Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2012
Business Overview: Ternium is a global steel manufacturer and distributor organized into two reportable segments: Steel and Mining. The company operates primarily in Mexico, Argentina, and other Latin American markets, with significant investments in non-consolidated companies, most notably Usiminas in Brazil.
Key Financial Metrics
| Metric (USD in thousands) | 2012 | 2011 |
|---|---|---|
| Net Sales | 8,608,054 | 9,122,832 |
| Gross Profit | 1,736,964 | 2,102,705 |
| Operating Income | 915,902 | 1,251,848 |
| Profit for the Year | 187,154 | 649,907 |
| Profit Attributable to Equity Holders | 139,235 | 513,540 |
| Earnings Per Share (Basic & Diluted) | $0.07 | $0.26 |
| Net Cash Provided by Operating Activities | 1,055,092 | 622,370 |
| Total Borrowings | 2,424,363 | 1,996,136 |
| Cash and Cash Equivalents | 560,307 | 2,158,044 |
Material Changes vs. Prior Period
- Significant Profit Decline: Profit for the year dropped 71% to $187.2 million from $649.9 million in 2011. This was primarily driven by a $346.8 million loss recorded in "Equity in (losses) earnings of non-consolidated companies."
- Usiminas Impairment: The decline in equity earnings was largely due to a $275.3 million impairment charge on the investment in Usiminas (Brazil), attributed to a weaker industrial environment in Brazil and reduced long-term iron ore price forecasts.
- Revenue Decrease: Net sales decreased 5.6% to $8.6 billion, reflecting lower volumes and pricing pressures in the steel market.
- Liquidity Reduction: Cash and cash equivalents fell by approximately 74% to $560.3 million. This decrease was driven by significant investing outflows, including a $2.24 billion purchase consideration for the Usiminas stake and $1.02 billion in capital expenditures.
- Debt Increase: Total borrowings increased by $428 million to $2.42 billion, partly to finance the Usiminas acquisition.
Outlook, Risks, and Contingencies
- Usiminas Litigation: A subsequent event disclosed a lawsuit filed in Brazil by Companhia Siderúrgica Nacional (CSN) against Ternium and affiliates regarding the Usiminas acquisition. CSN alleges a requirement to launch a tag-along tender offer to minority shareholders. Ternium considers the allegations groundless and intends to defend vigorously.
- Tax Contingencies:
- Argentina (Siderar): A provision of $1.8 million was recorded for an income tax claim by AFIP regarding fiscal years 1995-1999.
- Mexico (Ternium Mexico): A potential tax assessment of approximately $325 million was notified by Mexican authorities regarding a 2004 capital reduction. No provision was recorded as the company believes an obligation is not probable.
- Operational Risks: The company faces exposure to foreign exchange rate volatility (particularly ARS, MXN, COP, BRL) and commodity price fluctuations. The weighted average interest rate on debt was 5.99% as of year-end.
- Dividend Capacity: As of December 31, 2012, Ternium may pay dividends up to $6.0 billion in accordance with Luxembourg law.
Investor Verification Checklist
- Usiminas Investment Health: Verify the ongoing impact of the $275 million impairment and the status of the CSN lawsuit on the recoverability of the Usiminas investment.
- Liquidity Position: Assess the sustainability of operations given the sharp decline in cash reserves ($560M) against high capital expenditure requirements and debt maturities ($1.12B due in 2013).
- Tax Exposure: Monitor the resolution of the $325 million Mexican tax assessment and the Argentine tax litigation.
- Segment Performance: Review the divergence between IFRS operating income and "Management View" operating income, particularly regarding the Mining segment and the accounting treatment of Peña Colorada.
- Debt Covenants: Confirm compliance with financial covenants (leverage ratio, minimum cash requirements) under the "Ternium facility" used to finance the Usiminas acquisition.