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Business Context and Reporting Period

Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2012
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the United States, and Guatemala. The company manufactures finished and semi-finished steel products and iron ore. It operates through two reportable segments: Steel and Mining. As of December 31, 2012, the company had approximately 16,600 employees and a production capacity of 10.8 million tons of finished steel products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 6% to $8.6 billion, driven by a 4% reduction in revenue per ton (lower steel prices) and a 1% decrease in total shipments.
• Profitability Drop: Operating income fell 27% to $915.9 million. Net income attributable to equity holders dropped 73% to $139.2 million.
• Usiminas Impairment: A significant non-cash impairment charge of $275.3 million was recorded on the company's investment in Usiminas (Brazil) due to a weaker industrial environment in Brazil and lower long-term iron ore price forecasts. This contributed to a $363.9 million loss in equity earnings from non-consolidated companies.
• Cash Flow: Cash and cash equivalents decreased by $1.6 billion to $560.3 million. This was primarily due to $2.2 billion invested in the Usiminas acquisition and increased capital expenditures, partially offset by $1.1 billion in operating cash flow.
• Debt Increase: Total borrowings increased by $428 million to $2.4 billion, largely due to a new $700 million syndicated loan used to finance the Usiminas stake.
• Functional Currency Change: Effective January 1, 2012, the functional currency of Mexican subsidiaries changed to the U.S. dollar, eliminating the significant foreign exchange losses on debt that impacted 2011 results.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Expenditures: Ternium expects 2013 capital expenditures to be approximately $800 million, focused on the Pesquería project (cold-rolling and galvanizing in Mexico) and expansions in Argentina (continuous caster and vacuum degassing station).
• Strategy: The company aims to shift its sales mix toward higher-margin value-added products (cold-rolled, coated) and expand capacity in Mexico and Argentina.
• Dividend Proposal: The Board proposed an annual dividend of $0.065 per share ($0.65 per ADS), totaling approximately $130.3 million, subject to shareholder approval in May 2013.

Key Risks and Contingencies

• Usiminas Litigation: In early 2013, CSN (Companhia Siderúrgica Nacional) filed a lawsuit in Brazil alleging Ternium was required to launch a tag-along tender offer for minority Usiminas shareholders. Ternium intends to defend vigorously, citing prior regulatory decisions.
• Argentina Economic Conditions: Risks include high inflation, exchange controls restricting dividend repatriation, import restrictions on raw materials, and energy supply shortages (natural gas/electricity).
• Mexico Regulatory Changes: New labor regulations and potential fiscal/energy reforms could impact costs. Violence and crime in key operating regions (Monterrey, Michoacán) pose security risks.
• Tax Matters: Mexican tax authorities issued an assessment of approximately $325 million regarding a 2004 capital reduction; Ternium has appealed and does not expect a liability. Argentine tax authorities have challenged expense capitalization, with a provision of $1.8 million recorded.
• Iran Sanctions Disclosure: Affiliates Tenaris and Tenova reported sales to Iranian government-controlled entities totaling approximately $24.6 million in 2012, with profits of roughly $3.4 million.

Investor Verification Checklist

• Usiminas Investment Value: Verify the current status of the $1.6 billion carrying value of the Usiminas investment and the potential for further impairment charges given the Brazilian economic slowdown.
• Argentina Liquidity: Assess the impact of Argentine exchange controls on the ability of Siderar to remit dividends and service foreign debt.
• CSN Litigation Outcome: Monitor the progress of the Brazilian lawsuit regarding the Usiminas tender offer, as a negative outcome could result in significant cash outflows.
• Steel Price Volatility: Evaluate exposure to global steel price fluctuations and the company's ability to pass on raw material cost increases.
• Capital Project Execution: Confirm the timeline and budget adherence for the Pesquería project in Mexico and the San Nicolás expansions in Argentina, which are critical for future margin improvement.