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 JANUARY 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 March 13, 1998, there were 8,717,022 shares of
the Registrant's $.01 par value common stock outstanding.
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC.
INDEX TO FORM 10-Q
ITEM DESCRIPTION PAGE
- ------------ ----------------------------------------------------- ---------
PART I
1 Index to Financial Statements ...................... 2
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........... 12
PART II
1 Legal Proceedings .................................. 17
2 Changes in Securities .............................. *
3 Defaults Upon Senior Securities .................... *
4 Submission of Matters to a Vote of Security Holders 18
5 Other Information .................................. *
6 Index to Exhibits and Reports on Form 8-K .......... *
Signatures ......................................... 19
------------------
* Item not applicable to the Registrant for this filing on Form 10-Q.
1
<PAGE>
PART I
Item 1
INDEX TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
----------
Condensed Consolidated Balance Sheets
as of January 31, 1998 and July 31, 1997 ....................... 3
Unaudited Consolidated Statements of Operations
for the Quarters and Six Months Ended January 31, 1998 and 1997 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Six Months Ended January 31, 1998 ...................... 5
Unaudited Consolidated Statements of Cash Flows
for the Quarters and Six Months Ended January 31, 1998 and 1997 6
Footnotes to Unaudited Condensed Consolidated Financial Statements .. 7
2
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of January 31, 1998 and July 31, 1997
(in thousands, except share information)
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997 *
--------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ - $7,935
Short-term investments .................................................. - 15,912
Accounts receivable -- trade, net of allowance for doubtful
accounts: $2,030 at January 31 and $2,029 at July 31 ................. $50,727 49,088
Inventories (Note 2) ..................................................... 64,886 59,445
Other current assets ..................................................... 11,183 10,956
--------------- ----------------
Total current assets ................................................. 126,796 143,336
Property, plant and equipment, net ........................................... 116,470 87,653
Other assets ................................................................. 4,503 4,871
--------------- ----------------
Total assets ....................................................... $247,769 $235,860
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses:
Overdrafts ............................................................. $7,335 -
Interest ............................................................... 65 $3,835
Other current liabilities ................................................ 37,365 38,676
--------------- ----------------
Total current liabilities ............................................ 44,765 42,511
Long-term debt (Note 4) ...................................................... 83,032 80,035
Other liabilities ............................................................ 17,708 17,105
--------------- ----------------
Total liabilities .................................................. 145,505 139,651
--------------- ----------------
Stockholders' equity:
Common stock, $0.01 par value; 18,000,000 shares authorized; shares
issued: 9,849,022 at January 31 and 9,752,272 at July 31; shares
outstanding: 8,717,022 at January 31 and 8,632,272 at July 31 ........ 98 97
Additional paid-in capital ............................................... 35,626 34,163
Retained earnings ....................................................... 71,757 66,683
Other stockholders' equity items ........................................ (5,217) (4,734)
--------------- ----------------
Total stockholders' equity ....................................... 102,264 96,209
--------------- ----------------
Total liabilities and stockholders' equity ...................... $247,769 $235,860
=============== ================
</TABLE>
* Condensed from audited fiscal 1997 balance sheet.
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
3
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarters and six months ended January 31, 1998 and 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Quarter Ended January 31, Six Months Ended January 31,
------------------------------ ---------------------------------
1998 1997 1998 1997
------------- ------------- ---------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ....................................... $74,814 $75,081 $148,208 $142,797
Operating costs and expenses:
Cost of goods sold .......................... 60,293 61,827 119,629 117,727
Selling, general and administrative ......... 4,110 3,407 7,629 7,428
Other compensation (Note 6) ................. 279 647 507 914
------------- ------------- ---------------- --------------
Operating income ........................ 10,132 9,200 20,443 16,728
Other costs and expenses:
Interest expense (Note 4) ................... 1,152 2,092 2,625 4,197
------------- ------------- ---------------- --------------
Income before income taxes and
extraordinary loss .................... 8,980 7,108 17,818 12,531
Provision for taxes on income (Note 3) .......... 3,142 2,487 6,327 4,387
------------- ------------- ---------------- --------------
