidated case and names the Named Defendants, as well as Showa Denko Carbon,
Inc. (Showa Denko). Thereafter, five additional purchasers who were previously
included in the purported class of plaintiffs covered by the consolidated case
instituted their own actions against the Named Defendants, Showa Denko and, in
several cases, certain present or former related parties of UCAR asserting
substantially the same claims and seeking the same relief as in the consolidated
case. Three such actions were filed in the United States District Court for the
Eastern District of Pennsylvania on April 3, 1998, April 17, 1998 and May 14,
1998, respectively. One action was filed in the United States District Court for
the Northern District of Ohio on April 17, 1998 but has been transferred to the
Eastern District of Pennsylvania for pre-trial proceedings. One such action was
filed in the United States District Court for the Western District of
Pennsylvania on June 17, 1998 but that action has also been transferred to the
Eastern District of Pennsylvania for pre-trial proceedings. The plaintiffs have
also named as defendants in some of these actions other companies including
Mitsubishi Corporation, Tokai Carbon U.S.A., Inc. and related companies. On
December 7, 1998, the Company was served with a complaint filed by Chapparrel
Steel against the Named Defendants, Showa Denko and parties related to Showa
Denko and UCAR in state court in Ellis County, Texas alleging violations of
various Texas state antitrust laws and seeking treble damages.
The Company understands that defendants UCAR and Showa Denko have
reached settlement agreements with the class action plaintiffs, which are
subject by law to final approval by the court, and have also settled claims
brought by some of the individual purchasers. The Company further understands
that UCAR and Showa Denko have pleaded guilty to antitrust conspiracy charges
filed by the DOJ and have been ordered to pay fines in connection with those
guilty pleas.
The Company has also advised the Commission of the European Communities
(the European Commission) that it wishes to invoke its Leniency Notice.
Generally under these guidelines, the European Commission may
9
<PAGE> 11
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
substantially reduce fines and other penalties if a company cooperates with the
European Commission and in the judgment of the European Commission provides
significant information. The Company understands that the European Commission
will determine any fines at the completion of its proceedings that may not be
concluded for a year or more.
On June 18, 1998, a group of Canadian purchasers filed a lawsuit in the
Ontario Court (General Division) claiming a conspiracy and violations of the
Canadian Competition Act. The Canadian lawsuit names the Named Defendants and
Showa Denko, as well as several present or former parents, subsidiaries and/or
affiliates of UCAR, SGL and Showa Denko. The Canadian Competition and Consumer
Law Division (Canadian Division) has initiated an inquiry and the Company is
cooperating fully with the authorities conducting that inquiry pursuant to an
agreement with the Director of Research and Investigation of the Canadian
Division under which the Company and its present and former officers, directors
and employees will not be subject to criminal prosecution.
During fiscal 1998, the Company recorded a $38 million pre-tax charge
($25 million after expected tax benefits) for potential liabilities resulting
from civil lawsuits, claims, legal costs and other expenses associated with the
pending antitrust matters (the Antitrust Charge). Based on the information
currently available to the Company to date (including the nature of the
antitrust claims against the Company and its defenses), the Company presently
believes the Antitrust Charge should be appropriate under the present
assumptions to address the resolution of the civil suits and other claims and
costs associated with the antitrust investigations. The Company understands that
defendants UCAR and Showa Denko recently reached settlements at substantially
higher amounts with the class action plaintiffs and certain individual
purchasers. In light of these and other future developments and other factors,
the actual liabilities, costs and expenses resulting from the antitrust matters
(including the European Commission antitrust investigation) could differ
materially from the current estimate which could adversely affect the Company's
financial condition and its ability to service its currently planned liquidity
needs.
The Company is also involved in various legal proceedings considered
incidental to the conduct of its business or otherwise not material in the
judgement of management. Management does not believe that its loss exposure
related to these cases is materially greater than amounts provided in the
consolidated balance sheet as of October 31, 1998. As of October 31, 1998, a
$0.1 million reserve has been recorded to provide for estimated exposure on
claims for which a loss is deemed probable.
