Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
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 operates two primary segments: Steel (manufacturing and processing) and Mining (iron ore extraction). It also holds a significant investment in Usiminas, a major Brazilian steel producer.
Key Financial Metrics (2015)
| Metric | 2015 (USD) | 2014 (USD) |
|---|---|---|
| Net Sales | $7,877.4 million | $8,726.1 million |
| Operating Income | $639.3 million | $1,056.2 million |
| Net Income (Total) | $59.8 million | ($104.2 million) Loss |
| Net Income Attributable to Owners | $8.1 million | ($198.8 million) Loss |
| Basic EPS (USD) | $0.00 | ($0.10) |
| Dividends Per Share (USD) | $0.090 | $0.090 |
| Total Assets | $8,062.6 million | $9,690.2 million |
| Total Borrowings | $1,521.0 million | $2,164.8 million |
| Cash and Cash Equivalents | $151.5 million | $213.3 million |
| Operating Cash Flow | $1,323.5 million | $505.8 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10% year-over-year to $7.9 billion, driven by a 12% drop in average steel revenue per ton due to lower global steel prices, partially offset by a 2% increase in shipment volumes.
- Profitability Improvement: Despite lower operating income ($639.3M vs. $1.1B in 2014), the company returned to net profitability ($59.8M) compared to a net loss of $104.2M in 2014. This turnaround was primarily due to a significantly lower impairment charge on the Usiminas investment ($191.9M in 2015 vs. $739.8M in 2014).
- Debt Reduction: Total financial debt decreased by approximately $644 million to $1.5 billion, reflecting net repayments of borrowings.
- Segment Performance:
- Steel Segment: Operating income fell 34% to $670.7 million due to lower prices.
- Mining Segment: Recorded an operating loss of $24.5 million compared to a $42.3 million profit in 2014, driven by a 35% drop in net sales.
- Foreign Exchange: The company recorded a net foreign exchange loss of $5.2 million, largely due to the 34% depreciation of the Argentine Peso against the U.S. dollar.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Capital Expenditures: 2015 capital expenditures totaled $467 million. For 2016, expenditures are expected to range between $370 million and $470 million, focusing on environmental/safety projects, capacity expansion in hot-rolling and service centers, and mining facility upgrades.
- Dividend Proposal: The Board proposed an annual dividend of $0.09 per share (approx. $180.4 million aggregate), subject to shareholder approval in May 2016.
- Strategic Investments: Ternium is evaluating participation in a capital increase for Usiminas (up to $48.1 million) and plans to double the capacity of its Tenigal joint venture in Mexico with a new galvanizing line (expected completion 2019).
Key Risks and Contingencies
- Usiminas Investment Risk: Ternium holds a 32.9% stake in Usiminas. Usiminas faces significant financial leverage and cash generation challenges, with auditors noting a "material uncertainty" regarding its ability to continue as a going concern. Further impairment charges on this investment remain a significant risk.
- Steel Industry Conditions: The global steel market is characterized by significant overcapacity, particularly in China, leading to depressed prices and intense competition. Unfair trade practices and antidumping duties pose ongoing risks to export markets.
- Argentina Economic Instability: Operations in Argentina (Siderar) face risks from high inflation, currency devaluation, and potential reinstatement of exchange controls or import restrictions, which could delay payments to foreign suppliers or restrict dividend repatriation.
- Raw Material Costs: Volatility in the prices of iron ore, scrap, energy, and slabs directly impacts production costs. Supply constraints in Argentina (natural gas/electricity) could curtail production.
Unusual Items
- Impairment Charges: The 2015 results included a $191.9 million impairment charge related to the Usiminas investment. The 2014 results included a much larger $739.8 million impairment charge.
- Insurance Recovery: 2014 included a $57.5 million gain from insurance recovery related to Siderar, which was not present in 2015.
Investor Verification Checklist
- Usiminas Status: Verify the outcome of Usiminas' capital increase and debt restructuring efforts, as failure could trigger further impairment charges for Ternium.
- Argentina Exchange Controls: Monitor the stability of Argentine exchange controls and the ability of Siderar to repatriate funds and pay dividends.
- Steel Price Trends: Assess the trajectory of global steel prices and the impact of Chinese overcapacity on Ternium's realized prices in Mexico and the Southern Region.
- Debt Covenants: Confirm continued compliance with financial covenants (leverage and interest coverage ratios) under syndicated loan facilities.
- Legal Proceedings: Track the status of the CSN lawsuit in Brazil regarding the 2012 Usiminas acquisition and the CVM investigation regarding the 2014 acquisition.