Income before extraordinary loss ........ 5,838 4,621 11,491 8,144
Extraordinary loss on early extinguishment of
debt, net of $3,769 tax benefit ............... - - (6,417) -
------------- ------------- ---------------- --------------
Net income .......................... $5,838 $4,621 $5,074 $8,144
============= ============= ================ ==============
Earnings per share information (Note 1):
Weighted average common shares
outstanding .................................... 8,706,272 8,493,855 8,680,522 8,414,689
------------- ------------- ---------------- --------------
Weighted average common and common
equivalent shares outstanding .................. 8,908,818 8,797,471 8,916,716 8,789,349
------------- ------------- ---------------- --------------
Income before extraordinary loss:
Basic ....................................... $0.67 $0.54 $1.32 $0.97
Diluted ..................................... 0.66 0.53 1.29 0.93
Extraordinary loss on early extinguishment of debt:
Basic ....................................... - - (0.74) -
Diluted ..................................... - - (0.72) -
------------- ------------- ---------------- --------------
Net income:
Basic ....................................... $0.67 $0.54 $0.58 $0.97
============= ============= ================ ==============
Diluted ..................................... $0.66 $0.53 $0.57 $0.93
============= ============= ================ ==============
</TABLE>
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
4
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the six months ended January 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Retained Other Stockholders'
Shares Amount Capital Earnings Equity Items
------------- ----------- ------------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1997 *...... 9,752,272 $97 $34,163 $66,683 $(4,734)
Net income ..................... - - - 5,074 -
Exercise of stock options ...... 96,750 1 1,463 - (56)
Purchase of treasury stock ..... - - - - (427)
------------- ----------- ------------- ------------ ---------------------
Balance at January 31,
1998 (Unaudited) ............. 9,849,022 $98 $35,626 $71,757 ($5,217)
============= =========== ============= ============ =====================
</TABLE>
- ------------------
* Condensed from audited fiscal year 1997 statement of stockholders' equity.
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
5
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the quarters and six months ended January 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended January 31, Six Months Ended January 31,
---------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------ --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income ............................................... $5,838 $4,621 $5,074 $8,144
Adjustments for noncash transactions:
Depreciation and amortization .......................... 3,237 2,617 6,377 5,119
Amortization of debt issuance costs .................... 33 87 99 172
Amortization of intangible assets ...................... 95 79 179 161
Deferred revenue ....................................... (34) (33) (68) (67)
Stock option compensation .............................. - 20 - 40
Adjustments to deferred taxes .......................... 8 (681) 21 (610)
Provision for loss - accounts receivable ............... - 30 - 60
Extraordinary loss on early extinguishment of debt ...... - - 10,186 -
Increase (decrease) in cash from changes in:
Accounts receivable .................................... (1,978) (94) (1,639) (5,758)
Inventories ........................................... (3,028) 4,108 (5,441) 3,172
Income taxes ........................................... 2,813 3 235 1,569
Other current assets ................................... (212) 2,515 586 1,819
Accounts payable and accrued expenses .................. 4,678 919 (5,316) (3,392)
Net change in other non-current
assets and liabilities ............................... 50 342 (70) 314
------------- ------------ --------------- ---------------
Net cash provided by operations .................... 11,500 14,533 10,223 10,743
------------- ------------ --------------- ---------------
Investing activities:
Capital expenditures ................................... (18,843) (5,793) (35,249) (10,974)
Proceeds from (purchase of) short-term investments ...... - (409) 15,750 (5,409)
------------- ------------ --------------- ---------------
Net cash used for investing activities ............. (18,843) (6,202) (19,499) (16,383)
------------- ------------ --------------- ---------------
Financing activities:
Repurchase of Senior Notes, including
premium of $8,077 .................................... - - (88,030) -
Proceeds from revolving credit facility ................ 28,250 - 112,050 -
Repayment on revolving credit facility ................. (23,200) - (29,100) -
Other .................................................. 2,293 200 6,421 235
------------- ------------ --------------- ---------------
Net cash provided by financing activities ....... 7,343 200 1,341 235
------------- ------------ --------------- ---------------
Net change in cash and cash equivalents .................. - 8,531 (7,935) (5,405)
Cash and cash equivalents, beginning of period ........... - 2,650 7,935 16,586
------------- ------------ --------------- ---------------
Cash and cash equivalents, end of period ................. - $11,181 - $11,181
============= ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
6
<PAGE>
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, 1998.
