Business Context and Reporting Period
This Form 6-K filing by Ternium S.A. (a Luxembourg-based holding company for flat and long steel manufacturing) furnishes the consolidated financial statements for the year ended December 31, 2014, which were approved by shareholders on May 6, 2015. The filing also includes "Subsequent Information" regarding a U.S. SEC review of the company's investment in Usiminas as of March 31, 2015.
Key Financial Metrics (Year Ended Dec 31, 2014)
| Metric | 2014 (USD millions) | 2013 (USD millions) |
|---|---|---|
| Net Sales | 8,726.1 | 8,530.0 |
| Gross Profit | 1,800.9 | 1,929.7 |
| Operating Income | 1,056.2 | 1,109.4 |
| Profit for the Year | 588.8 | 592.9 |
| Profit Attributable to Owners | 452.4 | 455.4 |
| Basic EPS (USD) | 0.23 | 0.23 |
| Net Cash from Operating Activities | 505.8 | 1,092.2 |
| Total Borrowings | 2,164.8 | 2,002.8 |
| Cash and Cash Equivalents | 213.3 | 307.2 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 2.3% to $8.73 billion, driven primarily by the Steel segment ($8.70 billion) and Mining segment ($313 million).
- Profitability Decline: Operating income decreased by 4.8% to $1.06 billion. Gross margin compressed from 22.6% in 2013 to 20.6% in 2014 due to higher cost of sales.
- Operating Cash Flow: Net cash provided by operating activities dropped significantly by 53.7% to $505.8 million, largely due to a $551 million use of cash for changes in working capital (compared to a $115 million source in 2013).
- Investment Activity: The company acquired additional shares in Usiminas (Brazil) for $249 million, recognizing a bargain purchase gain of $189 million. However, this was offset by a $196.4 million impairment charge on the Usiminas investment due to a weaker Brazilian industrial environment and lower steel/iron ore prices.
- Debt Profile: Total borrowings increased by 8.1% to $2.16 billion. The weighted average interest rate decreased slightly to 4.64%.
Guidance, Outlook, Risks, and Unusual Items
- SEC Review of Usiminas Investment: The SEC Staff has issued comments regarding the carrying value of Ternium's investment in Usiminas. While Ternium believes its accounting is compliant with IFRS, the company acknowledged that if an additional impairment is required for 2014, it may need to restate its financial statements. As of March 31, 2015, the carrying value was $1.02 billion.
- Impairment Sensitivity: The company noted that a 10 basis point increase in the discount rate or a $10/ton decrease in steel prices could significantly impact the value in use of its Usiminas investment.
- Subsequent Events: On January 20, 2015, Ternium agreed to acquire the remaining 46% minority interest in its Colombian subsidiary Ferrasa for $74 million. It also agreed to sell its 54% stake in Ferrasa Panama for $2 million.
- Legal Contingencies: Ternium is involved in litigation regarding a tender offer requirement for Usiminas shares filed by CSN in Brazil. Management believes the claims are groundless and has not recorded a provision.
- Dividends: The company paid cash dividends of $147.2 million to shareholders and $33.6 million to non-controlling interests in 2014.
Investor Verification Checklist
- Usiminas Valuation: Verify the outcome of the SEC review regarding the Usiminas investment carrying value and the potential for 2014 financial restatement.
- Working Capital Trends: Investigate the drivers behind the $551 million cash outflow for working capital changes in 2014 compared to the prior year.
- Impairment Assumptions: Review the sensitivity analysis regarding discount rates and steel prices used to justify the $196.4 million impairment charge.
- Debt Maturity: Assess the liquidity position given $1.26 billion in borrowings maturing in 2015 against cash reserves of $213 million.
- Regulatory Risks: Monitor the status of the CSN lawsuit and CVM proceedings regarding the Usiminas acquisition.