Ternium S.A. Form 6-K Summary: Consolidated Financial Statements for the Year Ended December 31, 2020
Business Context and Reporting Period
This Form 6-K furnishes Ternium S.A.'s consolidated financial statements for the fiscal year ended December 31, 2020, approved by the Board of Directors on February 23, 2021. Ternium is a global steel manufacturer operating primarily in Mexico, Argentina, Brazil, and other markets. The company operates two reportable segments: Steel (flat and long steel products) and Mining (iron ore and pellets). The financial statements are prepared in accordance with IFRS and presented in thousands of U.S. dollars.
Key Financial Metrics
| Metric ($ thousands) | 2020 | 2019 | 2018 |
|---|---|---|---|
| Net Sales | 8,735,435 | 10,192,818 | 11,454,807 |
| Gross Profit | 1,635,512 | 1,740,378 | 2,971,479 |
| Operating Income | 1,079,473 | 864,566 | 2,108,371 |
| Profit for the Year | 867,871 | 630,045 | 1,662,132 |
| Profit Attributable to Owners | 778,468 | 564,269 | 1,506,647 |
| Earnings Per Share (Basic/Diluted) | $0.40 | $0.29 | $0.77 |
| Net Cash from Operating Activities | 1,761,246 | 1,647,619 | 1,739,265 |
| Capital Expenditures | (560,013) | (1,052,252) | (520,250) |
| Total Borrowings | 1,722,893 | 2,188,674 | N/A |
| Cash and Cash Equivalents | 537,882 | 519,965 | 250,541 |
| Total Assets | 12,856,235 | 12,935,533 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by approximately 14% to $8.74 billion in 2020 compared to $10.19 billion in 2019, driven by lower steel prices and reduced demand during the pandemic, particularly in the second quarter.
- Profitability Improvement: Despite lower sales, Profit for the Year increased 38% to $867.9 million. This was driven by a significant one-time gain of $186.0 million related to the derecognition of an ICMS tax contingency asset and liability in Brazil, as well as cost management and improved margins in the second half of the year.
- Debt Reduction: Total borrowings decreased by $465.8 million (21%) to $1.72 billion, reflecting strong operating cash flows and debt repayments.
- Capital Expenditures: Capex was reduced by 47% to $560 million, as the company rescheduled certain projects in response to the pandemic.
- Dividends: No cash dividends were paid to shareholders in 2020, compared to $235.6 million in 2019, to preserve liquidity during the pandemic.
Outlook, Risks, and Unusual Items
- Unusual Items: The 2020 results include a net gain of $186.0 million from the resolution of the ICMS deferral tax benefit action of unconstitutionality in Brazil. Additionally, "Other operating income" included a $380.1 million recovery of a provision related to this tax matter, partially offset by a $194.1 million reversal of the related asset.
- COVID-19 Impact: The pandemic caused significant capacity utilization drops in Q2 2020. However, operations recovered in the second half, and all facilities were back to normal production levels by year-end. Management believes the company has sufficient resources to meet working capital needs and service debt.
- Argentina Risks: Ternium Argentina faces a complex economic environment with foreign exchange restrictions imposed by the Central Bank. While these have not significantly impacted commercial payments, access to the foreign exchange market for dividends and related party services is restricted. The company changed the functional currency of its Argentine subsidiaries to the U.S. dollar effective January 1, 2020, to reduce earnings volatility.
- Legal Contingencies: The company is involved in various legal proceedings, including a tender offer litigation in Brazil (CSN case) and potential Mexican income tax adjustments. Management believes provisions are adequate, but unfavorable outcomes could materially affect results.
Key Facts for Investor Verification
- One-Time Tax Gain: Verify the sustainability of earnings by excluding the $186.0 million net gain from the ICMS tax contingency resolution in Brazil.
- Argentina Liquidity: Monitor the status of foreign exchange restrictions in Argentina and their potential impact on the repatriation of earnings from Ternium Argentina S.A.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the consolidated net senior leverage ratio (not greater than 3.5 to 1.00) on the $1.0 billion syndicated loan facility.
- Usiminas Investment: Review the valuation of the investment in Usiminas (carrying value $422.9 million vs. market value ~$756.3 million) and the status of the shareholders' agreement with Nippon Steel Corporation.
- Dividend Policy: Note the suspension of dividends in 2020; assess future dividend potential based on distributable retained earnings under Luxembourg law and liquidity needs.