Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This filing contains the consolidated condensed interim financial statements of Ternium S.A. for the nine-month period ended September 30, 2008, and the three-month period ended September 30, 2008. The report was filed on November 5, 2008. Ternium is a global steel manufacturer organized into flat steel, long steel, and other product segments. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and have been reviewed by Price Waterhouse & Co. S.R.L.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2008):
- Net Sales: $6,775.1 million (Continuing operations).
- Gross Profit: $2,005.5 million (Gross margin of approximately 29.6%).
- Operating Income: $1,498.5 million.
- Net Income: $1,229.6 million total, of which $1,049.4 million is attributable to equity holders of the Company.
- Earnings Per Share (Basic & Diluted): $0.52 per share.
Balance Sheet Highlights (as of Sept 30, 2008):
- Total Assets: $12,428.4 million.
- Cash and Cash Equivalents: $612.5 million.
- Total Borrowings: $3,207.2 million (Current: $884.3 million; Non-current: $2,322.8 million).
- Total Equity: $6,732.0 million.
Cash Flow (Nine Months Ended Sept 30, 2008):
- Operating Activities: Net cash used of $53.3 million (driven by a $1.67 billion increase in working capital).
- Investing Activities: Net cash provided of $518.5 million (primarily due to proceeds from the sale of discontinued operations).
- Financing Activities: Net cash used of $821.8 million (primarily due to debt repayments).
Material Changes vs. Prior Period
Comparing the nine-month period ended September 30, 2008, to the same period in 2007:
- Revenue Growth: Net sales increased 72.1% from $3,936.7 million to $6,775.1 million, driven by higher steel prices and volumes.
- Profitability: Operating income more than doubled from $635.6 million to $1,498.5 million. Net income attributable to equity holders increased 69.6% from $618.9 million to $1,049.4 million.
- Discontinued Operations: The 2008 period includes significant income from discontinued operations ($157.1 million) compared to $462.3 million in 2007. This decrease is largely due to the cessation of consolidation of Sidor C.A. results after March 31, 2008, and the sale of non-strategic U.S. assets.
- Working Capital: A significant outflow of $1.67 billion in operating cash flow was attributed to changes in working capital, contrasting with an inflow of $145.1 million in the prior year.
Outlook, Risks, and Contingencies
Sidor Nationalization (Critical Risk):
The most significant contingency involves the Venezuelan government's nationalization of Sidor C.A., a major subsidiary. In May 2008, a decree transformed Sidor into a state-owned enterprise. As of the filing date, the Venezuelan government assumed operational control, and negotiations regarding compensation for Ternium's interest (approximately 59.7%) had not concluded. The outcome and valuation of this investment remain uncertain. Ternium has classified its investment in Sidor as an available-for-sale asset (discontinued operations) and has reserved the right to initiate arbitration under the International Center for Settlement of Investment Disputes (ICSID).
Other Risks and Items:
- Inventory Valuation: The company recorded a $131.7 million adjustment for net realizable value of inventories during the period.
- Dividends: A dividend of $0.05 per share ($100.2 million total) was approved and paid in June 2008.
- Investment Commitments: Siderar has commitments to acquire new production equipment totaling $291.4 million.
- Profit Distribution: Dividends are subject to Luxembourg law restrictions regarding distributable retained earnings.
Key Facts for Investor Verification
- Sidor Compensation Status: Verify the current status of negotiations with the Venezuelan government regarding the fair value and compensation for Ternium's stake in Sidor.
- Working Capital Trends: Investigate the drivers behind the $1.67 billion increase in working capital usage, specifically inventory build-up and receivables.
- Debt Maturity Profile: Review the maturity schedule of the $3.2 billion in total borrowings to assess liquidity risks.
- Arbitration Proceedings: Monitor any updates on the initiation or progress of ICSID arbitration regarding the Sidor nationalization.
- Inventory Valuation: Assess the sustainability of the $131.7 million inventory write-down and its impact on future margins.