5. OTHER ITEMS:
OTHER EXPENSE
During the quarter ended October 31, 1998, the Company announced plans
to close certain baking and graphitizing operations at its St. Marys,
Pennsylvania plant. Other expense in the quarter ended October 31, 1998
represents an $8.0 million pre-tax charge to provide for the estimated cost of
the facility closure activities. Included in this charge is $5.7 million for the
net write-off of impaired fixed assets and spare parts inventory, $1.4 million
for hourly and salary workforce severance costs and $0.9 million in other
closure-related costs.
10
<PAGE> 12
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
EXTRAORDINARY LOSS ON THE EARLY EXTINGUISHMENT OF DEBT
The extraordinary loss on the early extinguishment of debt in the
quarter ended October 31, 1997 represents the premium paid to Senior Note
holders in connection with a tender of substantially all of the Company's 11.5%
Senior Notes and the write off of unamortized deferred financing fees associated
with the Senior Notes tendered and a revolving credit facility replaced in
connection with the tender.
SHARE REPURCHASE PROGRAM
During the quarter ended October 31, 1998, the Company repurchased
372,200 shares of Common Stock under its share repurchase program at a total
cost of $3.8 million. The Company is authorized to spend an additional $4.6
million under its share repurchase program.
11
<PAGE> 13
PART I
- ------
Item 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE FISCAL FIRST QUARTER ENDED OCTOBER 31, 1998
- -------------------------------------------------------------------------
VERSUS 1997
- -----------
The following table sets forth certain financial information for the
quarters ended October 31, 1998 and 1997 and should be read in conjunction with
the Unaudited Condensed Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Form 10-Q:
<TABLE>
<CAPTION>
Quarter Ended October 31,
-------------------------
1998 1997
------- ---------
(Unaudited)
<S> <C> <C>
Net sales:
Graphite electrode products .................. $53,503 $54,110
Calcium carbide products ..................... 15,849 19,284
======= =======
Total net sales ........................ $69,352 $73,394
======= =======
Percentage of net sales:
Graphite electrode products .................. 77.1% 73.7%
Calcium carbide products ..................... 22.9 26.3
======= =======
Total net sales ........................ 100.0% 100.0%
======= =======
Gross profit as a percentage of segment net sales:
Graphite electrode products .................. 15.2% 20.6%
Calcium carbide products ..................... 12.1 15.2
Percentage of total net sales:
Total gross profit ........................... 14.4% 19.2%
Selling, general and administrative .......... 5.2 5.1
Operating income (loss) ...................... (2.3) 14.0
Income (loss) from operations ................ (2.9) 7.7
</TABLE>
----------
Net sales for the quarter ended October 31, 1998 were $69.4 million
versus $73.4 million in the prior year comparable quarter, a 5.5% decrease.
Graphite electrode product sales decreased 1.1% over the prior year to $53.5
million, while calcium carbide product sales decreased 17.8% to $15.8 million.
Within the graphite electrode products segment, graphite electrode net
sales were $39.0 million, a 3.7% decrease resulting from a 3.7% decrease in
average electrode prices. Graphite electrode shipments totaling 30.0 million
pounds were unchanged as compared to last year's first quarter. Domestic and
foreign electrode shipments as a percentage of total electrode shipments for the
quarter ended October 31, 1998 were 54.9% and 45.1%, respectively, versus 51.8%
and 48.2%, respectively, in last year's first quarter. Domestic graphite
electrode prices decreased 5.4% in the current quarter as weakness in the U.S.
steel industry negatively impacted domestic pricing. Average foreign electrode
prices deceased 2.5% in the current quarter due to the continued strengthen of
the U.S. dollar against foreign currencies. Needle coke sales were $8.6 million
versus $8.1 million a year ago, with the increase resulting from a 22.1%
increase in third-party needle coke shipments. Average needle coke prices
decreased approximately 13.7% in the current quarter due to weakening demand.
Current weakness in certain
12
<PAGE> 14
regions of the global economy is having and is expected to continue to have a
negative impact on graphite electrode and needle coke demand for the remainder
of fiscal 1999 and, potentially, beyond. Such weakness in demand is expected to
have a negative impact on shipments and/or average prices of graphite electrodes
and needle coke over the same time period. In addition, subsequent to October
31, 1998, one of the Company's graphite customers, Dow Chemical Company, Inc.