1. Summary of Significant Accounting Policies:
Interim Accounting
The Company's Annual Report to Stockholders and Form 10-K for the fiscal
year ended July 31, 1997 include 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. Unless otherwise noted below, these policies were
also followed in preparing the Unaudited Condensed Consolidated Financial
Statements included herein. The 1997 year-end consolidated balance sheet data
contained herein was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
In the opinion of management, all adjustments which are of a normal and
recurring nature necessary for a fair statement of the results of operations of
these interim periods have been included. Net income for the six months ended
January 31, 1998 is not necessarily indicative of the results to be expected for
the full fiscal year. The Management Discussion and Analysis which 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 Company adopted Statement of Financial Accounting Standards (SFAS)
#128,"Earnings per Share" (SFAS #128) for its fiscal second quarter ended
January 31, 1998. SFAS #128 requires the presentation of "basic" and "diluted"
earnings per share. Under SFAS #128, basic earnings per share is computed
utilizing only the weighted average common shares outstanding during the
relevant period. Diluted earnings per share is computed utilizing both the
weighted average shares and common stock equivalents outstanding during the
period to the extent such common stock equivalents have a dilutive effect. Prior
year amounts have been restated to conform with the requirements of SFAS #128.
The following tables provide a reconciliation of the income and share
amounts for the basic and diluted earnings per share computations for income
from continuing operations for the quarters and six months ended January 31,
1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
For the quarters ended January 31,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share....... $5,838 8,706,272 $0.67 $4,621 8,493,855 $0.54
========= =========
Effect of dilutive securities:
Options for common stock..... - 202,546 - 303,616
----------- ------------- ----------- -------------
Diluted earnings per share .... $5,838 8,908,818 $0.66 $4,621 8,797,471 $0.53
=========== ============= ========= =========== ============= =========
</TABLE>
7
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
For the six months ended January 31,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share....... $11,491 8,680,522 $1.32 $8,144 8,414,689 $0.97
========= =========
Effect of dilutive securities:
Options for common stock..... - 236,194 - 374,660
----------- ------------- ----------- -------------
Diluted earnings per share .... $11,491 8,916,716 $1.29 $8,144 8,789,349 $0.93
=========== ============= ========= =========== ============= =========
</TABLE>
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has recently issued SFAS #130,
"Reporting Comprehensive Income", SFAS #131,"Disclosure about Segments of an
Enterprise and Related Information" and SFAS #132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The Company is required to adopt
these new reporting standards for its fiscal year ending July 31, 1999. The
Company has not yet evaluated the effects on disclosure of these new reporting
standards.
2. Inventories:
Inventories consisted of the following (in thousands):
January 31, July 31,
1998 1997
----------------- ------------------
Finished goods .................... $10,197 $13,990
Work in process ................... 38,491 33,074
Raw materials ..................... 16,734 11,256
----------------- ------------------
65,422 58,320
LIFO reserve ...................... (11,215) (9,434)
----------------- ------------------
54,207 48,886
Supplies .......................... 10,679 10,559
----------------- ------------------
$64,886 $59,445
================= ==================
8
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
3. Income Taxes:
The provision for income taxes for the quarters and six months ended
January 31, 1998 and 1997 are summarized by the following effective tax rate
reconciliations:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
January 31, January 31,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Federal statutory tax rate ....................... 35.0% 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal benefit ......... 1.4 1.8 1.4 1.8
Foreign sales corporation benefit ........... (1.6) (2.8) (1.6) (2.8)
Other ....................................... 0.2 1.0 0.7 1.0
---------- ----------- ----------- ----------
Effective tax rate ........................ 35.0% 35.0% 35.5% 35.0%
========== =========== =========== ==========
</TABLE>
The income tax provisions for the quarter and six months ended January 31,
1998 were recorded based on the Company's projected effective income tax rate
for the fiscal year ending July 31, 1998.
All federal tax returns prior to fiscal 1995 have been settled with the
Internal Revenue Service. Management does not believe that the settlement of its
open tax years will have a material adverse effect on the Company's future
operating results.
4. Long-Term Debt:
On September 26, 1997, the Company completed a tender offer for essentially
all ($79.9 million) of its 11.5% Senior Notes due 2003 (the Senior Notes) (the
Tender). The tender price paid to holders of the Senior Notes was $1,086.20 for
each $1,000 in Senior Note principal. Also, most holders received an additional
$15.00 per $1,000 in Senior Note principal in exchange for their consent to
eliminate substantially all of the restrictive covenants and certain default
provisions in the Senior Note Indenture other than the covenants to pay interest
on and principal of the Senior Notes and the default provisions related to such
covenants. Consents were received by holders of more than a majority of the
outstanding Senior Notes, resulting in the elimination of such restrictive
covenants and default provisions. After the Tender, $0.1 million in Senior Notes
were outstanding.
