Comeback Kids

6/29/2011

On the comeback trail: GrafTech International Ltd.

It was a bad situation, to say the least.

In the late 1990s, the U.S. Department of Justice and several other government agencies from around the world began investigating a group of graphite electrode makers thought to be fixing prices. Among them was UCAR Carbon Co., which today is known as GrafTech International Ltd. and is based in Parma.

The investigation sent the company's CEO and chief operating officer to prison and saddled the firm with hundreds of millions of dollars in fines and lawsuits. UCAR's stock plummeted, and its lenders cut off the company's lines of credit. On top of all that, UCAR had loads of debt to pay off.

The company — which sells its electrodes to steelmakers who use them to heat up furnaces that melt the metal — was “on the verge of bankruptcy,” said GrafTech CEO Craig Shular, who in 1999 joined the company as part of a team assigned to clean up the mess.

“Everything you touched was worse than what was expected,” said Mr. Shular, who was chief financial officer at the time.

Today, the mess is gone. What remains is spick and span.

A massive cost-cutting effort and an increased focus on research and development helped transform UCAR, which adopted the GrafTech name in 2002.

Not only has GrafTech been consistently profitable since 2006, but in the third quarter of 2009 the company paid off the last of its debt.

Strategy shift

Now the company is playing offense: GrafTech in November 2010 bought two companies — needle coke producer Seadrift Coke LP of Seadrift, Texas, and graphite electrode maker C/G Electrodes LLC of St. Marys, Pa. — for $936.7 million in cash, stock and debt. The purchase of the two companies, which had the same majority owner, was one of the biggest deals in the history of the graphite electrode industry, Mr. Shular said.

He said GrafTech's comeback officially was complete on April 29, 2010, when the company announced those acquisitions. That day, its stock price closed at $17.26 per share, up 28% from its closing price of $13.47 the day before.

“We put the lock on the door in 2010,” Mr. Shular said, adding that GrafTech in February bought fine grain graphite maker Micron Research Corp. of Emporium, Pa., which is near C/G Electrodes, for $6.5 million in cash.

To survive, GrafTech had to make some tough choices, he said. The company ended up closing higher-cost plants in Clarksville, Tenn., Canada, Germany, Italy and Russia. Its total employment level dropped to 2,200 from 5,500. The company employs about 3,000 today.

GrafTech moved equipment from shuttered factories to lower-cost factories in Mexico, Brazil, South Africa, France and Spain, doubling productivity at those plants.

That plan helped the company raise financing after its credit lines were cut off, Mr. Shular said. In 2001, the company raised $86 million in working capital through a stock offering. It also raised $200 million by selling off other businesses within the company. It raised more debt and equity financing over the next few years to pay back previous debts.

The cost cutting allowed the company to make money that it could reinvest in new product development. Its engineered solutions unit, which makes graphite products other than electrodes, accounted for about 17% of the company's revenue in 2010, which exceeded $1 billion.

You may own some of their products, even if you can't see them: The company's graphite technology is used to disseminate heat in consumer goods such as smart phones, TVs and computers. It also is developing ways to use graphite in fuel cells and other high-tech products.

“If we didn't invest in R&D, there's no way we would be in smart phones, no way we would be in flat screen TVs,” Mr. Shular said.

"Can-do attitude”

The increased focus on research and development was one reason GrafTech moved its headquarters to Parma, where its R&D team already was located, from Wilmington, Del., in 2006. The company also wanted to put all of its top executives under one roof, Mr. Shular said. A $1.5 million incentive package from the state of Ohio was a major factor as well.

The restructuring has turned GrafTech into a consistent cash producer. After earning $45 million in 2006, earnings jumped to $138 million in 2007 and $242 million in 2008. Profits fell to $63 million in 2009, when the company cut its electrode production in half because of a drop in global steel production. The company largely recovered in 2010, earning $146 million.

GrafTech's comeback exceeded David Walker's expectations. Mr. Walker, managing director with J.P. Morgan's investment bank, said he decided to help GrafTech raise equity and debt financing because he believed not only in the plan, but also in the new management team, which at the time was led by Gil Playford.

The group had a “can-do attitude” that was “grounded in reality,” he said.

“We saw a management team that really wanted to succeed,” he said.

The hardships GrafTech endured prepared it well for the recession, Mr. Shular said. Not only did the turnaround make the operation more efficient, but it taught company management a lot about leadership. For instance, when GrafTech cut salaries during the downturn, the top executives took the biggest pay cuts, while the lowest-paid staff members were spared.

“Leaders have to lead from the front of the bus,” he said.

Inside the numbers

SALES

2002: $596 million

2010: $1 billion

NET DEBT

2005: $689 million

2009: $0

2010: $288 million (following two acquisitions)

MARKET CAPITALIZATION

2002: $335 million

2010: $2.89 billion