Ferroglobe PLC 2017 Form 20-F Summary
Business context and reporting period
Ferroglobe is a global producer of silicon metal, silicon-based alloys and manganese-based alloys, with quartz and metallurgical coal mining operations and hydroelectric assets in Spain and France. Its products serve the aluminum, steel, silicone, polysilicon, photovoltaic, automotive and construction industries. The filing covers the fiscal year ended December 31, 2017, rather than a standalone fourth quarter. Financial statements are prepared under IFRS as issued by the IASB and reported in U.S. dollars.
Ferroglobe had 171,976,731 ordinary shares outstanding at December 31, 2017. Grupo Villar Mir owned approximately 53% of the voting power, making the company a controlled company.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | $1,741.7 million | $1,576.0 million | 10.5% increase |
| Operating profit | $39.7 million | $(373.1) million | Improved by $412.8 million |
| Operating profit before impairment and other specified items | $70.1 million | $(107.2) million | Improved by $177.3 million |
| Loss before tax | $(20.6) million | $(405.3) million | Substantially improved |
| Net loss | $(5.8) million | $(358.6) million | Substantially improved |
| Loss attributable to parent | $(0.7) million | $(338.4) million | Substantially improved |
| Basic loss per share | Less than $0.01 | $(1.97) | Improved |
| Cash flow from operating activities | $150.4 million | $121.2 million | Increase of $29.2 million |
| Capital expenditures | $74.6 million | $71.1 million | Increase of $3.5 million |
| Cash and cash equivalents | $184.5 million | $196.9 million | Decrease of $12.5 million |
| Gross financial debt | $571.3 million | $514.6 million | Increase of $56.8 million |
| Net financial debt | $386.9 million | $317.7 million | Increase of $69.2 million |
Sales growth was driven primarily by higher selling prices. Average prices increased 3.1% for silicon metal, 14.9% for silicon-based alloys and 60.7% for manganese-based alloys. This more than offset a 2.9% decline in sales volumes. Silicon metal sales declined to $739.6 million from $751.5 million, while manganese-based alloy sales increased to $363.6 million from $223.5 million.
Reported operating margin was approximately 2.3% in 2017, compared with a negative margin in 2016. The filing does not provide a clear EBITDA figure. Cost of sales was essentially flat at $1,043.4 million despite higher raw material and energy costs, while depreciation, amortization and operating allowances declined to $104.5 million from $125.7 million.
Liquidity, debt and cash flow
- Operating cash flow was $150.4 million. Investing activities used $74.8 million, primarily for capital expenditures, and financing activities used $113.4 million.
- Current assets were $691.3 million and current liabilities were $450.2 million, producing reported working capital of $241.1 million.
- Ferroglobe issued $350 million of 9.375% senior notes due March 2022. The notes had a carrying amount of $350.3 million at year-end and interest is payable semi-annually.
- The $200 million revolving credit facility was undrawn at December 31, 2017. After year-end, it was replaced with a $250 million revolving facility maturing in February 2021.
- The company began a trade receivables securitization program in July 2017. It provided approximately $166.5 million of upfront cash consideration at year-end, with capacity of up to $250 million. The company sold approximately $850 million of receivables during 2017 and recorded $7.3 million of related finance costs.
- Contractual obligations totaled $649.4 million, including $497.7 million of long-term debt obligations, $82.6 million of finance leases and $22.4 million of power purchase commitments.
- No dividends were paid or proposed for 2017, compared with $55.0 million of dividends paid in 2016.
Material changes versus the prior comparable period
- Results recovered sharply from the weak 2016 market environment as silicon metal, silicon-based alloy and manganese alloy pricing improved.
- Impairment losses fell to $31.0 million from $268.1 million. The 2017 charge primarily comprised a $30.6 million partial impairment of Canadian goodwill, compared with $193.0 million of North American goodwill impairment and $58.5 million of Venezuelan asset impairment in 2016.
- Finance costs increased to $65.4 million from $30.3 million, principally because of the senior notes issued in February 2017. A further $6.9 million loss arose from the non-hedged portion of a cross-currency swap.