In connection with the Tender, the Company entered into an agreement with a
consortium of banks led by PNC Bank for a five year, $150 million revolving
credit facility with a $15 million sub-limit for standby letters of credit (the
1997 Revolving Credit Facility). The 1997 Revolving Credit Facility replaces a
$25 million revolving credit facility with PNC Bank entered into on December 1,
1995 (the 1995 Revolving 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 0.625%) based on a
leverage calculation. As of January 31, 1998, the interest rate on borrowings
outstanding under the 1997 Revolving Credit Facility was 6.8%. Repayment of
funds borrowed under the new credit agreement are 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 ratio, all as
defined in the 1997 Revolving Credit Facility agreement. The 1997 Revolving
Credit Facility is collateralized with receivables and inventory.
9
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
As a result of the Tender and revolving credit facility refinancing, the
Company recorded a $6.4 million net extraordinary loss on the early retirement
of debt during the six months ended January 31, 1998. 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 the 1995 Revolving Credit Facility.
5. 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 Antitrust Division of
the United States Department of Justice (the 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.
The proceeding is in its preliminary stages. At this time, management cannot
determine whether a material loss will be incurred as a result of the
proceeding. No provision for any liability related to such matters has been made
in the Unaudited Condensed Consolidated Financial Statements of the Company as
of January 31, 1998.
Four civil cases have been filed in the United States District Court for
the Eastern District of Pennsylvania in Philadelphia asserting claims on behalf
of purchasers for violations of the Sherman Act. Those cases have been
consolidated. The consolidated case names the Company, UCAR International, Inc.,
SGL Carbon Corporation and SGL Carbon AG as defendants and seeks treble damages.
The Company intends to vigorously defend against this consolidated action. The
case is in its preliminary stages. At this time, management cannot determine
whether a material loss will be incurred as a result of the case. No provision
for any liability related to such matter has been made in the Unaudited
Condensed Consolidated Financial Statements of the Company as of January 31,
1998.
In April 1995, the Company was named as a third-party defendant in a
Superfund action in Federal District Court in New Jersey relating to waste
disposal at a landfill located in Sayreville, New Jersey (the Sayreville
Litigation). Carbon Graphite Group, Inc. was named as successor to Airco-Speer
Company (Airco-Speer). Since this landfill was closed prior to the organization
of the Company in 1988, the Company's only possible connection with the
Sayreville Litigation would be if it were a successor to Airco-Speer, a claim
which it disputes. Furthermore, pursuant to the Asset Purchase Agreement by
which the Company acquired its operating assets from The BOC Group, plc. (BOC),
BOC agreed to provide an indemnification for certain environmental matters. BOC
has assumed and commenced the defense of the Sayreville Litigation and agreed to
indemnify the Company for losses associated therewith in accordance with the
terms of the Asset Purchase Agreement. In addition, BOC asserts that the
liability in this matter was settled by a 1992 agreement with the plaintiffs in
the present case. As a result of a motion for summary judgment, the Court has
substantially reduced the scope of claims which may be brought against the
Company. Based on the above, management does not believe that the Company will
incur a material loss with respect to the Sayreville Litigation.
The Company is also involved in various legal proceedings considered
incidental to the conduct of its business, the ultimate disposition of which, in
the opinion of the Company's management, will not have a material
10
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
adverse effect on the financial position, fiscal year operating results, cash
flows or business of the Company. Claims (other than environmental and contract
claims and claims for punitive damages) against the Company are generally
covered by insurance which includes a $250,000 per occurrence self-insured
retention. As of January 31, 1998, a $0.4 million reserve has been recorded to
provide for estimated exposure on claims for which a loss is deemed probable.
6. Other Items:
Other Compensation
Other compensation for the quarter and six months ended January 31, 1998
included $0.3 million and $0.5 million, respectively, accrued under the
Company's Incentive Bonus Plan.
7. Subsequent Event:
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 will 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.
