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 nine-month period ended September 30, 2017. Ternium is a global steel and mining company organized into two reportable segments: Steel and Mining. The Steel segment operates in Mexico, the Southern Region (Argentina, Paraguay, Chile, Bolivia, Uruguay), and Other Markets (primarily Brazil and the U.S.). The Mining segment focuses on iron ore and pellets in Mexico. A significant corporate event during this period was the acquisition of thyssenkrupp's Brazilian steel slab business (CSA Siderúrgica do Atlântico) on September 7, 2017.
Key Financial Metrics (Nine Months Ended Sept 30, 2017)
| Metric | 2017 (USD '000) | 2016 (USD '000) |
|---|---|---|
| Net Sales | 6,782,261 | 5,374,394 |
| Gross Profit | 1,700,695 | 1,406,580 |
| Operating Income | 1,106,818 | 895,018 |
| Profit for the Period | 824,909 | 562,168 |
| Profit Attributable to Owners | 705,978 | 477,225 |
| Earnings Per Share (Basic/Diluted) | $0.36 | $0.24 |
| Net Cash from Operating Activities | 351,750 | 821,520 |
| Net Cash Used in Investing Activities | (1,928,284) | (485,327) |
| Net Cash from Financing Activities | 1,777,993 | (334,947) |
| Total Assets | 11,426,152 | 8,322,870 |
| Total Borrowings (Current + Non-Current) | 3,210,309 | 2,156,277 |
| Cash and Cash Equivalents | 383,814 | 183,463 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 26.2% to $6.78 billion, driven primarily by the acquisition of CSA Siderúrgica do Atlântico (Ternium Brasil) in September 2017, which contributed $270.4 million in revenue for the month of September alone.
- Profitability: Profit for the period rose 46.7% to $824.9 million. Operating income increased 23.7% to $1.11 billion. The Steel segment operating income (IFRS) was $1.07 billion, while the Mining segment contributed $37.2 million.
- Balance Sheet Expansion: Total assets grew by $3.1 billion to $11.43 billion, largely due to the acquisition of property, plant, and equipment ($892.9 million) and intangible assets ($316.9 million) from the new business.
- Debt and Liquidity: Total borrowings increased by approximately $1.05 billion to $3.21 billion to finance the acquisition. Despite a significant outflow in investing activities ($1.93 billion), cash and cash equivalents increased to $383.8 million, supported by net financing inflows of $1.78 billion.
- Foreign Exchange: Other financial expenses included a net foreign exchange loss of $85.0 million for the nine-month period, compared to a gain of $3.9 million in the prior year.
Outlook, Risks, and Contingencies
- Acquisition Integration: The company is finalizing the purchase price allocation for the CSA acquisition. Preliminary analysis indicates no goodwill was recorded. The transaction included a slab commitment agreement for 2.0 million tons annually until 2019.
- Legal Contingencies:
- CSN Litigation: A lawsuit by Companhia Siderúrgica Nacional regarding a tender offer for Usiminas shares is currently under special appeal to the Superior Court of Justice. Ternium believes the claims are groundless and has recorded no provision.
- Usiminas Tender Offer: A CVM staff determination regarding a 2014 acquisition of Usiminas shares is under appeal. If unsuccessful, Ternium may be required to sell excess shares or launch a tender offer.
- Tax Claims: A potential Mexican income tax adjustment of approximately $61.9 million is being contested; no provision has been recorded. An Argentine tax claim was settled for $12.8 million in March 2017.
- Acquired Contingencies: In connection with the CSA acquisition, Ternium recorded provisions of $24.3 million for fishermen association claims and $57.8 million for ICMS tax credit assessments.
- Commitments: Significant commitments include a 25-year power supply contract with Techgen (78% of capacity) and a railroad freight agreement with Ferromex guaranteeing minimum transport loads.
Investor Verification Checklist
- Acquisition Impact: Verify the final purchase price allocation for the CSA acquisition, specifically the valuation of intangible assets and provisions for contingent liabilities.
- Debt Covenants: Review the leverage ratio covenants associated with the new $1.5 billion syndicated facility used to finance the acquisition.
- Usiminas Valuation: Monitor the market value vs. carrying value of the Usiminas investment (Market: ~$790.5M; Carrying: ~$483.0M) and the status of the CVM appeal.
- Foreign Exchange Exposure: Assess the impact of currency fluctuations on operating results, given the significant foreign exchange loss in the current period.
- Dividend Capacity: Confirm distributable retained earnings under Luxembourg law, noting that not all retained earnings in the IFRS statements may be distributable.