Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This filing contains the unaudited consolidated condensed interim financial statements for Ternium S.A. for the six-month period ended June 30, 2011, and the three-month period ended June 30, 2011. Ternium is a global steel manufacturer organized into flat steel, long steel, and other product segments. The company operates primarily in South and Central America and North America. Effective January 1, 2011, the company transitioned from a tax-exempt holding company regime to an ordinary public limited liability company under Luxembourg law, subject to applicable corporate and withholding taxes.
Key Financial Metrics (Six Months Ended June 30, 2011)
| Metric | 2011 (USD '000) | 2010 (USD '000) |
|---|---|---|
| Net Sales | 4,492,501 | 3,577,239 |
| Gross Profit | 1,047,332 | 964,605 |
| Operating Income | 639,669 | 652,686 |
| Profit for the Period | 490,051 | 475,785 |
| Profit Attributable to Equity Holders | 402,406 | 392,885 |
| Basic EPS (USD) | 0.20 | 0.20 |
| Net Cash from Operating Activities | 69,304 | 532,301 |
| Cash and Cash Equivalents (End of Period) | 1,444,654 | 2,637,196 |
| Total Borrowings (Current + Non-Current) | 1,991,597 | 2,540,594 |
Note: All amounts in USD thousands unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 25.6% to $4.49 billion, driven by higher volumes and prices, particularly in the flat steel segment ($3.84 billion vs. $3.09 billion in 2010).
- Operating Income Decline: Despite revenue growth, operating income decreased slightly by 2.0% to $639.7 million. This was due to a significant increase in Selling, General, and Administrative (SG&A) expenses, which rose 27.6% to $398.8 million, largely due to higher freight and transportation costs.
- Financial Income: Other financial income increased significantly to $94.1 million (from $62.1 million), primarily due to a net foreign exchange gain of $93.2 million.
- Cash Flow Volatility: Net cash provided by operating activities dropped sharply to $69.3 million from $532.3 million in the prior year. This decrease was primarily driven by a $404.8 million increase in working capital requirements and a $113.2 million negative impact from net foreign exchange results.
- Debt Reduction: Total borrowings decreased by approximately $549 million to $1.99 billion, reflecting debt repayments and refinancing activities.
Outlook, Risks, and Unusual Items
- Sidor Nationalization Settlement: The company continues to receive payments related to the nationalization of its Sidor subsidiary in Venezuela. As of June 30, 2011, the carrying amount of the Sidor financial asset was $195.4 million. The company recorded $6.9 million in interest income from this asset for the six-month period.
- Tata Steel Arbitration Settlement: On June 16, 2011, Ternium settled a long-standing arbitration dispute with Tata Steel regarding the termination of a steel slab off-take agreement. The total settlement amount was $124 million, with Ternium Procurement paying its share of $21.3 million. The arbitration proceedings were subsequently terminated.
- Siderar Governance Dispute: Significant legal and regulatory developments occurred involving Siderar (Argentina). The Argentine social security agency (ANSeS) sought to exercise voting rights exceeding a 5% cap. While a dividend of approximately $362 million was approved at a July 2011 meeting, its payment is currently suspended pending a court decision revoking a preliminary injunction issued by ANSeS.
- Share Repurchase: In February 2011, Ternium repurchased 41.7 million shares from Usiminas for $150 million. This transaction reduced Usiminas' stake to zero and increased Techint's direct ownership to 62.02%.
- Dividends: The company paid dividends of $150.4 million in June 2011 ($0.075 per share).
Investor Verification Checklist
- Working Capital Impact: Verify the sustainability of the $404.8 million cash outflow for working capital changes and its impact on future liquidity.
- Siderar Dividend Timing: Monitor the status of the court injunction regarding the $362 million Siderar dividend and the potential for delayed cash inflows.
- Sidor Receivables: Track the collection schedule of the remaining $195.4 million Sidor receivable and any potential credit risks associated with the Venezuelan government.
- Freight Costs: Assess the trend in freight and transportation costs, which significantly impacted SG&A expenses in the first half of 2011.
- Tax Regime Transition: Confirm the actual tax impact of the transition to the ordinary Luxembourg holding company regime effective January 1, 2011.