11
<PAGE>
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain financial information for the
quarters and six months ended January 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 Quarterly Report on
Form 10-Q:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
January 31, January 31,
---------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales:
Graphite electrode products .............. $55,196 $54,960 $109,306 $103,273
Calcium carbide products ................. 19,618 20,121 38,902 39,524
------------ ------------ -------------- ---------------
Total net sales .................... $74,814 $75,081 $148,208 $142,797
============ ============ ============== ===============
Percentage of net sales:
Graphite electrode products .............. 73.8% 73.2% 73.8% 72.3%
Calcium carbide products ................. 26.2 26.8 26.2 27.7
------------ ------------ -------------- ---------------
Total net sales .................... 100.0% 100.0% 100.0% 100.0%
============ ============ ============== ===============
Gross profit as a percentage of segment net sales:
Graphite electrode products .............. 20.0% 18.6% 20.3% 18.7%
Calcium carbide products ................. 17.7 14.9 16.5 14.5
Percentage of total net sales:
Total gross profit ....................... 19.4% 17.7% 19.3% 17.6%
Selling, general and administrative ...... 5.5 4.5 5.1 5.2
Operating income ......................... 13.5 12.3 13.8 11.7
Income from continuing operations ......... 7.8 6.2 7.8 5.7
</TABLE>
Net sales for the quarter ended January 31, 1998 were $74.8 million versus
$75.1 million in the prior year comparable quarter. Graphite electrode product
sales for the quarter ended January 31, 1998 were $55.2 million versus $55.0
million in the prior year comparable quarter. Calcium carbide product sales were
$19.6 million versus $20.1 million in the prior year comparable quarter. Net
sales for the six months ended January 31, 1998 were $148.2 million versus
$142.8 million in the prior year comparable period, a 3.8% increase. For the six
months ended January 31, 1998, graphite electrode product sales increased 5.8%
to $109.3 million, while calcium carbide product sales decreased 1.6% to $38.9
million.
Within the graphite electrode products segment, graphite electrode net
sales for the quarter ended January 31, 1998 were $40.8 million, a 5.8% increase
over the prior year comparable quarter as a result of a 6.3% increase in
shipments. Net prices of graphite electrodes for the quarter ended January 31,
1998 were essentially unchanged as compared to the quarter a year ago. A 5.8%
increase in domestic electrode prices was offset by an 8.5% decrease in realized
foreign electrode prices. The continued strengthening of the U.S. dollar against
foreign currencies resulted in the decrease in realized foreign prices. Domestic
and foreign electrode shipments
12
<PAGE>
as a percentage of total electrode shipments for the quarter ended January 31,
1998 were 54.0% and 46.0%, respectively, versus 52.2% and 47.8%, respectively,
for the prior year comparable quarter. Needle coke sales for the quarter ended
January 31, 1998 were $10.1 million versus $7.0 million in the prior year
comparable quarter, a 43.9% increase due to a 37.9% increase in shipments and a
4.4% increase in average net selling prices. Graphite specialty product sales
for the quarter ended January 31, 1998 totaled $4.3 million versus $9.4 million
a year ago. The decrease was principally the result of the winding down of a
supply agreement with SGL Carbon Corporation (SGL Corp.) under which the Company
sold large graphite rods and plates and other processing services to SGL Corp.
at cost for a period of three years (the SGL Supply Agreement). The contract
expired in January 1998.
For the six months ended January 31, 1998, graphite electrode sales were
$81.2 million, a 10.2% increase over the prior year comparable period
principally resulting from a 9.1% increase in shipments. Net selling prices for
graphite electrodes during the six months ended January 31, 1998 were
essentially unchanged as compared to a year ago. While the average domestic net
price increased 6.5%, foreign price realizations were down 5.5% due to the
relatively stronger U.S. dollar during the current period. Domestic and foreign
electrode shipments as a percentage of total electrode shipments for the six
months ended January 31, 1998 were 52.9% and 47.1%, respectively, versus 50.5%
and 49.5%, respectively, in the prior year comparable period. Needle coke sales
for the six months ended January 31, 1998 were $18.3 million versus $12.1
million in the prior year comparable period. The increase in needle coke sales
was due to a 40.6% increase in needle coke shipments and a 7.0% increase in
needle coke prices. Graphite specialty product sales for the six months ended
January 31, 1998 were $9.8 million versus $17.4 million in the prior year
comparable period, with the decrease resulting from the winding down of the SGL
Supply Agreement.
Within the calcium carbide product segment, pipeline acetylene sales for
the quarter ended January 31, 1998 were $7.7 million versus $7.0 million in the
prior year comparable quarter, a 9.7% increase. The increase was due to a 13.2%
increase in acetylene deliveries, partially offset by a 3.1% decrease in
acetylene prices. Desulfurization sales of $5.8 million represented an 11.0%
decrease from a year ago, as shipments decreased 7.9% and prices decreased 3.4%.
Sales in other product categories totaled $6.2 million, a 7.0% decrease from the
prior year comparable quarter resulting from decreased shipments of electrically
calcined anthracite coal. For the six months ended January 31, 1998, pipeline
acetylene sales were $14.9 million versus $13.3 million for the comparable
period a year ago, a 12.0% increase resulting from a 15.8% increase in acetylene
deliveries, partially offset by a 3.2% decrease in acetylene prices.
