Ternium S.A. Q3 2011 Financial Summary
Business Context and Reporting Period
This Form 6-K filing, dated November 2, 2011, reports Ternium S.A.'s operational and financial results for the third quarter and the first nine months ended September 30, 2011. Ternium is a leading steel manufacturer in Latin America with principal operations in Mexico and Argentina, producing flat and long steel products. Financial data is presented in U.S. dollars in accordance with IFRS.
Key Financial Metrics
| Metric | 3Q 2011 | 9M 2011 |
|---|---|---|
| Net Sales | $2,467.1 million | $6,959.6 million |
| Operating Income | $352.0 million | $991.6 million |
| EBITDA | $453.0 million | $1,301.5 million |
| EBITDA Margin | 18.4% | 18.7% |
| Net Income | $23.4 million | $513.5 million |
| Net Income (Equity Holders) | $6.4 million | $408.8 million |
| Earnings per ADS | $0.03 | $2.08 |
| Shipments (Flat & Long) | 2.325 million tons | 6.670 million tons |
| Net Cash Position | $0.2 billion (as of Sept 30, 2011) | N/A |
| Free Cash Flow | -$34.9 million (3Q) | -$242.8 million (9M) |
Material Changes vs. Prior Periods
- Revenue Growth: Net sales increased 31% year-over-year (YoY) in Q3 2011 and 28% for the first nine months, driven by a 16% increase in shipments and higher average selling prices (revenue per ton up 14% in Q3).
- Profitability Decline: Despite higher operating income ($352.0M in Q3 vs. $267.6M in Q3 2010), Net Income collapsed to $23.4 million in Q3 2011, a decrease of 88% YoY. Equity holders' net income fell 96% to $6.4 million.
- Foreign Exchange Impact: The primary driver of the net income decline was a non-cash foreign exchange loss of $257.6 million in Q3 2011, compared to a gain of $32.0 million in Q3 2010. This was caused by a 13.4% depreciation of the Mexican Peso against the U.S. dollar, impacting the company's USD-denominated debt in Mexico.
- Cost Pressures: Operating costs per ton increased due to higher raw material, purchased slab, and energy costs, partially offsetting revenue gains.
Outlook, Risks, and Management Commentary
- Guidance: Management expects lower operating income in Q4 2011 compared to Q3 2011 due to seasonal shipment decreases and lower average steel prices.
- Market Risks: The company anticipates increased volatility in the steel industry due to global economic uncertainty.
- Unusual Items:
- FX Loss: A significant non-cash foreign exchange loss of $257.6 million in Q3 (and $164.3 million for 9M) related to Mexican Peso devaluation.
- Arbitration: A non-recurring charge of $21.3 million in Q2 2011 related to the settlement of arbitration proceedings with Tata Steel.
- Tax Dispute: A non-recurring non-cash tax charge of $4.4 million in Q3 2011 due to an unfavorable resolution in Mexico.
- Liquidity: Net cash position decreased to $0.2 billion from $0.3 billion in Q2, impacted by a $140.6 million dividend payment to minority shareholders in Argentina and negative free cash flow driven by capital expenditures ($445.0 million for 9M).
Investor Verification Checklist
- FX Sensitivity: Verify the extent of USD-denominated debt in Mexico and the potential for further Mexican Peso depreciation to impact future earnings.
- Cost Pass-Through: Assess the company's ability to pass on rising raw material and energy costs to customers given the outlook for lower steel prices in Q4.
- Cash Flow Sustainability: Review the negative free cash flow trend ($242.8M for 9M) against capital expenditure plans for greenfield facilities in Mexico and expansions in Argentina.
- Minority Interest: Confirm the impact of minority interest dividends (e.g., the $140.6M payment by Siderar) on consolidated cash balances.
- Non-Cash Adjustments: Distinguish between operating performance (EBITDA) and reported net income, which is heavily distorted by non-cash currency translation adjustments.