Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2011
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Ternium is a leading steel company in Latin America, manufacturing and processing flat and long steel products. Its primary operations are located in Mexico, Argentina, Colombia, and the southern United States. The company operates through subsidiaries, including Ternium Mexico, Siderar (Argentina), and Ferrasa (Colombia).
Key Financial Metrics (2011)
| Metric | 2011 (USD) | 2010 (USD) |
|---|---|---|
| Net Sales | $9,157.2 million | $7,382.0 million |
| Operating Income | $1,265.2 million | $1,053.9 million |
| Net Income (Profit for the year) | $649.9 million | $779.5 million |
| Net Income Attributable to Equity Holders | $513.5 million | $622.1 million |
| Basic EPS (Attributable to Equity Holders) | $0.26 | $0.31 |
| Dividends per Share (Proposed) | $0.075 | $0.075 |
| Total Assets | $10,746.6 million | $11,112.3 million |
| Total Borrowings (Debt) | $1,990.0 million | $1,939.7 million |
| Cash and Cash Equivalents | $2,158.6 million | $1,779.4 million |
| Capital Expenditures | $601.3 million | $350.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 24% year-over-year to $9.2 billion, driven by a 10% increase in shipments (8.8 million tons) and a 14% increase in revenue per ton ($1,021) due to higher steel prices.
- Profitability Decline: Despite higher operating income ($1.3 billion vs. $1.1 billion), net income decreased 17% to $650 million. This was primarily due to a $431 million deterioration in net financial results.
- Foreign Exchange Impact: A significant non-cash foreign exchange loss of $236.4 million occurred due to the 13.1% depreciation of the Mexican peso against the U.S. dollar, impacting U.S. dollar-denominated debt.
- Segment Performance:
- Flat Steel: Operating income rose 12% to $965 million, supported by higher demand and prices.
- Long Steel: Operating income surged 91% to $260 million, largely due to the consolidation of Ferrasa (Colombia) and higher prices.
- Debt Reduction: Total financial debt increased slightly to $2.0 billion, but the company maintained a strong liquidity position with $2.2 billion in cash and cash equivalents.
Guidance, Outlook, and Risks
Recent Developments and Outlook
- Usiminas Acquisition: In January 2012, Ternium acquired a participation in the control group of Usiminas (Brazil's largest flat steel producer) for approximately $2.2 billion, strengthening its position in Latin America.
- Capital Expenditures: The company expects 2012 capital expenditures to be approximately $1 billion, focused on new cold-rolling and galvanizing facilities in Mexico (expected production start in 2013) and expansions in Argentina.
- Functional Currency Change: Effective January 1, 2012, the functional currency of Mexican subsidiaries changed from the Mexican peso to the U.S. dollar to better reflect the economic environment.
Key Risks and Contingencies
- Argentina Economic Environment: High inflation, exchange controls, and restrictions on energy supply (natural gas/electricity) pose significant risks to Siderar's operations and the ability to repatriate funds.
- Steel Industry Cyclicality: The company faces risks from global excess capacity, volatile steel prices, and intense competition, particularly from China.
- Legal Proceedings:
- Tax Matters (Mexico): A tax assessment of approximately $321 million was notified in January 2012 regarding a 2004 capital reduction; Ternium believes an obligation is not probable and has not recorded a provision.
- Tax Matters (Argentina): Ongoing disputes with Argentine tax authorities regarding capitalization of expenses, with a provision of $2.0 million recorded.
- Sidor Receivable: As of the report date, $130.3 million remains outstanding from the Venezuelan government (CVG) regarding the 2009 nationalization of Sidor.
Investor Verification Checklist
- Usiminas Integration: Verify the financial impact and integration progress of the January 2012 Usiminas acquisition in subsequent filings.
- Argentina Liquidity: Monitor the status of Argentine exchange controls and their impact on Siderar's ability to transfer dividends or service debt.
- Foreign Exchange Sensitivity: Assess the impact of the Mexican peso's volatility on future earnings, noting the change in functional currency for Mexican subsidiaries.
- Capital Expenditure Execution: Track the completion and commissioning of the $700 million cold-rolling and galvanizing project in Monterrey, Mexico, scheduled for 2013.
- Legal Resolutions: Follow the outcome of the Mexican tax assessment ($321 million) and the Argentine tax disputes.