Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2020 (Unaudited)
Business Overview: Ternium is a global steel and mining company organized into two reportable segments: Steel (flat and long steel products) and Mining (iron ore and pellets). Operations span Mexico, the Southern Region (Argentina, Paraguay, Chile, Bolivia, Uruguay), Brazil, and other markets including the U.S. and Colombia.
Key Financial Metrics
| Metric ($ thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Net Sales | 4,017,115 | 5,493,107 |
| Gross Profit | 587,841 | 1,000,394 |
| Gross Margin | 14.6% | 18.2% |
| Operating Income | 201,262 | 543,700 |
| Profit for the Period | 24,220 | 428,168 |
| Net Margin | 0.6% | 7.8% |
| Earnings Per Share (Basic & Diluted) | $0.02 | $0.20 |
| Net Cash Provided by Operating Activities | 946,432 | 748,558 |
| Capital Expenditures | (368,429) | (488,942) |
| Cash and Cash Equivalents (End of Period) | 454,559 | 777,529 |
| Total Borrowings (Current + Non-Current) | 2,082,039 | 3,452,535 |
| Net Debt (Management Commentary) | $917 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by approximately 27% year-over-year, driven by reduced market demand and capacity utilization due to the COVID-19 pandemic.
- Profitability Compression: Profit for the period dropped significantly from $428.2 million to $24.2 million. This was exacerbated by a large income tax expense of $255.0 million in 2020 compared to $116.7 million in 2019.
- Foreign Exchange Impact: The company recorded a net foreign exchange gain of $100.5 million in 2020, compared to a loss of $43.1 million in 2019. This was a key driver in "Other financial income (expenses), net," which swung from a $5.2 million expense in 2019 to a $106.4 million gain in 2020.
- Debt Reduction: Total borrowings decreased by approximately $1.37 billion, reflecting active debt repayment and refinancing activities.
- Investment in Non-Consolidated Companies: The carrying value of the investment in Usiminas decreased from $486.6 million to $353.6 million, primarily due to the share of results and other comprehensive income adjustments.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- COVID-19 Impact: Management expects the second quarter of 2020 to be the hardest hit by the pandemic. However, production is gradually increasing in Mexico, Argentina, Colombia, and Brazil as restrictions are lifted.
- Capital Expenditures: To mitigate lower sales, Ternium has slowed or postponed several CAPEX projects, including a new hot rolling mill in Mexico and a rebar mill in Colombia.
- Liquidity: Management asserts that liquidity remains strong with $1.2 billion in cash and other investments. The company has adequate access to credit markets and believes it can meet financial covenants.
- Dividends: The annual dividend payment for the 2019 fiscal year was withdrawn to preserve cash.
Risks and Contingencies
- Usiminas Litigation: Ongoing litigation with Companhia Siderúrgica Nacional (CSN) regarding a tender offer for Usiminas shares. The case is currently before the Superior Court of Justice in Brazil. No provision has been recorded as management believes claims are groundless.
- Tax Incentive Uncertainty: A pending action of unconstitutionality regarding an ICMS tax benefit in Rio de Janeiro. The maximum gross exposure is estimated at $1.54 billion, though a provision of $374.6 million is recorded.
- Class Action: A putative class action in the U.S. regarding the "Notebooks Case" and alleged improper payments. Defendants' motions to dismiss are expected to be decided in 2020.
- Impairment Testing: Management performed impairment tests as of June 30, 2020, resulting in no impairment charges for any cash-generating units.
Investor Verification Checklist
- Income Tax Expense: Verify the composition of the $255 million income tax expense, which significantly reduced net profit despite a $106 million foreign exchange gain.
- Usiminas Valuation: Review the market value ($369.7 million) versus carrying value ($353.6 million) of the Usiminas stake and the status of the CSN litigation.
- ICMS Contingency: Monitor the status of the Brazilian Federal Supreme Court ruling on the ICMS tax benefit unconstitutionality and the associated $1.54 billion gross exposure.
- CAPEX Deferral: Assess the long-term impact of postponing major projects (Mexico hot rolling mill, Colombia rebar mill) on future growth capacity.
- Argentina Functional Currency: Confirm the implications of the change in functional currency for Ternium Argentina from the local currency to the US Dollar effective January 1, 2020.