Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2014
Accounting Basis: International Financial Reporting Standards (IFRS)
Restatement Note: The 2014 financial statements have been restated to correct an error regarding the carrying value of the Company's investment in Usiminas S.A. (Brazil), following discussions with the SEC Staff.
Key Financial Metrics
| Metric (USD Millions) | 2014 (Restated) | 2013 |
|---|---|---|
| Net Sales | 8,726.1 | 8,530.0 |
| Operating Income | 1,056.2 | 1,109.4 |
| Net (Loss) Profit for the Year | (104.2) | 592.9 |
| Net Loss Attributable to Owners of Parent | (198.8) | 455.4 |
| Basic EPS (USD) | (0.10) | 0.23 |
| Total Assets | 9,606.2 | 10,372.6 |
| Total Borrowings | 2,164.8 | 2,002.8 |
| Cash and Cash Equivalents | 213.3 | 307.2 |
| Operating Cash Flow | 505.8 | 1,092.2 |
Material Changes vs. Prior Period
- Profitability Reversal: The Company reported a net loss of $104.2 million in 2014 compared to a net profit of $592.9 million in 2013. This reversal was primarily driven by a non-cash impairment charge of $739.8 million related to the investment in Usiminas.
- Restatement Impact: The 2014 results were restated to reduce the carrying value of the Usiminas investment. Prior to restatement, the Company had reported a profit; the restatement resulted in a loss attributable to owners of the parent of $198.8 million.
- Revenue Growth: Net sales increased 2% year-over-year to $8.7 billion, driven by a 15% increase in sales in Mexico, partially offset by declines in the Southern Region (Argentina) and Other Markets.
- Operating Income: Operating income decreased slightly to $1.1 billion (12.1% margin) from $1.1 billion (13.0% margin) in 2013, reflecting lower steel revenue per ton partially offset by lower operating costs per ton.
- Liquidity: Cash and cash equivalents decreased by $93.9 million to $213.3 million, primarily due to investing activities including capital expenditures and the acquisition of additional Usiminas shares.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: 2014 capital expenditures were $443 million. For 2015, the Company expects capital expenditures to range between $500 million and $600 million, focusing on environmental/safety projects, capacity expansion in Mexico and Argentina, and mining facility upgrades.
- Dividends: On May 6, 2015, shareholders approved an annual dividend of $0.090 per share ($0.90 per ADS), totaling approximately $180.4 million.
- Usiminas Investment: The Company holds a 32.9% stake in Usiminas. A controversy exists within Usiminas' control group regarding governance and the appointment of senior managers. The Company is monitoring the situation and ongoing legal proceedings.
Key Risks and Contingencies
- Usiminas Impairment Risk: Further write-downs of the Usiminas investment could occur if Brazilian economic conditions or steel industry performance worsen. The carrying value is sensitive to iron ore prices, exchange rates, and Brazilian GDP.
- Argentina Economic Conditions: High inflation, exchange controls, and import restrictions in Argentina pose significant risks to the Siderar subsidiary's operations and the ability to repatriate funds.
- Steel Industry Cyclicality: Global excess capacity, particularly from China, and volatile raw material/energy prices continue to pressure margins.
- Legal Proceedings: Outstanding litigation includes claims by CSN regarding a potential tag-along tender offer for Usiminas shares and tax disputes in Argentina and Mexico.
Investor Verification Checklist
- Usiminas Valuation: Verify the assumptions used in the "value in use" calculation for the Usiminas investment and the status of the ongoing governance dispute within Usiminas' control group.
- Argentina Exchange Controls: Assess the impact of Argentine foreign exchange restrictions on the repatriation of dividends and the ability to service foreign debt from Siderar operations.
- Restatement Details: Review Note 2(b) of the financial statements for the full impact of the $739.8 million impairment charge on equity and retained earnings.
- Debt Maturity Profile: Confirm the Company's ability to refinance $1.26 billion in borrowings due within one year, given the reduced cash flow from operations.
- Tax Contingencies: Monitor the status of the Mexican tax audit regarding the 2008 intercompany share sale (potential $34 million adjustment) and Argentine tax assessments.