Desulfurization sales of $12.2 million represented a 3.9% decrease from a year
ago, as shipments decreased 1.7% and prices decreased 2.2%. All other calcium
carbide product sales for the six months ended January 31, 1998 totaled $11.8
million, a 12.8% decrease from the comparable prior year period resulting
primarily from a decrease in shipments of electrically calcined anthracite coal.
Gross profit as a percentage of graphite electrode product sales for the
quarter ended January 31, 1998 was 20.0% versus 18.6% in the prior year
comparable quarter. Gross profit as a percentage of graphite electrode product
sales for the six months ended January 31, 1998 was 20.3% versus 18.7% in the
prior year comparable period. The increase in the gross margins in both periods
resulted primarily from increased shipments and selling prices for needle coke.
Also, the cost of decant oil, the primary raw material in the production of
needle coke, during the current quarter and six months was approximately 11% and
9% lower, respectively, as compared to a year ago.
Gross profit as a percentage of calcium carbide product sales for the
quarter ended January 31, 1998 was 17.7% versus 14.9% in the prior year
comparable quarter. Gross profit as a percentage of calcium carbide product
sales for the six months ended January 31, 1998 was 16.5% versus 14.5% in the
prior year comparable period. The increase was primarily the result of increased
shipments of pipeline acetylene, coupled with lower raw material and operating
costs during the current quarter.
13
<PAGE>
Selling, general and administrative expenditures for the quarter ended
January 31, 1998 were $4.1 million versus $3.4 million in the comparable quarter
a year ago. Total expenses increased in the current quarter as a result of a
one-time charge of $0.3 million for consulting expenditures, as well as
increased legal fees and marketing expenditures in the graphite electrode
products business. Selling, general and administrative expenditures for the six
months ended January 31, 1998 were $7.6 million versus $7.4 million in the
comparable period a year ago. The prior year amount was unusually high as a
result of a settlement of a lawsuit and the accrual of costs associated with the
search for a new chief executive officer for the Company. Excluding these
unusual items, expenditures increased $0.7 million in the current period as a
result of the items noted in the quarterly discussion above.
Other compensation for the quarter and six months ended January 31, 1998
included $0.3 million and $0.5 million, respectively, in charges associated with
the Company's incentive bonus plan. Other compensation for the quarter and six
months ended January 31, 1997 included $0.2 million and $0.8 million,
respectively, in charges associated with the Company's incentive bonus plan.
Net interest expense for the quarter ended January 31, 1998 was $1.2
million and included $1.4 million of interest expense associated with the 1997
Revolving Credit Facility and $0.2 million in bank fees, less $0.4 million in
capitalized interest. Net interest expense for the quarter ended January 31,
1997 was $2.1 million and included $2.5 million of interest expense associated
with the Senior Notes, less $0.4 million in interest income associated with the
Company's cash equivalents and short-term investments. Net interest expense for
the six months ended January 31, 1998 was $2.6 million, including $1.9 million
of interest expense associated with the 1997 Revolving Credit Facility, $1.5
million of interest expense associated with the Senior Notes and $0.3 million in
bank fees, less capitalized interest of $0.8 million and interest income of $0.2
million. Net interest expense for the six months ended January 31, 1997 was $4.2
million, including $4.7 million of interest expense associated with the Senior
Notes, less $0.7 million of interest income.
The income tax provisions for the quarter and six months ended January 31,
1998 were recorded based on the Company's projected effective income tax rate
for the fiscal year ending July 31, 1998. 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. See Note 3 to the
Unaudited Condensed Consolidated Financial Statements for more details on the
Company's effective tax rate.
As a result of the Tender and revolving credit facility refinancing, the
Company recorded a $6.4 million net extraordinary loss on the early retirement
of debt during the six months ended January 31, 1998. 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 the 1995 Revolving Credit Facility.
Recently Issued Accounting Pronouncements
The Company adopted SFAS #128, "Earnings per Share", during its fiscal
second quarter ended January 31, 1998. See Note 1 to the Unaudited Condensed
Consolidated Financial Statements for a discussion of this new accounting
standard.
The Financial Accounting Standards Board has recently issued SFAS #130,
"Reporting Comprehensive Income", SFAS #131,"Disclosure about Segments of an
Enterprise and Related Information" and SFAS #132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The Company is required to adopt
these new reporting standards for its fiscal year ending July 31, 1999. The
Company has not yet evaluated the effects on disclosure of these new reporting
standards.
