10-Q 1 e10q0106-glc.txt GLC 2Q 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 333-59545 GREAT LAKES CARBON CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3637043 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 551 Fifth Avenue, Suite 3600, New York, New York 10176 (Address of principal executive office) (Zip Code) (212) 370-5770 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) 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 [ ]. 1 of 17 GREAT LAKES CARBON CORPORATION FORM 10-Q June 30, 2001 CONTENTS

2 of 17 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Great Lakes Carbon Corporation and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share and per share data)

3 of 17 Great Lakes Carbon Corporation and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

4 of 17 Great Lakes Carbon Corporation and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

5 of 17 Great Lakes Carbon Corporation and Subsidiaries Condensed Consolidated Statement of Stockholder's Equity (Unaudited)

6 of 17 Great Lakes Carbon Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)

7 of 17 Great Lakes Carbon Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements June 30, 2001 (Unaudited) 1. Organization and Basis of Presentation Great Lakes Carbon Corporation (the Company) is a producer of calcined petroleum coke ("CPC") principally for customers in the aluminum industry. The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts have been eliminated in consolidation. On May 22, 1998, the Company was acquired by Great Lakes Acquisition Corp. ("GLAC"), a substantially wholly owned subsidiary of American Industrial Capital Fund II, L.P. ("AIP"), whereby GLAC acquired all of the Company's outstanding common stock in a transaction accounted for as a purchase (the "Acquisition"). Net shareholder's equity upon consummation of the above transactions was $92,380,000, and based upon estimates of fair value of assets acquired and liabilities assumed, goodwill of approximately $179,000,000 was established. This amount is being amortized on a straight-line basis over 40 years. 2. Basis of Presentation The accompanying financial statements as of June 30, 2001 do not reflect the principal amount related to 13 1/8% Senior Discount Debentures issued by GLAC as the Company has not guaranteed or otherwise pledged its assets as collateral for the Debentures. Certain prior year amounts have been reclassified to conform to current year presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The information furnished reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair summary of the results of operations. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K, File No. 333-59541. 3. Accounting Pronouncements Derivative Investments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Investments and Hedging Activities". The Company adopted the new Statement effective January 1, 2001. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities. Under the Statement, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of SFAS 133 did not have a significant effect on the Company's financial position, results of operations or cash flows. Business Combinations In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. 8 of 17 Great Lakes Carbon Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements June 30, 2001 (Unaudited) Goodwill and Other Intangible Assets In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles, such as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transtional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet determined, the impact that adoption of SFAS 142 may have on its financial position and results of operations. 4. Inventories Inventories are as follows: December 31, June 30, 2000 2001 --------- --------- (In thousands) Raw materials $ 19,473 $ 24,896 Finished goods 10,047 8,632 Supplies and spare parts 6,617 7,033 --------- --------- $ 36,137 $ 40,561 ========= ========= 5. Accrued Expenses Accrued expenses included interest payable and employee profit sharing payable of $2,546,000 and $2,055,000 and $496,000 and $1,026,000 at December 31, 2000 and June 30, 2001, respectively. 9 of 17 Great Lakes Carbon Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements June 30, 2001 (Unaudited) 6. Financial Information Relating to Segments The Company has three reportable business segments. Anode Grade CPC-is produced and marketed directly to primary aluminum smelters world-wide for use as the principal raw material in the production of carbon anodes, a key component in the aluminum smelting process. Industrial Grade CPC-is produced and marketed for use in a variety of non- aluminum, industrial applications, including as a raw material in the production of titanium dioxide, as a recarburizer (carbon additive) in the manufacture of steel and foundry products and for use in other specialty materials and chemicals markets. RPC Trading-involves the world-wide marketing of raw petroleum coke ("RPC") for use as the raw material in the production of CPC and as a fuel source in a variety of other industrial applications. The production and distribution of CPC, which is the focus of