Business Context and Reporting Period
This Form 6-K filing by Ternium S.A. (NYSE: TX) serves as a notice of the Annual General Meeting of Shareholders and an Extraordinary General Meeting of Shareholders scheduled for May 6, 2015. The filing includes the Company's 2014 Annual Report, covering the fiscal year ended December 31, 2014. Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala, and holds a significant stake in Usiminas, a Brazilian steel producer.
Key Financial Metrics (Year Ended Dec 31, 2014)
| Metric | 2014 Value | 2013 Value |
|---|---|---|
| Net Sales | $8,726.1 million | $8,530.0 million |
| Operating Income | $1,056.2 million | $1,109.4 million |
| EBITDA | $1,471.0 million | $1,486.6 million |
| Net Income (Consolidated) | $588.8 million | $592.9 million |
| Net Income (Parent Company Only) | Loss of $289.98 million | Loss of $6.95 million |
| Free Cash Flow | $62.4 million | $208.9 million |
| Total Financial Debt | $2,164.8 million | $2,002.8 million |
| Net Debt | $1,801.5 million | $1,526.1 million |
| Capital Expenditures | $443.5 million | $883.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 2% year-over-year, driven by a 15% increase in Mexico sales, partially offset by declines in the Southern Region (-10%) and Other Markets (-7%).
- Profitability: Operating income decreased slightly by 4.8% to $1.06 billion. Operating margin declined from 13.0% to 12.1% due to lower steel revenue per ton, partially offset by lower operating costs per ton.
- Usiminas Impairment: The Company recorded a $196.4 million impairment charge on its investment in Usiminas due to a weaker Brazilian industrial environment and lower steel/iron ore prices. This was partially offset by an $188.9 million gain from a bargain purchase upon acquiring additional Usiminas shares.
- Parent Company Loss: While consolidated net income remained stable, the Parent Company (Ternium S.A.) reported a loss of $289.98 million for 2014, primarily due to the Usiminas impairment and value adjustments on financial fixed assets.
- Dividend Proposal: Management proposes a dividend of $0.09 per share ($0.90 per ADS), representing a 20% increase from the prior year, to be paid from retained earnings.
Guidance, Outlook, and Risks
- Market Outlook: Management expects Mexico's GDP growth to accelerate in 2015, driving record shipment levels. Conversely, Argentina's economy is expected to remain stagnant, and Brazil faces continued economic slowdown.
- Strategic Investments: The Company is ramping up new facilities in Pesquería, Mexico (cold rolling and galvanizing), and progressing with the Techgen power plant project to reduce energy costs.
- Key Risks:
- Usiminas Controversy: Ongoing legal and governance disputes within the Usiminas control group regarding the appointment of senior managers and potential tender offer requirements.
- Competition: Aggressive competition from Chinese steel imports, which rose 56% in Latin America in 2014, threatening regional manufacturing.
- Commodity Prices: Volatility in iron ore and steel prices impacting margins and asset valuations.
- Capital Structure: The Extraordinary General Meeting will seek shareholder approval to renew the authorized share capital and the Board's authority to issue shares without pre-emptive rights for five years to facilitate strategic acquisitions and financing.
Investor Verification Checklist
- Verify the final resolution of the Usiminas governance dispute and any potential impact on the investment valuation or voting rights.
- Confirm the timing and execution of the proposed $0.90 per ADS dividend payment.
- Monitor the progress of the Techgen power plant and the ramp-up of the Pesquería facilities to ensure projected cost savings and volume increases are realized.
- Review the impact of Chinese steel import penetration on Latin American market share and pricing power in 2015.
- Assess the liquidity position given the increase in net debt to $1.8 billion and the reduction in free cash flow.