Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This filing reports the consolidated condensed interim financial statements for Ternium S.A., a Luxembourg-based steel manufacturer, for the three-month period ended March 31, 2007. The company operates globally with primary segments in flat steel products, long steel products, and other products (pig iron and pellets). 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
| Metric (USD thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Sales | 1,798,293 | 1,530,999 |
| Gross Profit | 574,403 | 541,342 |
| Operating Income | 415,416 | 392,524 |
| Net Income | 251,628 | 194,513 |
| Net Income Attributable to Equity Holders | 222,133 | 165,043 |
| Diluted EPS (USD) | 0.11 | 0.09 |
| Cash and Cash Equivalents | 983,690 | 2,979,230 (Dec 31, 2006) |
| Total Borrowings (Current + Non-current) | 959,514 | 3,354,850 (Total Liabilities) |
| Operating Cash Flow | 530,293 | 297,047 |
Margins: Gross margin was approximately 31.9% in Q1 2007 compared to 35.4% in Q1 2006. Operating margin was approximately 23.1% in Q1 2007 compared to 25.6% in Q1 2006.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.5% year-over-year, driven by higher volumes and prices across both flat and long steel segments.
- Profitability: Net income attributable to equity holders rose 34.6% to $222.1 million. Operating income increased 5.8% to $415.4 million.
- Cost Structure: Cost of sales increased 23.7%, outpacing revenue growth, which compressed gross margins. This was largely due to higher raw material costs and maintenance expenses.
- Financial Expenses: "Other financial expenses, net" improved significantly, decreasing from a loss of $101.4 million in 2006 to $76.1 million in 2007, primarily due to net foreign exchange transaction gains of $18.9 million in 2007 versus a loss of $5.5 million in 2006.
- Liquidity: Cash and cash equivalents decreased significantly from $2.98 billion at year-end 2006 to $983.7 million at March 31, 2007, reflecting substantial debt repayments and capital expenditures.
Guidance, Outlook, and Risks
Subsequent Event (Acquisition): On April 30, 2007, Ternium announced a definitive agreement to acquire control of Grupo Imsa S.A.B. de C.V. for approximately $1.7 billion. The transaction is expected to close in the third quarter of 2007, subject to regulatory approvals. Ternium plans to finance this primarily through debt.
Dividends: The Board proposed a dividend of $0.05 per share (approx. $100.2 million total), subject to shareholder approval at the June 6, 2007 meeting.
Risks and Contingencies:
- Legal: Sidor (a subsidiary) faces a potential exposure of $134.7 million related to an appeal by PDVSA Gas regarding gas pricing arbitration. Management considers the likelihood of loss remote.
- Restrictions: Credit agreements related to the Hylsamex acquisition impose restrictions on dividend payments in excess of certain amounts.
- Accounting: The company has not yet assessed the impact of the new IAS 23 (revised 2007) standard on borrowing costs, which is applicable for periods beginning after January 1, 2009.
Investor Verification Checklist
- Verify the closing conditions and financing terms for the $1.7 billion Grupo Imsa acquisition.
- Monitor the outcome of the PDVSA Gas arbitration appeal and any potential impact on Sidor's financials.
- Confirm shareholder approval of the proposed $0.05 per share dividend at the June 6, 2007 meeting.
- Review the impact of rising raw material costs on future gross margins, given the compression observed in Q1 2007.
- Assess the company's leverage ratio post-acquisition, given the plan to finance the Grupo Imsa deal primarily with debt.