- North American sales increased 3.8% and Europe sales increased 14.1%. South African sales declined 13.8%, primarily because two Polokwane furnaces were idle.
- The Spanish hydroelectric business was returned to continuing operations after the planned divestiture failed to receive regulatory approvals. Low precipitation reduced 2017 Spanish hydroelectric output to approximately 283,600 megawatt hours versus an average annual output of approximately 583,000 megawatt hours.
- Goodwill declined to $205.3 million from $230.2 million. Property, plant and equipment increased to $918.0 million from $781.6 million, partly reflecting the return of Spanish energy assets from held-for-sale classification.
Guidance, outlook, commentary and unusual items
Management expected 2018 capital expenditures of approximately $92 million, excluding the solar-grade silicon project. Ferroglobe had also committed approximately €51 million of additional capital expenditures for the initial phase of that project, in addition to approximately €21 million invested previously. Management expected operating cash flow to fund operations, working capital needs and debt service over the following 12 months, subject to market conditions.
Management stated that 2018 contracting strategy was intended to use shorter-term contracts to retain exposure to anticipated price increases. The company highlighted improved demand in chemical, aluminum and solar markets and strong steel mill production during 2017, but emphasized the cyclicality of metals markets, energy costs, raw material prices and import competition.
After year-end, Ferroglobe acquired Glencore’s manganese alloy plants in Mo i Rana, Norway and Dunkirk, France. The company said the acquisition would approximately double its manganese alloy production capacity and could increase company-wide revenue by 10% to 20%; acquisition accounting was incomplete when the financial statements were authorized. The transaction also added integration, foreign exchange and execution risks.
Other unusual or material matters include an $8.9 million provision for a mediation dispute with a North American joint venture partner, $2.3 million recorded for asbestos-related liabilities in France, ongoing Clean Air Act negotiations concerning the Beverly, Ohio facility, and a $31.2 million deferred tax benefit from U.S. tax reform. The company also recorded a $1.7 million estimated transition-tax charge.
Principal risks and contingencies
- Highly cyclical silicon and ferroalloy markets, volatile selling prices and dependence on steel, aluminum, silicone and polysilicon end markets.
- Significant exposure to electricity availability and pricing, including Spanish wholesale power prices, South African regulated rates and Argentine energy-price disputes.
- Concentration of customers and suppliers: the ten largest customers represented approximately 47.1% of sales, and Dow Corning represented 12.2%; approximately 94% of manganese ore purchases came from South Africa and Gabon.
- Debt service, restrictive covenants and change-of-control provisions. A default by Grupo Villar Mir on loans secured by its pledged Ferroglobe shares could trigger a change of control and potential debt repayment or note redemption obligations.
- Environmental, health and safety liabilities, including the unresolved Beverly facility NOV/FOVs. The filing states that statutory penalties could reach $93,750 per day per violation, although the eventual penalty and required remediation were not determinable.
- Material weaknesses in internal control over financial reporting. Management and Deloitte concluded that internal control was ineffective as of December 31, 2017, resulting in an adverse auditor opinion on internal control, although Deloitte issued an unqualified opinion on the consolidated financial statements.
- Foreign exchange exposure, political and economic instability in Venezuela and other jurisdictions, labor disputes, mining-permit risks, climate and hydrology risk, litigation and related-party transactions.
Facts investors should verify
- Whether pricing and volume trends in silicon metal and manganese-based alloys remained favorable after 2017.
- Actual leverage, covenant compliance and liquidity after the February 2018 refinancing and the Glencore acquisition.
- Integration performance, purchase accounting and expected synergies from the Norway and France manganese plants.
- Progress in remediating the identified internal-control weaknesses, especially revenue cut-off, manual invoicing, financial close controls and the Spanish administration office.
- Potential costs and timing of the Beverly environmental matter, asbestos claims and the North American joint venture dispute.
- Capital requirements, financing and commercial viability of the solar-grade silicon project.
- Exposure to electricity prices, raw material supply concentration, customer concentration and future antidumping or tariff decisions.