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, 2015
Business Overview: Ternium is a global steel manufacturer organized into two reportable segments: Steel (flat and long products) and Mining (iron ore and pellets). The company operates primarily in Mexico, Argentina, Brazil, Colombia, and the United States. The financial statements are prepared in accordance with IFRS and presented in thousands of USD.
Key Financial Metrics
| Metric (USD Thousands) | 2015 | 2014 |
|---|---|---|
| Net Sales | 7,877,449 | 8,726,057 |
| Gross Profit | 1,400,177 | 1,800,888 |
| Operating Income | 639,339 | 1,056,161 |
| Profit for the Year | 59,779 | (104,181) |
| Profit Attributable to Owners | 8,127 | (198,751) |
| Net Cash from Operating Activities | 1,323,491 | 505,844 |
| Cash and Cash Equivalents (Year End) | 151,491 | 213,303 |
| Total Borrowings | 1,521,023 | 2,164,819 |
| Total Assets | 8,062,593 | 9,690,159 |
Margins (2015): Gross Margin was 17.8%; Operating Margin was 8.1%. The company returned to profitability for the full year, contrasting with a net loss in 2014.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by 9.7% to $7.88 billion, driven by lower volumes and prices in the steel market, particularly in the Southern Region and Other Markets segments.
- Profitability Recovery: The company reported a net profit of $59.8 million in 2015, a significant turnaround from a net loss of $104.2 million in 2014. This improvement was largely due to a reduction in equity losses from non-consolidated companies.
- Usiminas Impairment: A major factor in 2014 was a $739.8 million impairment charge on the investment in Usiminas (Brazil). In 2015, an additional impairment of $191.9 million was recorded on the Usiminas investment due to a downgraded economic scenario and going-concern risks at Usiminas. However, the total equity loss from non-consolidated companies dropped significantly from $751.8 million in 2014 to $272.8 million in 2015.
- Debt Reduction: Total borrowings decreased by approximately $644 million (30%) to $1.52 billion, reflecting active debt management and refinancing activities.
- Currency Impact: Significant currency translation adjustments negatively impacted comprehensive income, with a total comprehensive loss of $580.7 million, primarily due to the devaluation of the Argentine peso (34.4% cumulative devaluation in 2015).
Guidance, Outlook, Risks, and Contingencies
Management Commentary & Outlook: The filing does not contain specific forward-looking financial guidance or earnings projections for 2016. Management notes that the company is in compliance with all loan covenants. The weighted average interest rate on borrowings decreased to 3.37% in 2015 from 4.64% in 2014.
Key Risks and Contingencies:
- Usiminas Going Concern: Usiminas' auditors included an emphasis of matter paragraph regarding a material uncertainty about its ability to continue as a going concern. Ternium's investment value ($240 million book value) exceeds its market value ($171 million) as of year-end.
- Foreign Exchange Risk: Significant exposure to the Argentine peso, Mexican peso, and Colombian peso. A 1% simultaneous weakening of these currencies against the USD would have reduced pre-tax income by $3.3 million.
- Legal and Tax Litigation:
- Argentina (Siderar): Ongoing tax disputes with AFIP regarding fiscal years 1995-1999. A provision of $0.4 million was recorded for potential additional outflows.
- Brazil (Usiminas): Litigation regarding tender offer requirements following the 2014 acquisition of Usiminas shares. The CVM staff determined a tender offer might be required, but Ternium has appealed. No provision was recorded as the outcome is not considered probable.
- Mexico: Tax audit regarding a 2008 intercompany share sale. Authorities estimate a potential adjustment of $34 million plus interest; Ternium believes an unfavorable outcome is not probable.
- Commitments: Significant off-balance sheet commitments include long-term energy supply contracts (Iberdrola, Tractebel) and gas transportation agreements for the Techgen power plant project (Ternium's exposure approx. $136.7 million).
Investor Verification Checklist
- Usiminas Status: Verify the current financial health and going-concern status of Usiminas, as it represents a significant portion of non-consolidated investments and carries impairment risk.
- Argentine Operations: Assess the impact of continued Argentine peso volatility and potential further devaluation on the valuation of Siderar assets and future repatriation of earnings.
- Debt Maturity Profile: Review the maturity schedule of the $1.52 billion in borrowings, noting that $914 million is due in 2016, to evaluate near-term liquidity requirements.
- Tax Litigation Outcomes: Monitor the resolution of the Siderar tax dispute in Argentina and the Usiminas tender offer litigation in Brazil for potential material cash outflows.
- Dividend Capacity: Confirm the distributable retained earnings under Luxembourg law, which stood at approximately $5.2 billion as of December 31, 2015.