Business Context and Reporting Period
This Form 6-K filing presents the consolidated financial statements of Ternium S.A., a global steel and mining company incorporated in Luxembourg, for the fiscal year ended December 31, 2013. The report was filed with the SEC on February 21, 2014. Ternium operates primarily through two reportable segments: Steel (manufacturing and selling of steel products) and Mining (iron ore and pellets). The company's operations are concentrated in Mexico, the Southern Cone (Argentina, Uruguay, Chile, etc.), and other markets including the U.S. and Colombia.
Key Financial Metrics (Year Ended Dec 31, 2013)
| Metric | 2013 (USD millions) | 2012 (USD millions) |
|---|---|---|
| Net Sales | 8,530.0 | 8,608.1 |
| Gross Profit | 1,929.7 | 1,741.7 |
| Gross Margin | 22.6% | 20.2% |
| Operating Income | 1,109.4 | 920.6 |
| Profit for the Year (Net Income) | 592.9 | 190.9 |
| Net Income Attributable to Equity Holders | 455.4 | 142.0 |
| Earnings Per Share (Basic & Diluted) | $0.23 | $0.07 |
| Operating Cash Flow | 1,092.2 | 1,055.1 |
| Total Borrowings (Debt) | 2,002.8 | 2,424.4 |
| Cash and Cash Equivalents | 307.2 | 560.3 |
| Total Assets | 10,372.6 | 10,867.0 |
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to equity holders increased significantly by 221% (from $142.0 million to $455.4 million). This was driven by a 20.5% increase in operating income and a substantial reduction in losses from non-consolidated companies.
- Non-Consolidated Investments: In 2012, the company recorded a massive impairment charge of $275.3 million related to its investment in Usiminas (Brazil). In 2013, the equity in losses of non-consolidated companies was only $31.6 million, compared to a $346.8 million loss in 2012.
- Debt Reduction: Total borrowings decreased by approximately $421.6 million (17.4%) to $2.0 billion. This was achieved through the early repayment of a syndicated loan used to finance the Usiminas acquisition and the repayment of short-term debt.
- Cash Position: Cash and cash equivalents declined by 45% to $307.2 million, primarily due to significant capital expenditures ($883.3 million) and dividend payments ($194.3 million total).
- Revenue Mix: Net sales decreased slightly by 0.9%. However, the Mining segment saw a significant increase in reported sales due to a change in accounting treatment for the Peña Colorada joint operation (from equity method to line-by-line consolidation starting Jan 1, 2013).
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The company changed the functional currency of its Mexican subsidiaries to the U.S. dollar effective Jan 1, 2012, and began consolidating 50% of the Peña Colorada mining operations line-by-line in 2013 rather than using the equity method. These changes impact comparability of segment results.
- Dividends: The company paid cash dividends of $127.6 million to shareholders ($0.065 per share) and $66.7 million to non-controlling interests in 2013.
- Legal Contingencies:
- CSN Lawsuit: A lawsuit filed by Companhia Siderúrgica Nacional (CSN) regarding the Usiminas acquisition was dismissed by a first-instance court in September 2013. Ternium believes the allegations are groundless and has recorded no provision.
- Tax Claims: A significant tax claim in Mexico (approx. $348 million) was settled in May 2013 for approximately $34 million under a tax amnesty program.
- Capital Projects: Significant investments were made in Mexico, including the Tenigal galvanizing plant (production started H2 2013) and a new power plant project (Techgen) with Tenaris and Tecpetrol.
- Risk Factors: The company faces exposure to foreign exchange volatility (particularly ARS, MXN, COP), interest rate fluctuations (75.7% of debt is variable rate), and commodity price volatility. Management uses derivatives to hedge these risks.
Investor Verification Checklist
- Usiminas Performance: Verify the ongoing financial health of Usiminas (Brazil), as Ternium's 22.71% stake remains a significant asset ($1.37 billion) and a source of volatility.
- Debt Maturity Profile: Review the maturity schedule of the $2.0 billion debt, noting that $798 million is due in 2014, to assess near-term liquidity requirements.
- Dividend Sustainability: Confirm that distributable retained earnings under Luxembourg law remain sufficient to support future dividend policies, noting the distinction between IFRS equity and Luxembourg GAAP equity.
- Segment Accounting: Understand the impact of the Peña Colorada consolidation change on the Mining segment's reported revenue and operating income for future comparisons.
- Legal Outcomes: Monitor the status of the CSN lawsuit appeal and any new tax assessments in Argentina or Mexico.