(Dow), announced its intention to permanently close its magnesium production
facility in Freeport, Texas. The Company previously supplied Dow with all of its
graphite anode needs under a long-term supply agreement. The cancellation of the
supply agreement accounts for approximately 8 million pounds of graphite
production capacity. The Company is currently evaluating all of its options
created by the Dow facility closure, including the possible substitution of
other graphite sales to replace the Dow volumes and the possible closure of
additional graphite production facilities. Graphite specialty product sales
during the quarter ended October 31, 1998 were $6.0 million versus $5.5 million
in the prior year comparable quarter. The increase in sales was attributable to
increased shipments of bulk graphite.
Within the calcium carbide products segment, pipeline acetylene sales
decreased 20.9% to $5.7 million due primarily to lower acetylene deliveries
during the quarter. Scheduled maintenance outages by the Company's acetylene
customers negatively impacted demand during the current quarter. Sales of
calcium carbide for metallurgical applications decreased 16.6% to $5.3 million
due primarily to lower shipments in the current quarter. Weakness in the
domestic steel market as well as competition from replacement products and an
extended maintenance outage by a significant customer had a negative impact on
demand for calcium carbide for metallurgical applications. Sales of calcium
carbide for fuel gas applications decreased 19.6% to $3.8 million for the
current quarter due primarily to lower shipments and, to a lesser extent, lower
prices. Net sales of calcium carbide for metallurgical and fuel gas applications
are expected to remain at lower levels throughout fiscal 1999 and, potentially,
beyond as a result of increased competition and weak demand in these product
lines. All other calcium carbide product sales were unchanged at $1.0 million.
Gross profit as a percentage of graphite electrode product sales for
the quarter ended October 31, 1998 was 15.2% versus 20.6% in the prior year
comparable quarter. The decrease in the gross margin was the result of lower
prices of graphite electrodes and needle coke, coupled with a $1.3 million
increase in depreciation charges in the current quarter. Gross profit as a
percentage of calcium carbide product sales was 12.1% versus 15.2% a year ago.
The decrease was the result of lower calcium carbide shipments, coupled with
lower prices of calcium carbide for metallurgical and fuel gas applications.
Selling, general and administrative expenses for the quarter ended
October 31, 1998 were $3.6 million, essentially unchanged as compared to a year
ago.
During the quarter ended October 31, 1998, the Company announced plans
to close certain baking and graphitizing operations at its St. Marys,
Pennsylvania plant resulting in a 12% reduction in the Company's graphite
electrode production capacity. The Company estimates that it is now capable of
producing 110 million pounds of graphite electrodes per year. Other expense in
the quarter ended October 31, 1998 represents an $8.0 million pre-tax charge to
provide for the estimated cost of the facility closure activities. Included in
this charge is $5.7 million for the net write-off of impaired fixed assets and
spare parts inventory, $1.4 million for hourly and salary workforce severance
costs and $0.9 million in other closure-related costs.
Net interest expense for the quarter ended October 31, 1998 was $1.5
million and included $2.0 million of interest and amortization expense
associated with the Company's revolving credit facility, less $0.5 million of
capitalized interest. Net interest expense for the quarter ended October 31,
1997 was $1.5 million and included $1.5 million of interest expense associated
with the Senior Notes and $0.5 million of interest expense associated with the
Company's revolving credit facility, less $0.2 million in interest income earned
on cash, cash equivalents and short-term investments and $0.4 million of
capitalized interest.
13
<PAGE> 15
The income tax benefit for the quarter ended October 31, 1998 was
recorded based on the Company's projected effective income tax rate for the
fiscal year ending July 31, 1999. The current year effective rate differs from
the federal statutory rate due primarily to state taxes, offset by benefits
derived from the Company's foreign sales corporation.
