Ferroglobe PLC: 2018 Form 20-F Summary
Business context and reporting period
Ferroglobe PLC is a U.K.-incorporated global producer of silicon metal, silicon-based alloys and manganese-based alloys, with quartz and coal mining activities and hydroelectric power operations. The filing is an annual report for the fiscal year ended December 31, 2018, prepared under IFRS as issued by the IASB. It does not provide a separate fourth-quarter income statement; references to “2018 Q4” should therefore be understood as the full fiscal year unless quarterly information is obtained elsewhere.
In February 2018, Ferroglobe acquired manganese-alloy plants in Mo i Rana, Norway, and Dunkirk, France, from Glencore. The acquired operations contributed approximately $230.3 million of 2018 revenue for roughly eleven months of ownership. Ferroglobe also sold its majority interest in Hidro Nitro Española’s hydroelectric assets in Spain in December 2018.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $2,274.0 million | $1,741.7 million | +30.6% |
| Operating profit | $116.8 million | $39.7 million | +194.1% |
| Profit attributable to parent | $43.7 million | $(0.7) million | Returned to profit |
| Basic EPS | $0.25 | Approximately $0.00 loss | Improved |
| Operating margin | 5.1% | 2.3% | +2.8 percentage points |
| Profit attributable to parent margin | 1.9% | Approximately 0.0% | Improved |
| Net cash from operating activities | $73.8 million | $150.4 million | −51.0% |
| Capital expenditures | $106.1 million | $74.6 million | +42.2% |
| Cash and cash equivalents | $216.6 million | $184.5 million | +17.4% |
| Gross financial debt | $645.4 million | $571.3 million | +13.0% |
| Net financial debt | $428.7 million | $386.9 million | +10.8% |
| Net debt to total equity | 48.5% | 41.3% | Higher leverage |
Cost of sales was $1,447.4 million, implying a gross margin of approximately 36.4%, compared with approximately 40.1% in 2017. Finance costs were $62.0 million, down from $65.4 million, while income tax expense was $24.2 million compared with a $14.8 million benefit in 2017. Total assets were $2.124 billion and total equity was $884.4 million at year-end.
Operating cash flow declined primarily because of higher working capital requirements associated with the acquired manganese businesses. Investing cash outflows were $85.9 million, while financing activities generated $53.3 million, including increased revolving-credit borrowings. The company paid $20.6 million of dividends and repurchased $20.1 million of shares.
Material changes versus the prior comparable period
- Revenue increased 30.6%, driven principally by the Glencore manganese-plant acquisition, higher shipment volumes and improved silicon-metal and silicon-based-alloy pricing.
- Shipments increased 8.2% for silicon metal, 10.1% for silicon-based alloys and 54.8% for manganese-based alloys. Manganese-alloy average selling prices declined 6.3% to $1,244 per metric ton, while silicon-metal pricing increased 16.6% to $2,647 per metric ton.
- Manganese-alloy margins were pressured by historically high manganese-ore prices and relatively low alloy pricing. Management described the resulting spread compression as a significant 2018 issue.
- Operating profit benefited from volume growth, the energy business, a $40.1 million bargain-purchase gain on the Glencore acquisition and a $14.6 million gain on disposal of non-current assets.
- Impairment losses increased to $58.9 million from $31.0 million, including $40.5 million on property, plant and equipment and $13.9 million on intangible assets related to the Puertollano solar-grade silicon project. No goodwill impairment was recorded in 2018.
- Cash conversion weakened materially: operating cash flow fell by approximately $76.6 million despite higher operating profit, while inventories increased to $457.0 million from $361.2 million.
- Gross debt increased, primarily because $135.9 million was drawn under the revolving credit facility. The company remained in compliance with its debt covenants at December 31, 2018.
- The company completed a $20 million share-repurchase program, acquiring 2.894 million shares at an average price of $6.89; 1.153 million shares were cancelled and 1.741 million were held in treasury.
Guidance, outlook, commentary, risks and unusual items
Management expected approximately $50.0 million of 2019 capital expenditures and stated that operating cash flow was expected to fund operations, working capital, debt service and planned expenditures over the following 12 months. The solar-grade silicon project was suspended because of adverse market conditions; no 2019 capital expenditures were expected other than already committed amounts. Management expected manganese-alloy spreads to normalize toward more historical levels in 2019, but provided no formal revenue or earnings guidance.
Management reported a rapid and unexpected decline in product prices during the second half of 2018 and deterioration in market conditions continuing into early 2019. Key exposures include the cyclicality of steel, aluminum, polysilicon and silicone markets; electricity prices and supply reliability; manganese-ore, coal and other raw-material costs; foreign exchange; tariffs and antidumping measures; customer concentration; labor disruptions; mining, environmental and safety regulation; and the ability to maintain liquidity and comply with debt covenants.
- The company’s ten largest customers represented approximately 33% of 2018 revenue, although no individual customer exceeded 10%.
- Power represented approximately 28% of consolidated cost of sales. The Argentine power agreement’s favorable rate was scheduled to expire in December 2019, with renewal subject to negotiation.
- A fatal employee accident occurred following an explosion at the Selma, Alabama plant. WARN notices were issued for the Selma and Niagara facilities in late 2018.
- GMI’s Beverly, Ohio facility remained subject to unresolved U.S. Clean Air Act Notices and Findings of Violation. Potential remedies include pollution-control investments, injunctive relief and civil penalties; the filing states the statutory maximum could be $93,750 per day per violation from April 2013.
- Approximately 32 asbestos-related claims remained pending in France, including 13 involving allegations of “inexcusable negligence.” A $1.8 million provision was recorded, but ultimate exposure was not considered reliably estimable.
- The acquired manganese businesses include contingent consideration with a maximum undiscounted potential payment of $60.0 million; the recorded fair value was $26.2 million.
- After year-end, the revolving credit facility was amended on February 22, 2019: commitments were reduced from $250 million to $200 million, and interim leverage and minimum-cash covenants were introduced through the first quarter of 2020.
- Internal control over financial reporting was assessed as effective, but the assessment excluded the acquired manganese businesses, representing approximately 6% of total assets and 10% of 2018 net revenue.
Most important facts for investors to verify
- Whether product prices and manganese-alloy spreads improved after the sharp second-half 2018 deterioration.
- Whether operating cash flow and working-capital intensity normalize after the acquisition-related inventory buildup.
- Availability under the amended revolving credit facility, compliance with interim cash and leverage covenants, and refinancing needs before the 2022 senior-notes maturity.
- The final resolution and potential cost of the Beverly, Ohio environmental proceedings.
- The status, remaining funding requirements and recoverability of the suspended solar-grade silicon project.
- The amount and timing of contingent consideration for the Norway and France manganese plants.
- Renewal terms for important power arrangements, particularly in Argentina, and the effect of energy-price volatility on margins.
- The effect of the 2019 adoption of IFRS 16, which was expected to add approximately $28.3 million of lease liabilities at transition.