the first two units, is accomplished utilizing the same process, plant facilities and operating assets. The RPC trading business, as conducted by the Company, generally involves the use of such assets on a limited basis. Accordingly, the Company does not segregate, or otherwise account for, the assets by segments. ----------------------------------------------------------------------------- Six Months ended June 30, 2000 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 92,652 $ 21,741 $ 6,408 $ 1,060 $ 121,861 Cost of goods sold (67,435) (15,128) (5,707) (3,171) (91,441) ---------- ---------- ---------- --------- ---------- Segment Profit $ 25,217 $ 6,613 $ 701 $ (2,111) 30,420 ========== ========== ========== ========= Selling, general and administrative expenses (9,303) Interest expense, net (14,169) Other income (expense) 656 ---------- Income before income taxes $ 7,604 ========== ----------------------------------------------------------------------------- Six months ended June 30, 2001 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 93,641 $ 25,410 $ 8,817 $ 1,262 $ 129,130 Cost of goods sold (70,493) (18,475) (8,003) (3,405) (100,376) ---------- ---------- ---------- --------- ---------- Segment Profit $ 23,148 $ 6,935 $ 814 $ (2,143) 28,754 ========== ========== ========== ========= Selling, general and administrative expenses (9,612) Interest expense, net (12,299) Other income (expense) 985 ---------- Income before income taxes and extraordinary item $ 7,828 ========== 10 of 17 Great Lakes Carbon Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements June 30, 2001 (Unaudited) ----------------------------------------------------------------------------- Quarter ended June 30, 2000 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 47,941 $ 11,235 $ 3,957 $ 584 $ 63,717 Cost of goods sold (34,584) (8,323) (3,359) 1,575 (47,614) ---------- ---------- ---------- --------- ---------- Segment Profit $ 13,584 $ 2,912 $ 598 $ (991) 16,103 ========== ========== ========== ========= Selling, general and administrative expenses (4,780) Interest expense, net (7,103) Other income (expense) 439 ---------- Income before income taxes $ 4,659 ========== ----------------------------------------------------------------------------- Quarter ended June 30, 2001 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 47,340 $ 11,909 $ 3,584 $ 535 $ 63,368 Cost of goods sold (35,515) (8,604) (3,221) (1,675) (49,015) ---------- ---------- ---------- --------- ---------- Segment Profit $ 11,825 $ 3,305 $ 363 $ (1,140) 14,353 ========== ========== ========== ========= Selling, general and administrative expenses (5,052) Interest expense, net (6,086) Other income (expense) 737 ---------- Income before income taxes $ 3,952 ========== 7. Extraordinary Item The period ended June 30, 2001 reflects an extraordinary gain related to the repurchase of the Company's debt of approximately $3,850,000 (net of income tax expenses of $2,073,000). 11 of 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General This Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "plans," or "continue" or the negative thereof or variations thereon or similar terminology. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These forward-looking statements are subject to a number of risks and uncertainties, including, the factors discussed in the Company's filings with the Securities and Exchange Commission. Actual results could differ materially from these forward-looking statements. As used in this document, Adjusted EBITDA represents operating income before depreciation, amortization and AIP fees and expenses. Adjusted EBITDA should not be considered a substitute for net income, cash flow from operating activities or other cash flow statement data prepared in accordance with generally accepted accounting principles or as an alternative to net income as an indicator of operating performance or cash flows as a measure of liquidity. Adjusted EBITDA is presented here only to provide additional information with respect to the Company's ability to satisfy debt service. While Adjusted EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. The Company is the world's largest producer of calcined petroleum coke ("CPC"). The Company produces anode grade CPC, which is the principal raw material used in the production of carbon anodes used in primary aluminum production, and industrial grade CPC, which is used in a variety of specialty metals and materials applications. CPC is produced from raw petroleum coke ("RPC") utilizing a high temperature, rotary kiln process developed by the Company in the 1930's. RPC is a by-product of the petroleum refining process and constitutes the largest single component of the Company's cost of goods sold. The Company's principal source of revenues and profits are sales of anode grade CPC to the aluminum industry. Historically, the Company's profitability has been primarily a function of its CPC sales volumes, CPC pricing and the cost of RPC. Results of Operations Three Months Ended June 30, 2001 Versus Three Months Ended June 30, 2000 The Company's net sales for the quarter ended June 30, 2001 decreased 0.5% to $63.4 million from $63.7 million in the comparable 2000 period. Net sales of anode grade CPC decreased 1.3% to $47.3 million, net sales of industrial grade CPC increased 6.0% to $11.9 million and net sales of RPC decreased 9.4% to $3.6 million. The decrease in anode grade CPC net sales was primarily the result of a 5.7% decrease in sales volume to 310,920 tons offset in large measure by a 4.7% increase in average per ton selling prices. The decrease in sales volume was a function of routine period to period scheduling fluctuations. The increse in selling prices was attributable to continued tightening of available CPC supplies. The increase in industrial grade CPC net sales was the result of an 8.8% increase in average per ton selling prices partially offset by a 2.6 % decrease in sales volume to 87,076 tons. Higher prices across all product lines coupled with greater shipments to chemical customers out-weighed volume declines in recarb and titanium dioxide accounts. 12 of 17 The decrease in RPC net sales was primarily the result of a 40.0% decrease in sales volume to 60,164 tons largely offset by a 50.9% increase in the average per ton selling price. Fewer shipments of higher priced anode grade RPC was the primary reason for the change. The Company's gross profit for the second quarter decreased by 10.9% to $14.4 million from $16.1 million in 2000. The decrease in gross profit was due to the decrease in sales discussed above and higher cost of goods sold. The increase in cost of goods sold was primarily the result of higher average per ton raw material costs offset partially by lower sales volume. Tight anode grade RPC supply, particularly in the United States Gulf coast, was the major factor impacting raw material costs. Operating income decreased 17.9% to $9.3 million from $11.3 million in the prior year quarter. The decrease in operating income was due to the decrease in gross profit discussed above coupled with a slight increase in selling, general and administrative expenses. The increase in selling, general and administrative expenses was primarily the result of higher commission and management fee expenses. Income before income taxes decreased 15.2% to $4.0 million from $4.7 million in the comparable 2000 period. The decrease was due to the decrease in operating income discussed above offset mainly by a decrease in net interest expense. The lower net interest expense was due primarily to the effects of continued debt reduction. The Company's effective tax rate decreased to 44.0% in 2001 from 52.2% in the corresponding 2000 period primarily as a result of providing for taxes by means of an annualized rate in the current year. This method alleviates the distortions caused by applying statutory rates to interim period taxable income when, as in the Company's case, the corresponding pretax book income includes relatively large ratable amortizations of non-deductible items, such as goodwill. As a result of the factors discussed above, net income for the three months ended June 30, 2001 remained essentially unchanged at $2.5 million ( a decrease of 0.4%) compared to 2000. Adjusted EBITDA for the second quarter decreased 9.8% to $15.4 million from $17.1 million in 2000 due to the decrease in operating income discussed above and increases to add-back adjustments for depreciation/amortization and AIP management fee expenses of $0.21 million and $0.13 million, respectively. Six Months Ended June 30, 2001 Versus Six Months Ended June 30, 2000 The Company's net sales for the six months ended June 30, 2001 increased 6.0% to $129.1 million from $121.9 million in the comparable 2000 period. Net sales of anode grade CPC increased 1.1% to $93.6 million, net sales of industrial grade CPC increased 16.9% to $25.4 million and net sales of RPC increased 37.6% to $8.8 million. The increase in anode grade CPC net sales was primarily the result of a 4.0% increase in average per ton selling prices partially offset by a 2.8% decrease in sales volume to 619,432 tons. The increse in selling prices was attributable to continued tightening of available CPC supplies. The decrease in sales volume was a function of routine period to period scheduling fluctuations. The increase in industrial grade CPC net sales was the result of a 9.9% increase in sales volume to 189,594 tons augmented by a 6.4% increase in average selling prices. Higher prices across most product lines and greater shipments to titanium dioxide and chemical customers out-weighed volume declines in recarb accounts. The increase in RPC net sales was primarily the result of a 51.5% increase in the average per ton selling price offset partially by a 9.2% decrease in sales volume to 141,320 tons. Fewer shipments of higher priced anode grade RPC was the primary reason for the change. The Company's gross profit for the year-to-date period decreased by 5.5% to $28.8 million from $30.4 million in 2000. The decrease in gross profit was due to higher cost of goods sold that was only partially offset by the increase in sales discussed above. The increase in cost of goods sold was due mainly to higher average per ton raw material costs which were only slightly offset by the volume decline. Tight anode grade RPC supply, particularly in the United States Gulf coast, was the major factor impacting raw material costs. 