As a result of a tender of the Company's Senior Notes and a related
revolving credit facility refinancing, the Company recorded a $6.4 million net
extraordinary loss on the early extinguishment of debt in the quarter ended
October 31, 1997. This extraordinary charge represents the premium paid to
Senior Note holders in connection with the tender and the write off of
unamortized deferred financing fees associated with the Senior Notes tendered
and a revolving credit facility replaced in connection with the tender.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
The Financial Accounting Standards Board has issued several new
financial accounting and reporting standards that the Company will be required
to adopt in the coming fiscal years. The Company is required to adopt SFAS #131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
#131) and SFAS #132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits - an amendment to FASB Statements #87, #88 and #106"
(SFAS #132) for fiscal year ending July 31, 1999. SFAS #131 will require the
Company to expand its disclosure of information on its reportable segments. SFAS
#132 standardizes the disclosure requirements for pensions and other
postretirement benefits.
The Company is also required to adopt SFAS #133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS #133) for its fiscal year
ending July 31, 2000. SFAS #133 establishes accounting and reporting standards
for derivatives and hedging activities. The Company has not yet evaluated the
financial accounting and reporting impact of SFAS #133.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
LIQUIDITY
The Company's liquidity needs are primarily for capital expenditures,
working capital and debt service on its revolving credit facility. The weakness
in certain regions of the global economy and its impact on demand for the
Company's products has resulted in the deferment of certain discretionary
capital projects, including a $40 million project to install a longitudinal
graphitizing facility. The Company believes that its cash flows from operations
and availability under its revolving credit facility will be sufficient to fund
all of its currently planned liquidity needs through at least the expiration of
its revolving credit facility in September 2002. However, in the event these
resources are not sufficient to fund the Company's planned capital expenditures,
service its indebtedness and pay any other obligation including those that may
arise from pending legal proceedings and the resolution of current antitrust
matters, the Company may be required to obtain additional funding or further
delay discretionary capital projects. If the Company were required to obtain
additional funding to satisfy its liquidity needs, there can be no assurance
that sources of funds would be available in amounts sufficient for the Company
to meet its obligations or on terms favorable to the Company.
In connection with the tender of substantially all of the Company's
Senior Notes in the quarter ended October 31, 1997, the Company entered into an
agreement with a consortium of banks led by PNC Bank for a new, 5-year, $150
million revolving credit facility with a $15 million sub-limit for letters of
credit (the 1997 Revolving Credit Facility, as amended). The 1997 Revolving
Credit Facility replaced the Company's previous credit facility. Interest under
the 1997 Revolving Credit Facility is based on, at the option of the Company,
either PNC Bank's prime rate or a floating LIBOR rate plus a spread (currently
0.75%) based on a leverage calculation (specifically,
14
<PAGE> 16
the Consolidated Total Indebtedness to EBITDA Ratio). As of October 31, 1998,
the interest rate on borrowings outstanding under the 1997 Revolving Credit
Facility was 6.1%. Repayment of funds borrowed under the new credit agreement is
not required until the expiration of the facility on September 25, 2002. The
most restrictive covenants under the 1997 Revolving Credit Facility include a
minimum Interest Coverage Ratio of 3.5 to 1.0, a maximum Consolidated Total
Indebtedness to EBITDA Ratio of 3.0 to 1.0 and a minimum Consolidated Tangible
Net Worth, all as defined in the 1997 Revolving Credit Facility agreement.
During the fiscal year ended July 31, 1998, the 1997 Revolving Credit Facility
was amended to incorporate the Antitrust Charge. The financial covenants in the
1997 Revolving Credit Facility agreement were generally amended to exclude the
effects of the Antitrust Charge, although the cash flow impact associated with
any future settlements of pending antitrust claims will effectively reduce
EBITDA in the computation of the Consolidated Total Indebtedness to EBITDA Ratio
computed for pricing purposes in the future. The 1997 Revolving Credit Facility
is collateralized with receivables and inventory.
On March 4, 1998, the Company's Board of Directors authorized the
expenditure of up to $10 million to repurchase the Company's Common Stock.
