Business Context and Reporting Period
This Form 6-K filing by Ternium S.A. furnishes the consolidated financial statements for the fiscal year ended December 31, 2017. Ternium is a leading steel producer in Latin America, organized into two reportable segments: Steel and Mining. The filing was signed on February 20, 2018. A significant corporate event during the period was the acquisition of thyssenkrupp Slab International B.V. and its subsidiary CSA Siderúrgica do Atlântico Ltda. (renamed Ternium Brasil Ltda.) in September 2017 for approximately USD 1.89 billion.
Key Financial Metrics (Year Ended Dec 31, 2017)
| Metric | 2017 (USD millions) | 2016 (USD millions) |
|---|---|---|
| Net Sales | 9,700.3 | 7,224.0 |
| Gross Profit | 2,297.3 | 1,839.6 |
| Operating Income | 1,456.8 | 1,141.7 |
| Profit for the Year | 1,022.9 | 706.9 |
| Profit Attributable to Owners | 886.2 | 595.6 |
| Earnings Per Share (Basic/Diluted) | $0.45 | $0.30 |
| Net Cash from Operating Activities | 383.9 | 1,099.6 |
| Total Assets | 12,122.6 | 8,322.9 |
| Total Borrowings | 3,221.9 | 1,218.6 |
| Cash and Cash Equivalents | 337.8 | 183.5 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34% to USD 9.7 billion, driven primarily by the consolidation of Ternium Brasil (contributing USD 864 million in revenue post-acquisition) and higher volumes/prices in the Steel segment.
- Profitability: Profit for the year rose 45% to USD 1.02 billion. Operating income increased 28% to USD 1.46 billion. Gross margin improved to approximately 23.7% from 25.5% in 2016, though absolute gross profit grew significantly.
- Balance Sheet Expansion: Total assets increased by 46% to USD 12.1 billion, largely due to the acquisition of Ternium Brasil (adding USD 1.57 billion in PP&E and intangibles) and increased inventory levels.
- Debt Increase: Total borrowings surged to USD 3.22 billion from USD 1.22 billion, primarily to finance the USD 1.5 billion syndicated facility for the Ternium Brasil acquisition.
- Cash Flow: Net cash provided by operating activities decreased to USD 384 million from USD 1.1 billion, impacted by a significant increase in working capital requirements (USD 865 million outflow) related to inventory buildup and receivables.
Outlook, Risks, and Contingencies
- Acquisition Contingencies: The Ternium Brasil acquisition included significant provisions for contingencies, totaling approximately USD 799.9 million at acquisition. Key items include:
- ICMS Tax Incentive: A provision of USD 651.8 million (USD 620.1 million as of year-end) related to the potential unconstitutionality of a state tax incentive. The company has a right to recover part of this from the seller.
- Legal Claims: Provisions for fishermen associations' claims (USD 23.4 million) and tax assessments regarding ICMS credits (USD 54.9 million).
- Usiminas Governance: A subsequent event (February 2018) noted a new governance agreement with Nippon Steel & Sumitomo Metal Corporation (NSSMC) regarding Usiminas, including an exit mechanism (buy-and-sell procedure) exercisable after May 2018.
- Foreign Exchange Risk: The company faces significant exposure to currency fluctuations, particularly the Argentine Peso (devalued 14.8% in 2017) and Mexican Peso. A 1% weakening of these currencies against the USD would impact pre-tax income.
- Dividends: The company paid cash dividends of USD 196.3 million to shareholders in 2017. Under Luxembourg law, distributable retained earnings allow for potential dividends up to USD 3.1 billion.
Investor Verification Checklist
- Acquisition Integration: Verify the operational integration and financial performance of Ternium Brasil beyond the initial four months of consolidation.
- Tax Contingency Resolution: Monitor the status of the ICMS tax incentive confirmation process in Rio de Janeiro, which could impact the USD 620 million provision.
- Debt Servicing: Assess the impact of the increased debt load (USD 3.2 billion) on interest coverage ratios, noting the weighted average interest rate of 4.76%.
- Working Capital Management: Review the sustainability of the USD 865 million working capital outflow and inventory levels relative to sales growth.
- Usiminas Strategy: Evaluate the implications of the new governance agreement and potential exit mechanisms for the Usiminas investment (carrying value USD 466 million).