13 of 17 Operating income decreased 9.4% to $19.1 million from $21.1 million in the prior year period. The decrease in operating income was due to the decrease in gross profit discussed above coupled by a slight increase in selling, general and administrative expenses. The increase in selling, general and administrative expenses was primarily the result of higher employee compensation, commission and management fee expenses. Income before income taxes and extraordinary item increased 2.9% to $7.8 million from $7.6 million in the comparable 2000 period. The increase was attributable to a decrease in other income (expense) which more than offset the decline in operating income discussed above. Lower net interest expense, mainly due to the effects of continued debt reduction, was the most significant factor in the decrease in other income (expense). The Company's effective tax rate decreased to 45.5% in 2001 from 50.9% in the corresponding 2000 period primarily as a result of providing for taxes by means of an annualized rate in the current year. This method alleviates the distortions caused by applying statutory rates to interim period taxable income when, as in the Company's case, the corresponding pretax book income includes relatively large ratable amortizations of non-deductible items, such as goodwill. An extraordinary gain related to the repurchase of debt of approximately $3,850,000 (net of income tax expense of $2,073,000) was recognized in current year period. As a result of the factors discussed above, net income for the six months ended June 30, 2001 increased 117.6% to $8.1 million from $3.7 million in 2000. Adjusted EBITDA for the year-to-date period decreased by 4.3% to $31.3 million from $32.8 million in 2000 due to the decrease in operating income discussed above and an increase to the add-back adjustment for depreciation/ amortization of $0.43 million. Liquidity and Capital Resources The Company's liquidity requirements are primarily for debt service, capital expenditures and general working capital needs. The timing of inventory receipts and product shipments, all of which are entirely U.S. dollar-denominated transactions, can have a substantial impact on the Company's working capital requirements. Capital investments generally relate to facility maintenance and projects to improve plant throughput and product quality. It is anticipated that capital investments for 2001 will be approximately $4.0 million. The Company expects to meet its liquidity needs, including debt service, through cash from operations, its revolving credit facility and other financing sources provided in its debt agreements. The revolving credit facility provides for borrowings of up to $25.0 million, including a $10.0 million sub-limit for letters of credit. As of August 3, 2001, no funds had been drawn down, and approximately $3.0 million in letters of credit were outstanding under this facility. Pursuant to the terms of the 10 1/4% Senior Subordinated Notes Indenture, the Company gave irrevocable notice of its election to make the November 15, 2001 interest payment through the issuance of additional notes. Any determination regarding future elections (applicable to interest payments through May 2003) will depend upon the Company's financial condition, potential business opportunities and such other factors as the Board of Directors may deem relevant. The Company or its affiliates may, from time to time, depending on liquidity and market and economic conditions, purchase in open-market transactions its 10 1/4% Senior Subordinated Notes or the 13 1/8% Senior Discount Debentures issued by GLAC. 14 of 17 New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Investments and Hedging Activities". The Company adopted the new Statement effective January 1, 2001. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities. Under the Statement, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of SFAS 133 did not have a significant effect on the Company's financial position, results of operations or cash flows. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations". SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles, such as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transtional goodwill impairment test six months from the date of adoption. The Company is currently assessing, but has not yet determined, the impact that adoption of SFAS 142 may have on its financial position and results of operations. 15 of 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings Refer to the Company's annual report on form 10K dated March 23, 2001. Item 2. Change in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits: Not applicable. (b) Reports on Form 8-K The Company filed no reports on Form 8-K with the Commission during the three months ended June 30, 2001. 16 of 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GREAT LAKES CARBON CORPORATION Date: 8/3/01 /s/James D. McKenzie James D. McKenzie President and Chief Executive Officer 17 of 17

GREAT LAKES CARBON CORP 10-Q