Subject to price and market considerations and applicable securities laws, such
purchases may be made from time to time in open market, privately negotiated or
other transactions. No time limit was placed on the duration of the repurchase
program. The extent and timing of any repurchases will depend on market
conditions and other corporate considerations, including the Company's liquidity
needs. During the quarter ended October 31, 1998, the Company repurchased
372,200 shares of Common Stock at a total cost of $3.8 million. The Company has
repurchased a total of 437,200 shares of Common Stock under the repurchase
program at a total cost of $5.4 million. The Company is authorized to spend an
additional $4.6 million under the repurchase program.
CASH FLOW INFORMATION
Cash flow provided by operations for the quarter ended October 31, 1998
was $8.0 million. Cash inflows from net loss plus non-cash items of $7.7
million, which includes the $5.2 million net graphite production facility
closure charge, were further increased by a $0.3 million improvement in cash
flow from other working capital items. Net interest payments during the quarter
totaled $1.8 million.
Investing activities for the quarter ended October 31, 1998 included
capital expenditures of $2.8 million. Cash flow used for financing activities
for the quarter ended October 31, 1998 was $5.1 million. Major financing cash
outflows during the quarter included $3.8 million for the repurchase of Common
Stock and a $1.3 million decrease in the Company's overdraft position.
OTHER ITEMS
- -----------
YEAR 2000 COMPLIANCE
The Company is in the process of modifying, upgrading and replacing
certain components of its computer software, operating systems and manufacturing
process control systems to accommodate the "Year 2000" changes required for
correct recording of dates in the year 2000 and beyond. The Company has adopted
a comprehensive "Year 2000" compliance action plan that includes (i)
inventorying all of its information technology (IT) systems, manufacturing
process control systems and non-IT systems, (ii) assessing these systems and
resources for "Year 2000" compliance, (iii) remedying and replacing
non-compliant systems, (iv) testing upgraded systems for compliance, and (v)
developing contingency plans. The Company is in the final stages of its action
plan and believes that its significant IT and non-IT systems will be "Year 2000"
compliant by mid-1999. The Company believes that its current plan will
adequately address the "Year 2000" issue and the Company does not expect to
experience significant operational problems associated with "Year 2000"
compliance once its program is complete.
15
<PAGE> 17
The Company is also evaluating the "Year 2000" compliance programs of
its critical customers, suppliers and service providers in an attempt to
determine the adequacy of their programs in addressing the "Year 2000" issue.
This evaluation includes the distribution of questionnaires to such parties and
the development of contingency plans which assume the failure of a third party
critical to the Company's business. The Company believes that the most
reasonably likely worst-case scenario for the Company with respect to the "Year
2000" issue is the failure of a critical vendor, including but not limited to a
utility supplier, or the failure of a critical customer, including electric arc
furnace steel producers who use a substantial amount of power in their
production process. A failure by a critical supplier or group of critical
customers could materially negatively impact sales, profits and cash flows. The
Company believes that the formulation of contingency plans will help mitigate
exposure and losses should such a failure occur. However, because the Company's
overall "Year 2000" compliance is contingent upon the readiness of its critical
vendors and customers, there can be no assurance that the Company's "Year 2000"
compliance programs will adequately address "Year 2000" issues not under its
direct control.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements that are based on
current expectations, estimates and projections about the industries in which
the Company operates, management's beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, and are subject to the safe harbor created thereby. These
statements are based on a number of assumptions that could ultimately prove
inaccurate and, therefore, there can be no assurance that such statements will
prove to be accurate. Factors that could affect actual future results include
the developments related to the antitrust investigations by the DOJ, the
antitrust enforcement authorities of the European Union or related civil
lawsuits as well as the assertion of other claims relating to such
investigations or lawsuits or the subject matter thereof. Such factors also
include the possibility that increased demand or prices for the Company's
products may not occur or continue, changing economic and competitive conditions
(including currency exchange rate fluctuations), technological risks and other
risks, costs and delays associated with the start-up and operation of major
capital projects (including the Company's modernization program), changing
governmental regulations (including environmental rules and regulations) and
other risks and uncertainties, including those detailed in this and the
Company's other filings with the Securities and Exchange Commission. Neither the
statements contained in this report nor any reserve or charge recorded by the
Company relating to civil lawsuits or claims shall be deemed to constitute an
admission as to any liability in connection with the subject matter thereof. The
Company does not undertake to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise.
