Business Context and Reporting Period
This Form 6-K filing presents the consolidated financial statements of Ternium S.A., a global steel producer, for the fiscal year ended December 31, 2022. The report was signed on February 14, 2023. Ternium operates primarily through two segments: Steel (flat and long products) and Mining (iron ore and pellets), with significant operations in Mexico, Argentina, Brazil, and other Latin American markets.
Key Financial Metrics
| Metric ($ thousands) | 2022 | 2021 |
|---|---|---|
| Net Sales | 16,414,466 | 16,090,744 |
| Gross Profit | 3,927,184 | 6,195,674 |
| Operating Income | 2,699,519 | 5,271,136 |
| Profit for the Year | 2,092,772 | 4,367,191 |
| Profit Attributable to Owners | 1,767,516 | 3,825,068 |
| Earnings Per Share (Basic/Diluted) | $0.90 | $1.95 |
| Net Cash from Operating Activities | 2,752,943 | 2,677,315 |
| Total Borrowings | 1,031,865 | 1,479,038 |
| Cash and Cash Equivalents | 1,653,355 | 1,276,605 |
Margins: Gross margin decreased to approximately 24% in 2022 from 38% in 2021. Operating margin declined to roughly 16% from 33%.
Material Changes vs. Prior Period
- Profitability Decline: Net profit attributable to owners dropped by 54% to $1.77 billion, driven by a significant reduction in gross profit despite a 2% increase in net sales.
- Impairment Charges: The company recognized a non-cash impairment charge of $99.0 million related to the Brazil Cash Generating Unit (CGU) due to macroeconomic volatility and increased raw material costs. Additionally, a $120.4 million impairment was recorded on the investment in Usiminas (non-consolidated) due to lower production availability and higher discount rates.
- Debt Reduction: Total borrowings decreased by approximately $447 million to $1.03 billion, reflecting active debt repayment strategies.
- Foreign Exchange Impact: Net foreign exchange losses totaled $163.7 million, primarily attributed to the devaluation of the Argentine peso.
- Dividends: Cash dividends paid to shareholders totaled $530.0 million ($0.27 per share), a slight decrease from $569.3 million in 2021.
Outlook, Risks, and Contingencies
- Argentina Economic Environment: Ternium Argentina faces significant foreign exchange restrictions imposed by the Argentine government, including the SIRA system for import payments. While operations continue, there is a risk of restricted access to USD for imports or dividend repatriation.
- Geopolitical Risks: The Russia-Ukraine conflict has disrupted global supply chains for key inputs like steel slabs and iron ore, potentially leading to higher costs and production limitations.
- Legal Contingencies:
- CSN Litigation: A lawsuit regarding a tender offer for Usiminas shares is pending before the Superior Court of Justice in Brazil. No provision has been recorded as the company believes claims are groundless.
- Tax Adjustments: A provision of $47.2 million was recognized for potential Mexican income tax adjustments regarding 2008 and 2011 tax losses.
- Climate Change: The company has committed to reducing CO2 emissions intensity by 20% by 2030, requiring significant long-term investment in decarbonization technologies.
Investor Verification Checklist
- Verify the sustainability of gross margins given the 14 percentage point decline in 2022 and rising raw material costs.
- Monitor the resolution of the CSN tender offer litigation in Brazil and potential financial exposure.
- Assess the impact of Argentine foreign exchange restrictions on the repatriation of earnings from Ternium Argentina.
- Review the progress of debt reduction and the weighted average interest rate increase to 6.21%.
- Track the execution of the $99 million Brazil impairment and the $120 million Usiminas impairment to ensure no further write-downs are required.