Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Overview: Ternium is a leading steel producer in Latin America with operations in Mexico, Argentina, Colombia, the United States, and Guatemala. The company operates through two primary segments: Steel and Mining. In 2013, the company proportionally consolidated Consorcio Peña Colorada (mining) and Exiros (procurement), changing from equity method accounting.
Key Financial Metrics
| Metric (in millions USD) | 2013 | 2012 |
|---|---|---|
| Net Sales | 8,530.0 | 8,608.1 |
| Operating Income | 1,109.4 | 920.6 |
| Operating Margin | 13.0% | 10.7% |
| Net Income (Total) | 592.9 | 190.9 |
| Net Income (Attributable to Equity Holders) | 455.4 | 142.0 |
| Basic EPS (USD) | 0.23 | 0.07 |
| Capital Expenditures | 883.0 | 1,022.3 |
| Cash and Cash Equivalents | 307.2 | 560.3 |
| Total Borrowings | 2,002.8 | 2,424.4 |
Material Changes vs. Prior Period
- Profitability Surge: Net income attributable to equity holders increased 221% to $455.4 million, driven primarily by a $328.6 million improvement in the Usiminas investment result (2012 included a $275.3 million impairment charge) and higher operating income.
- Operating Performance: Operating income rose 21% to $1.1 billion. This was achieved despite a 1% decline in net sales, due to a lower operating cost per ton (driven by lower raw material and slab costs) and a 3% increase in steel shipment volumes.
- Segment Shifts:
- Steel Segment: Sales decreased 2% due to lower revenue per ton in Mexico and Other Markets, partially offset by volume growth in the Southern Region.
- Mining Segment: Sales increased 103% and shipments increased 128% due to the proportional consolidation of Consorcio Peña Colorada starting January 1, 2013.
- Liquidity: Cash and cash equivalents decreased by $253.1 million to $307.2 million, primarily due to investing activities (capital expenditures) and financing activities (net debt repayment of $270.8 million).
Guidance, Outlook, and Risks
- Dividend Proposal: The Board proposed an annual dividend of $0.075 per share ($0.75 per ADS), totaling approximately $150.4 million, subject to shareholder approval in May 2014.
- Capital Expenditures: 2014 capital expenditures are expected to be approximately $650 million, focusing on the Pesquería industrial center, environmental/safety improvements, and mine development.
- Key Risks:
- Argentina: High inflation, exchange controls restricting capital outflows, and potential energy shortages (natural gas/electricity) pose significant risks to Siderar operations and dividend repatriation.
- Mexico: New tax reforms effective 2014 include a 7.5% royalty on mining profits and a 10% withholding tax on dividends. Security issues related to crime and violence in key operating regions remain a concern.
- Usiminas Investment: Continued volatility in the Brazilian economy and iron ore prices could necessitate further impairment charges on the $1.4 billion investment.
- Steel Industry: Global excess capacity and price volatility, particularly influenced by Chinese production levels, impact margins.
Investor Verification Checklist
- Usiminas Valuation: Verify the current status of the Usiminas investment and any new indicators of impairment given the 2012 write-down.
- Argentina Exchange Controls: Confirm the ability of Siderar to repatriate cash flows and pay dividends amidst ongoing Argentine foreign exchange restrictions.
- Mexico Tax Impact: Assess the full financial impact of the 2014 Mexican tax reform, specifically the new mining royalties and dividend withholding taxes.
- Debt Maturity Profile: Review the $2.0 billion debt portfolio, noting that approximately $800 million matures within one year, to evaluate refinancing risks.
- Raw Material Costs: Monitor trends in slab and energy prices, which are the primary drivers of the company's cost structure.