Ferroglobe PLC — FY2019 Form 20-F Summary
Business context and reporting period
Ferroglobe is a global producer of silicon metal, silicon-based alloys, manganese-based alloys and related specialty metals, with mining and manufacturing operations across North America, Europe, South Africa and other regions. The filing is the audited annual report for the year ended December 31, 2019, prepared under IFRS. It is not a quarterly filing; the source text does not provide a separate Q4 2019 income statement.
The Spanish hydroelectric business was sold on August 30, 2019. Prior-period income statements were recast so that the Spanish energy business is presented as discontinued operations.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $1.615 billion | $2.242 billion | Down 28.0% |
| Operating profit/(loss) | $(355.6) million | $99.1 million | Turned to loss |
| Loss/profit before tax | $(411.8) million | $35.6 million | Turned to loss |
| Continuing-operations loss | $(370.3) million | $15.1 million | Turned to loss |
| Net loss | $(285.6) million | $24.6 million profit | Turned to loss |
| Loss attributable to parent | $(280.6) million | $43.7 million profit | Turned to loss |
| Basic and diluted EPS | $(1.66) | $0.25 | Declined |
| Operating cash flow | $(74.2) million | $73.8 million | Turned negative |
| Capital expenditures | $32.4 million | $106.1 million | Down materially |
| Cash, restricted cash and equivalents | $123.2 million | $216.6 million | Down $93.5 million |
| Gross financial debt | $606.4 million | $645.4 million | Down $39.0 million |
| Total equity | $602.3 million | $884.4 million | Down $282.1 million |
Calculated margins were approximately 24.8% on sales less cost of sales, negative 22.0% operating margin and negative 17.7% net margin. These margins were heavily affected by the 2019 impairment charges and the collapse in product prices and volumes.
- Impairment losses totaled $175.9 million, including $174.0 million of goodwill impairment related to U.S. and Canadian operations.
- Discontinued operations generated $84.6 million of profit, primarily including an $85.1 million gain on the sale of the Spanish hydroelectric business.
- Product sales declined across major categories: silicon metal revenue fell to $539.9 million from $933.4 million; manganese-based alloys to $447.3 million from $527.8 million; and ferrosilicon to $275.4 million from $359.4 million.
- Average selling prices declined to $2,252 per metric ton for silicon metal, $1,140 for manganese-based alloys and $1,351 for ferrosilicon.
- Power consumption represented approximately 27% of consolidated cost of sales, underscoring the company’s sensitivity to electricity prices and supply reliability.
Liquidity, debt and cash flow
- The company had $94.9 million of unrestricted cash and $28.3 million of restricted cash at December 31, 2019.
- Debt comprised approximately $355.0 million of debt instruments, $159.0 million of bank borrowings, $25.9 million of lease liabilities and $66.5 million of other financial liabilities.
- The principal debt instrument was $350 million of 9.375% senior unsecured notes due March 1, 2022. The notes require a change-of-control repurchase at 101% of principal plus accrued interest.
- A new $100 million North American asset-based revolving facility was entered into in October 2019, with approximately $58.0 million drawn at year-end. The facility has a legal maturity in 2024 but includes a spring-forward provision that could require repayment by December 1, 2021 if the notes are not refinanced.
- The receivables securitization program had a maximum commitment of $150 million and provided approximately $58.3 million of upfront cash consideration at year-end. The program was consolidated beginning September 5, 2019 because Ferroglobe determined that it controlled the special purpose entity.
- 2019 cash flow was supported by $165.9 million of investing inflows, including approximately $177.6 million of proceeds from the Spanish hydroelectric business sale, but financing activities used $181.0 million.
- Working capital was reported at $474.0 million. Contractual obligations totaled $1.113 billion, including $688.6 million of debt obligations and $346.7 million of power purchase commitments.
Material changes versus FY2018
- Sales declined 28.0% because of lower shipment volumes and lower average selling prices, following weakening metals markets during the second half of 2018 and throughout 2019.
