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Ternium S.A. 2014 Annual Financial Summary (Form 6-K)

Business Context and Reporting Period

This filing presents the consolidated financial statements of Ternium S.A., a global steel manufacturer and distributor, for the fiscal year ended December 31, 2014. The report was filed with the SEC on February 19, 2015. Ternium operates primarily in two reportable segments: Steel (flat and long products) and Mining (iron ore and pellets). The company is incorporated in Luxembourg and operates significant facilities in Mexico, Argentina, Brazil, Colombia, and other Latin American markets.

Key Financial Metrics (Year Ended Dec 31, 2014)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by approximately 2.3% to $8.73 billion, driven by volume increases in the Steel segment, partially offset by lower average selling prices.
• Profitability Decline: Gross profit decreased by 6.7% to $1.80 billion due to higher raw material costs and unfavorable price realizations. Operating income declined 4.8% to $1.06 billion.
• Operating Cash Flow: Net cash from operating activities dropped significantly by 53.7% to $505.8 million. This was primarily due to a negative change in working capital of $551.0 million (compared to a positive $114.6 million in 2013), driven by increased inventory levels and trade receivables.
• Investment Activity: Capital expenditures decreased to $443.5 million from $883.3 million in 2013. However, the company incurred a $249.0 million cash outflow for the acquisition of additional shares in Usiminas (Brazil).
• Impairment Charges: The company recorded a significant impairment charge of $196.4 million related to its investment in Usiminas, attributed to a weaker industrial environment in Brazil and lower iron ore/steel prices. This was partially offset by a $188.9 million gain from a bargain purchase upon acquiring additional Usiminas shares.

Guidance, Outlook, Risks, and Unusual Items

• Usiminas Investment: The investment in Usiminas remains a critical risk factor. Despite the 2014 impairment, the recoverable value was estimated at $1.39 billion, while the market value of the stake was approximately $769 million. Future impairment risks depend on Brazilian GDP, steel demand, and commodity prices.
• Legal Contingencies: Ternium is involved in litigation regarding the Usiminas acquisition (tag-along tender offer claims by CSN) and tax claims in Argentina (Siderar). Management believes these claims are groundless and has not recorded provisions for the Usiminas litigation, though a $0.6 million provision exists for the Argentine tax matter.
• Dividends: The company paid cash dividends of $147.2 million to shareholders ($0.075 per share) and $33.6 million to non-controlling interests. Under Luxembourg law, the company has distributable retained earnings of approximately $5.4 billion.
• Subsequent Events: In January 2015, Ternium agreed to acquire the remaining 46% minority interest in its Colombian subsidiary Ferrasa for $74 million and agreed to sell its 54% stake in Ferrasa Panama for $2 million.
• Financial Risk: The company maintains a debt-to-equity ratio of 0.26. Approximately 63.2% of total borrowings are at variable interest rates, exposing the company to interest rate volatility.

Key Facts for Investor Verification

• Usiminas Valuation: Verify the assumptions used for the $196.4 million impairment charge and the $1.39 billion recoverable value of the Usiminas investment, given the significant gap between book value and market value ($769 million).
• Working Capital Trends: Investigate the drivers behind the $551 million negative working capital swing, specifically the increase in inventory ($193 million increase) and trade receivables ($49 million increase).
• Legal Exposure: Monitor the status of the CSN lawsuit regarding the Usiminas tender offer and the Argentine tax authority (AFIP) claims, as adverse rulings could impact future cash flows.
• Debt Maturity: Review the maturity profile of the $2.16 billion in borrowings, noting that $1.26 billion is due within one year (2015), requiring refinancing or cash management attention.
• Segment Performance: Analyze the divergence between the Steel segment (operating income $1.01 billion) and the Mining segment (operating income $42.3 million) to understand margin pressures in the core steel business.