Business Context and Reporting Period
This Form 6-K filing by Ternium S.A. (NYSE: TX) furnishes the Notice of Annual General Meeting, Proxy Statement, and the 2015 Annual Report. The reporting period covers the fiscal year ended December 31, 2015. Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the southern United States, and Guatemala. The company also holds a significant investment in Usiminas, a Brazilian steel producer.
Key Financial Metrics (2015)
| Metric | 2015 Value | 2014 Value |
|---|---|---|
| Net Sales | $7,877.4 million | $8,726.1 million |
| Operating Income | $639.3 million | $1,056.2 million |
| EBITDA | $1,073.1 million | $1,471.0 million |
| Profit for the Year (Consolidated) | $59.8 million | ($104.2 million) Loss |
| Profit Attributable to Owners of Parent | $8.1 million | ($198.8 million) Loss |
| Free Cash Flow | $856.8 million | $62.4 million |
| Total Financial Debt | $1,521.0 million | $2,164.8 million |
| Net Debt | $1,132.3 million | $1,801.5 million |
| Capital Expenditures | $466.6 million | $443.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10% year-over-year to $7.9 billion, driven by lower steel prices in main markets, despite a 2% increase in shipment volumes (9.6 million tons).
- Profitability Improvement: The company returned to profitability with a consolidated net profit of $59.8 million, compared to a net loss of $104.2 million in 2014. This turnaround was primarily due to a significantly lower impairment charge on the Usiminas investment ($191.9 million in 2015 vs. $739.8 million in 2014).
- Strong Cash Flow: Free cash flow surged to $856.8 million, up from $62.4 million in 2014, aided by a $509 million reduction in working capital.
- Debt Reduction: Total financial debt decreased by $643.8 million (29.7%) to $1.5 billion, and net debt fell to $1.1 billion.
- Regional Performance: Mexico shipments grew 5.3% to a record 5.9 million tons. Southern Region shipments increased slightly, while "Other Markets" (including Colombia and the U.S.) saw a 10% decline in shipments due to low-priced Chinese imports and lower oil & gas activity.
Guidance, Outlook, and Risks
- Dividend Proposal: The Board proposes an annual dividend of $0.09 per share ($0.90 per ADS), totaling approximately $177 million, payable on May 13, 2016. This is funded from retained earnings despite the loss recorded in the company's annual accounts under Luxembourg law.
- Outlook: Management expects steel consumption in Mexico to continue expanding in 2016. In Argentina, local demand is expected to decrease in 2016 due to economic adjustments and the recession in Brazil.
- Usiminas Investment: The investment in Usiminas was written down to $240 million. Usiminas' auditors noted a material uncertainty regarding its ability to continue as a going concern. Ternium continues to seek a solution to the unresolved dispute within the Usiminas control group.
- Key Risks:
- Global steel overcapacity and unfair trade practices, particularly from China.
- Macroeconomic instability in Argentina and Brazil.
- Volatility in commodity prices and foreign exchange rates (specifically the Argentine Peso and Mexican Peso).
- Legal contingencies regarding Usiminas tender offers and tax claims in Argentina and Mexico.
Investor Verification Checklist
- Usiminas Valuation: Verify the recoverable value of the Usiminas investment ($240 million book value vs. ~$171 million market value) and the status of the "going concern" warning from Usiminas' auditors.
- Dividend Sustainability: Confirm the source of the proposed dividend ($177 million) given the consolidated profit attributable to the parent was only $8.1 million; the filing states it is paid from retained earnings reserves.
- Working Capital Management: Review the $509 million reduction in working capital to ensure it is sustainable and not a one-time event.
- Legal Contingencies: Monitor the status of the Brazilian securities regulator (CVM) appeal regarding the Usiminas tender offer and the Argentine tax authority (AFIP) claims.
- Regional Exposure: Assess the impact of the Argentine Peso's 34% depreciation in 2015 on future earnings translation and the outlook for the Southern Region.