14
<PAGE>
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 Company
has undertaken a substantial modernization program with respect to its graphite
electrode production facilities and several other major capital projects
expected to increase total capital expenditures to approximately $65 million in
fiscal 1998 and $35 million in fiscal 1999. The Company believes that its cash
flows from operations and availability under its revolving credit facility will
be sufficient to fund all of its planned liquidity needs through at least the
expiration of the 1997 Revolving Credit Facility in September 2002. However, in
the event these resources are not sufficient to fund the Company's capital
expenditures (including cash needs for the modernization program and other major
capital projects), service its indebtedness and pay any other obligation
including those that may arise from pending legal proceedings, the Company would
be required to obtain additional funding. 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.
On September 26, 1997, the Company completed the Tender (See Note 4 to the
Unaudited Condensed Consolidated Financial Statements). The tender price paid to
holders of the Senior Notes was $1,086.20 for each $1,000 in Senior Note
principal. Also, most holders received an additional $15.00 per $1,000 in Senior
Note principal in exchange for their consent to eliminate substantially all of
the restrictive covenants and certain default provisions in the Senior Note
Indenture other than the covenants to pay interest on and principal of the
Senior Notes and the default provisions related to such covenants. Consents were
received by holders of more than a majority of the outstanding Senior Notes,
resulting in the elimination of such restrictive covenants and default
provisions. After the Tender, $0.1 million in Senior Notes were outstanding.
In connection with the Tender, the Company entered into an agreement with a
consortium of banks led by PNC Bank for the 1997 Revolving Credit Facility. The
1997 Revolving Credit Facility replaces the 1995 Revolving 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 0.625%) based on a leverage calculation. As of January 31, 1998, the
interest rate on borrowings outstanding under the 1997 Revolving Credit Facility
was 6.8%. Repayment of funds borrowed under the new credit agreement are 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
ratio, all as defined in the 1997 Revolving Credit Facility agreement. The 1997
Revolving Credit Facility is collateralized with receivables and inventory.
In the process of developing permit applications for facility upgrades, the
Company determined that certain parameters in its air permits do not reflect
current operations. The Company is working to resolve this issue and has advised
the appropriate state environmental authorities. At this time, management cannot
determine the magnitude of the costs, if any, that may be incurred.
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 will 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.
15
<PAGE>
Cash Flow Information
Cash flow provided by operations for the quarter ended January 31, 1998 was
$11.5 million, including $9.2 million of cash inflows from net income plus
non-cash items and $2.3 million of net cash inflows from changes in working
capital items. Net interest and tax payments for the quarter were $1.6 million
and $0.1 million, respectively. Cash flow provided by operations for the six
months ended January 31, 1998 was $10.2 million. Cash inflows from net income
plus non-cash items of $21.9 million were partially offset by an $11.6 million
net cash outflow due to changes in working capital items, including a $5.4
million increase in inventories. Net interest and tax payments for the six-month
period were $6.9 million and $1.2 million, respectively.
Investing activities for the quarter and six months ended January 31, 1998
included $18.8 million and $35.2 million, respectively, in capital expenditures.
Also, investing activities during the six months ended January 31, 1998 included
a $15.8 million net cash inflow from the sale of short-term investments. The
Company believes that most of its future investing activity cash flow
requirements will be for capital expenditures, including its modernization and
expansion programs. The Company believes that its future cash flow provided by
operations and borrowings under its revolving credit facility will be adequate
to fund its currently planned investing needs in the future.
Cash flow provided by financing activities for the quarter ended January
31, 1998 was $7.3 million, including a $5.1 million net inflow from the 1997
Revolving Credit Facility. Cash flow provided by financing activities for the
six months ended January 31, 1998 was $1.3 million. Major cash flow items
included an $83 million net cash inflow from the 1997 Revolving Credit Facility,
offset by outflows of $79.9 million for the principal amount of Senior Notes
repurchased in connection with the Tender and $8.1 million for the related
tender premium.
16
<PAGE>
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 Antitrust Division of
the United States Department of Justice (the 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.
The proceeding is in its preliminary stages. At this time, management cannot
determine whether a material loss will be incurred as a result of the
proceeding. No provision for any liability related to such matters has been made
in the Unaudited Condensed Consolidated Financial Statements of the Company as
of January 31, 1998.
Four civil cases have been filed in the United States District Court for
the Eastern District of Pennsylvania in Philadelphia asserting claims on behalf
of purchasers for violations of the Sherman Act. Those cases have been
consolidated. The consolidated case names the Company, UCAR International, Inc.,
SGL Carbon Corporation and SGL Carbon AG as defendants and seeks treble damages.