- Silicon metal shipment volume fell 32.0%, silicon-based alloy volume fell 13.9% and manganese-based alloy volume fell 7.5%.
- Operating results deteriorated from a $99.1 million profit to a $355.6 million loss. Higher energy and manganese ore costs further compressed margins.
- North America recorded a $200.7 million operating loss, including $174.0 million of impairment charges. Europe recorded a $100.2 million operating loss, compared with a $101.9 million profit in 2018.
- Several facilities were closed, idled or operated at reduced levels, including the Selma and Niagara facilities in North America and the Polokwane plant in South Africa.
- Debt decreased modestly, but net debt increased to $483.2 million from $428.7 million because cash declined substantially. Net debt-to-equity increased to 80.2% from 48.5%.
- The company paid no dividends in 2019, compared with $20.6 million in 2018.
- The Solar JV was unwound in July 2019. Investment in the solar-grade silicon project remained suspended, with project assets carried at approximately $45.6 million.
Guidance, outlook, risks and unusual items
- Management expected 2020 capital expenditures of approximately $40.0 million, subject to COVID-19 uncertainty, with the ability to reduce spending by idling facilities.
- Management expected manganese alloy market spreads to normalize in 2020 and sought shorter-term 2020 contracts to benefit from potential price increases. This expectation is forward-looking and not assured.
- Management stated that COVID-19 had not materially affected liquidity or financial position as of the financial statement issuance date, but acknowledged that demand, prices and cash flow were difficult to forecast. The downside scenario assumed a recovery in trading activity in the latter part of 2020.
- The auditors included an explanatory paragraph stating that substantial doubt existed regarding the company’s ability to continue as a going concern, principally because of limited cash headroom, weak operating cash flow, COVID-19 uncertainty and the potential need to repay debt following a change of control. Management nevertheless concluded that the company had adequate resources to operate for the foreseeable future.
- Pending environmental matters at the Beverly, Ohio facility involve alleged Clean Air Act violations. Potential injunctive relief, pollution-control capital expenditures and civil penalties remain uncertain; the stated statutory maximum penalty was $93,750 per day per violation from April 2013 onward.
- Approximately 96 asbestos-related claims had been declared in France, with approximately 21 pending and 12 including allegations of inexcusable negligence. A provision of $1.2 million was recorded, but ultimate exposure was not reliably estimable.
- Shareholder securities litigation and a related derivative action were pending. Management stated that it believed the allegations lacked merit, but outcomes remained uncertain.
- Grupo Villar Mir controlled approximately 54% of voting power, and most of its shares were pledged to lenders. A lender foreclosure could result in a change of control and potentially trigger accelerated debt repayment obligations.
- Key operating risks include cyclicality in steel, aluminum, polysilicon and silicone markets; electricity costs and availability; raw-material pricing and supply; tariffs and trade remedies; foreign exchange; labor actions; environmental compliance; mining permits; and customer concentration. The ten largest customers represented approximately 39.9% of 2019 revenue.
Most important facts for an investor to verify
- Whether Ferroglobe refinanced or repaid the $350 million senior notes before their March 2022 maturity and whether the ABL spring-forward provision was triggered.
- Actual 2020 and subsequent operating cash flow, liquidity headroom and compliance with ABL, securitization and note covenants.
- Progress in recovering silicon metal, ferrosilicon and manganese alloy prices, shipment volumes and segment margins.
- The final resolution and financial exposure from the Beverly environmental proceedings, shareholder litigation and asbestos claims.
- The impact of COVID-19 and subsequent market conditions on customer demand, facility utilization, energy costs and raw-material availability.
- Whether the remaining U.S. goodwill and other long-lived assets require further impairment, particularly given the limited $5.3 million headroom disclosed for the U.S. cash-generating unit.
- Future obligations under power purchase contracts, debt maturities, government loans and other contractual commitments.