Ferroglobe PLC 20-F Filing Summary
Business Context and Reporting Period
This Form 20-F is the annual report for Ferroglobe PLC for the fiscal year ended December 31, 2016. Ferroglobe is a global leader in the production of silicon metal, silicon-based alloys, and manganese-based alloys, formed by the business combination of Globe Specialty Metals, Inc. and Grupo FerroAtlántica, S.A.U. in December 2015. The company operates production facilities across North America, Europe, South America, Africa, and Asia. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric ($ thousands) | 2016 | 2015 |
|---|---|---|
| Sales | 1,555,657 | 1,289,886 |
| Cost of Sales | (1,043,000) | (817,875) |
| Operating Loss | (375,593) | (22,818) |
| Loss Before Taxes | (402,157) | (9,557) |
| Net Loss (Continuing Ops) | (355,548) | (58,276) |
| Net Loss for the Year | (358,613) | (58,472) |
| Loss Attributable to Parent | (338,427) | (43,268) |
| Cash and Cash Equivalents | 196,931 | 116,666 |
| Total Assets | 2,019,301 | 2,391,161 |
| Total Equity | 892,042 | 1,294,973 |
| Operating Cash Flow | 121,169 | 145,449 |
| Capital Expenditures | 71,100 | 68,500 |
Note: 2015 results include only eight days of Globe operations following the December 23, 2015 Business Combination, whereas 2016 includes a full year of Globe operations.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 20.6% to $1.56 billion, primarily driven by the inclusion of a full year of Globe sales ($545 million) compared to only eight days in 2015. This growth was partially offset by a 20.3% decrease in average selling prices for primary products.
- Significant Impairments: The company recorded total impairment losses of $267.4 million, a sharp increase from $52.0 million in 2015. Key drivers included:
- $193.0 million goodwill impairment related to North American assets due to sustained declines in sales prices.
- $58.5 million impairment of long-lived assets in Venezuela due to political and financial instability.
- $9.2 million impairment of mining assets in South Africa.
- Profitability Decline: The company moved from a loss of $58.5 million in 2015 to a loss of $358.6 million in 2016. This deterioration was caused by lower product prices, higher operating costs (including staff costs and depreciation), and the significant non-cash impairment charges.
- Discontinued Operations: Spanish hydroelectric operations were classified as discontinued and held-for-sale, resulting in a loss of $3.1 million for the year.
Guidance, Outlook, and Risks
Management Commentary and Strategy:
- Asset Dispositions: Ferroglobe is pursuing the strategic disposal of its hydroelectric power operations in Spain and France. A definitive agreement for the Spanish operations was entered into, with expected net cash proceeds of approximately $165 million. The French disposal is expected to yield approximately $21 million. Proceeds are intended to repay indebtedness.
- Capital Expenditures: The company expects 2017 capital expenditures to be approximately $65 million, excluding the solar grade silicon project. However, it has committed to approximately $118 million in capital expenditures over three years for a joint venture to produce upgraded metallurgical grade (UMG) solar silicon.
- Refinancing: In February 2017, the company completed a refinancing, issuing $350 million of 9.375% Senior Notes due 2022 and amending its revolving credit facility.
Key Risks and Contingencies:
- Internal Controls: The company identified material weaknesses in its internal control over financial reporting regarding the control environment and revenue recognition cut-off. Management concluded controls were not effective as of December 31, 2016, though all misstatements were corrected.
- Legal Proceedings:
- Executive Chairman: Javier López Madrid, Executive Chairman, was convicted as an accessory in a Spanish court regarding Bankia/Caja Madrid matters (appealed) and is under investigation in other Spanish proceedings regarding alleged bribery and harassment. He vehemently denies all allegations.
- Environmental: The U.S. EPA issued Notices of Violation regarding the Beverly facility in Alabama. The company is negotiating a resolution which may involve installing pollution control equipment and paying civil penalties.
- Market Conditions: The company faces cyclical downturns in the metals industry, with sharp decreases in silicon metal prices since late 2014. It is also exposed to energy price volatility and supply disruptions, particularly in South Africa and Venezuela.
- Debt Covenants: The company has breached certain financial maintenance covenants under its credit facilities in late 2016, though waivers were obtained. Continued compliance is critical to avoid debt acceleration.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used in the $193 million North American goodwill impairment and the $58.5 million Venezuela asset write-down.
- Internal Control Remediation: Review the specific steps management is taking to remediate the identified material weaknesses in internal controls over financial reporting.
- Hydroelectric Sale Completion: Monitor the status of the Spanish and French hydroelectric asset sales, as the proceeds are critical for debt reduction and liquidity.
- Debt Covenant Compliance: Assess the company's ability to maintain compliance with financial covenants under the Amended Revolving Credit Facility and Senior Notes Indenture.
- Legal Exposure: Evaluate the potential financial impact of the ongoing EPA investigation in Alabama and the legal proceedings involving the Executive Chairman.
- Product Pricing Trends: Track the recovery of silicon metal and alloy prices, as the company's profitability is highly sensitive to these market rates.