Item 3
- ------
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have not been any material changes in the Company's exposures to
market risk during the quarter ended October 31, 1998 which would require an
update to the disclosures provided in the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1998.
16
<PAGE> 18
PART II
- -------
Item 1
- ------
LEGAL PROCEEDINGS
In May 1997, the Company was served with a subpoena issued by a Grand
Jury empanelled by the United States District Court for the Eastern District of
Pennsylvania. The Company was advised by attorneys for the Department of Justice
that the Grand Jury is investigating price fixing by producers of graphite
products in the United States and abroad during the past five years. The Company
is cooperating with the DOJ in the investigation. The DOJ has granted the
Company and certain former and present senior executives the opportunity to
participate in its Corporate Leniency Program and the Company has entered into
an agreement with the DOJ under which the Company and such executives who
cooperate will not be subject to criminal prosecution with respect to the
investigation if charges are issued by the Grand Jury. Under the agreement, the
Company has agreed to use its best efforts to provide for restitution to its
domestic customers for actual damages if any conduct of the Company which
violated the Federal Antitrust Laws in the manufacture and sale of such graphite
products caused damage to such customers.
Subsequent to the initiation of the DOJ investigation, four civil cases
were filed in the United States District Court for the Eastern District of
Pennsylvania in Philadelphia asserting claims on behalf of a class of purchasers
for violations of the Sherman Act. These cases, which have been consolidated,
name the Company, UCAR, SGL Corp. and SGL as defendants and seek treble damages.
On March 30, 1998, a number of purchasers who were previously included in the
purported class of plaintiffs covered by the consolidated case initiated a
separate action in the same District Court which asserts substantially the same
claims and seeks the same relief as the consolidated case and names the Named
Defendants, as well as Showa Denko. Thereafter, five additional purchasers who
were previously included in the purported class of plaintiffs covered by the
consolidated case instituted their own actions against the Named Defendants,
Showa Denko and, in several cases, certain present or former related parties of
UCAR asserting substantially the same claims and seeking the same relief as in
the consolidated cases. Three such actions were filed in the United States
District Court for the Eastern District of Pennsylvania on April 3, 1998, April
17, 1998 and May 14, 1998, respectively. One action was filed in the United
States District Court for the Northern District of Ohio on April 17, 1998 but
has been transferred to the Eastern District of Pennsylvania for pre-trial
proceedings. One such action was filed in the United States District Court for
the Western District of Pennsylvania on June 17, 1998 but that action has also
been transferred to the Eastern District of Pennsylvania for pre-trial
proceedings. The plaintiffs have also named as defendants in some of these
actions other companies including Mitsubishi Corporation, Tokai Carbon U.S.A.,
Inc. and related companies. On December 7, 1998, the Company was served with a
complaint filed by Chapparrel Steel against the Named Defendants, Showa Denko
and parties related to Showa Denko and UCAR in state court in Ellis County,
Texas alleging violations of various Texas state antitrust laws and seeking
treble damages.
The Company understands that defendants UCAR and Showa Denko have
reached settlement agreements with the class action plaintiffs, which are
subject by law to final approval by the court, and have also settled claims
brought by some of the individual purchasers. The Company further understands
that UCAR and Showa Denko have pleaded guilty to antitrust conspiracy charges
filed by the DOJ and have been ordered to pay fines in connection with those
guilty pleas.
The Company has also advised the European Commission that it wishes to
invoke its Leniency Notice. Generally under these guidelines, the European
Commission may substantially reduce fines and other penalties if a company
cooperates with the European Commission and in the judgment of the European
Commission provides significant information. The Company understands that the
European Commission will determine any fines at the completion of its
proceedings that may not be concluded for a year or more.
17
<PAGE> 19
On June 18, 1998, a group of Canadian purchasers filed a lawsuit in the
Ontario Court (General Division) claiming a conspiracy and violations of the
Canadian Competition Act. The Canadian lawsuit names the Named Defendants as
well as several present or former parents, subsidiaries and/or affiliates of
UCAR, SGL and Showa Denko. The Canadian Competition and Consumer Law Division
has initiated an inquiry and the Company is cooperating fully with the
authorities conducting that inquiry pursuant to an agreement with the Director
of Research and Investigation of the Canadian Division under which the Company
and its present and former officers, directors and employees will not be subject
to criminal prosecution.