The Company intends to vigorously defend against this consolidated action. The
case is in its preliminary stages. At this time, management cannot determine
whether a material loss will be incurred as a result of the case. No provision
for any liability related to such matter has been made in the Unaudited
Condensed Consolidated Financial Statements of the Company as of January 31,
1998.
In April 1995, the Company was named as a third-party defendant in a
Superfund action in Federal District Court in New Jersey relating to waste
disposal at a landfill located in Sayreville, New Jersey (the Sayreville
Litigation). Carbon Graphite Group, Inc. was named as successor to Airco-Speer
Company (Airco-Speer). Since this landfill was closed prior to the organization
of the Company in 1988, the Company's only possible connection with the
Sayreville Litigation would be if it were a successor to Airco-Speer, a claim
which it disputes. Furthermore, pursuant to the Asset Purchase Agreement by
which the Company acquired its operating assets from The BOC Group, plc. (BOC),
BOC agreed to provide an indemnification for certain environmental matters. BOC
has assumed and commenced the defense of the Sayreville Litigation and agreed to
indemnify the Company for losses associated therewith in accordance with the
terms of the Asset Purchase Agreement. In addition, BOC asserts that the
liability in this matter was settled by a 1992 agreement with the plaintiffs in
the present case. As a result of a motion for summary judgment, the Court has
substantially reduced the scope of claims which may be brought against the
Company. Based on the above, management does not believe that the Company will
incur a material loss with respect to the Sayreville Litigation.
The Company is also involved in various legal proceedings considered
incidental to the conduct of its business, the ultimate disposition of which, in
the opinion of the Company's management, will not have a material adverse effect
on the financial position, fiscal year operating results, cash flows or business
of the Company. Claims (other than environmental and contract claims and claims
for punitive damages) against the Company are generally covered by insurance
which includes a $250,000 per occurrence self-insured retention. As of January
31, 1998, a $0.4 million reserve has been recorded to provide for estimated
exposure on claims for which a loss is deemed probable.
17
<PAGE>
Item 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 1997, the Company held its Annual Meeting of Stockholders in
Pittsburgh, PA. (the Meeting). At the Meeting, Mr. Paul F. Balser, Mr. Robert M.
Howe and Mr. Ronald B. Kalich were each re- elected to the Company's Board of
Directors for terms expiring at the Annual Meeting of Stockholders in 2000. In
addition to Messrs. Balser, Howe and Kalich, Mr. Walter B. Fowler, Mr. Nicholas
T. Kaiser, Mr. James G. Baldwin, Mr. James R. Ball and Mr. Charles E. Slater
constitute the Company's Board of Directors. Also at the Meeting, Coopers &
Lybrand L.L.P. was ratified as the Company's independent accountants for its
fiscal year ending July 31, 1998. Total shares issued and outstanding as of
October 20, 1997, the date of record for the Meeting, were 8,689,272.
Tabulations of votes cast were as follows:
For Board of Directors For Withheld Authority
- ------------------------------ ---------- ---------------------------
Paul F. Balser 7,180,799 17,344
Robert M. Howe 7,194,479 3,664
Ronald B. Kalich 7,194,599 3,544
For Coopers & Lybrand L.L.P.
- ---------------------------------------
For 7,189,234
Against 6,000
Abstain 2,900
There were no broker non-votes for any elections held at the Meeting.
18
<PAGE>
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 March 13, 1998.
Signature Title
- -------------------------------------------------------------------------------
/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 (Principal Accounting Officer)
- -------------------------
(Jeffrey T. Jones)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE 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 JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-START> Aug-01-1997
<PERIOD-END> Jan-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 52,302
<ALLOWANCES> (2,030)
<INVENTORY> 64,886
<CURRENT-ASSETS> 126,796
<PP&E> 305,454
<DEPRECIATION> (188,984)
<TOTAL-ASSETS> 247,769
<CURRENT-LIABILITIES> 44,765
<BONDS> 83,032
0
0
<COMMON> 98
<OTHER-SE> 102,166
<TOTAL-LIABILITY-AND-EQUITY> 247,769
<SALES> 148,208
<TOTAL-REVENUES> 148,208
<CGS> 119,629
<TOTAL-COSTS> 127,258
<OTHER-EXPENSES> 507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,625
<INCOME-PRETAX> 17,818
<INCOME-TAX> 6,327
<INCOME-CONTINUING> 11,491
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<EXTRAORDINARY> (6,417)
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</TABLE>