During fiscal 1998, the Company recorded the Antitrust Charge, a $38
million pre-tax charge ($25 million after expected tax benefits) for potential
liabilities resulting from civil lawsuits, claims, legal costs and other
expenses associated with the pending antitrust matters. Based on the information
currently available to the Company to date (including the nature of the
antitrust claims against the Company and its defenses), the Company presently
believes the Antitrust Charge should be appropriate under the present
assumptions to address the resolution of the civil suits and other claims and
costs associated with the antitrust investigations. The Company understands that
defendants UCAR and Showa Denko recently reached settlements at substantially
higher amounts with the class action plaintiffs and certain individual
purchasers. In light of these and other future developments and other factors,
the actual liabilities, costs and expenses resulting from the antitrust matters
(including the European Commission antitrust investigation) could differ
materially from the current estimate which could adversely affect the Company's
financial condition and its ability to service its currently planned liquidity
needs.
The Company is also involved in various legal proceedings considered
incidental to the conduct of its business or otherwise not material in the
judgement of management. Management does not believe that its loss exposure
related to these cases is materially greater than amounts provided in the
consolidated balance sheet as of October 31, 1998. As of October 31, 1998, a
$0.1 million reserve has been recorded to provide for estimated exposure on
claims for which a loss is deemed probable.
18
<PAGE> 20
PART II
- -------
Item 6
- ------
EXHIBITS AND REPORTS ON FORM 8-K
A. INDEX TO EXHIBITS
None.
B. REPORTS ON FORM 8-K
During the quarter ended October 31, 1998, the Company filed a Current
Report on Form 8-K which reflected the Company's press release reporting the
closure of certain graphite production facilities at its plant in St. Marys, PA.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the following authorized officers on December 14, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------------------------------------------------------------------------
<S> <C>
/S/ WALTER B. FOWLER CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
- -----------------------------------------------------
(WALTER B. FOWLER)
/S/ STEPHEN D. WEAVER VICE PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER
- ----------------------------------------------------- (PRINCIPAL FINANCIAL OFFICER)
(STEPHEN D. WEAVER)
/S/ JEFFREY T. JONES CONTROLLER - CORPORATE FINANCE
- ----------------------------------------------------- (PRINCIPAL ACCOUNTING OFFICER)
(JEFFREY T. JONES)
/S/ MICHAEL F. SUPON VICE PRESIDENT AND GENERAL MANAGER,
- ----------------------------------------------------- ELECTRODES AND GRAPHITE SPECIALTY PRODUCTS
(MICHAEL F. SUPON)
/S/ ARARAT HACETOGLU VICE PRESIDENT AND GENERAL MANAGER,
- ----------------------------------------------------- CARBIDE PRODUCTS
(ARARAT HACETOGLU)
/S/ JIM J. TRIGG VICE PRESIDENT AND GENERAL MANAGER,
- ----------------------------------------------------- SEADRIFT COKE, L.P.
(JIM J. TRIGG)
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 53,273
<ALLOWANCES> (2,025)
<INVENTORY> 67,668
<CURRENT-ASSETS> 144,077
<PP&E> 327,049
<DEPRECIATION> 195,808
<TOTAL-ASSETS> 282,260
<CURRENT-LIABILITIES> 74,000
<BONDS> 110,000
0
0
<COMMON> 99
<OTHER-SE> 79,192
<TOTAL-LIABILITY-AND-EQUITY> 282,260
<SALES> 69,352
<TOTAL-REVENUES> 69,352
<CGS> 59,332
<TOTAL-COSTS> 62,916
<OTHER-EXPENSES> 8,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,458
<INCOME-PRETAX> (3,065)
<INCOME-TAX> (1,072)
<INCOME-CONTINUING> (1,993)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,993)
<EPS-PRIMARY> (0.23)
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</TABLE>
