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, 2010, and the three-month period ended September 30, 2010. Ternium is a global steel manufacturer organized into flat steel, long steel, and other product segments. The report was signed on November 3, 2010.
Key Financial Metrics
| Metric (USD Thousands) | 9 Months 2010 | 9 Months 2009 | 3 Months 2010 | 3 Months 2009 |
|---|---|---|---|---|
| Net Sales | 5,454,473 | 3,593,783 | 1,877,234 | 1,278,835 |
| Gross Profit | 1,393,690 | 495,150 | 429,085 | 273,472 |
| Operating Income | 920,253 | 80,304 | 267,567 | 158,878 |
| Profit for the Period | 676,621 | 572,325 | 200,836 | 104,657 |
| Net Cash from Operating Activities | 581,395 | 1,089,203 | N/A | N/A |
| Cash and Cash Equivalents | 2,227,001 | 1,884,367 | 2,227,001 | 1,884,367 |
| Total Borrowings | 1,930,292 | 2,872,667 | 1,930,292 | 2,872,667 |
| Basic EPS (Continuing Ops) | 0.27 | 0.07 | 0.08 | 0.04 |
Note: Total Borrowings calculated as sum of current and non-current borrowings. 2009 Profit for the period includes a $428.0 million gain from discontinued operations (Sidor disposal).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 51.8% year-over-year for the nine-month period, driven by higher volumes and improved pricing in both flat and long steel segments.
- Profitability Surge: Operating income jumped from $80.3 million to $920.3 million. This is largely attributable to a $27.0 million impairment charge in the prior year's flat steel segment which did not recur, alongside significantly higher gross margins.
- Debt Reduction: Total borrowings decreased by approximately $942 million, reflecting strong cash generation and debt repayment activities.
- Discontinued Operations: The 2009 comparative period included a one-time gain of $428.0 million from the disposal of Sidor (Venezuela), which is absent in the 2010 period. However, 2010 includes $56.7 million in accretion income related to the Sidor financial asset.
- Acquisition: In August 2010, Ternium acquired a 54% interest in Ferrasa S.A.S. (Colombia) for $74.5 million, contributing $33.1 million in revenue for the remainder of the quarter.
Outlook, Risks, and Contingencies
- Sidor Receivable Risk: The company holds a receivable of $253.7 million from the Venezuelan government (CVG) for the nationalized Sidor assets. Payments are subject to a 14.36% discount rate and potential non-compliance risks. The final outcome of related arbitration proceedings remains uncertain.
- Legal Contingencies: Ternium is involved in an ongoing arbitration with Corus UK regarding the early termination of a steel slab off-take agreement. Corus claims damages exceeding $150 million; Ternium has filed counterclaims. The outcome is currently unforeseeable.
- Commitments: Siderar has commitments for raw material purchases totaling $649.8 million over three years, some at prices above current market rates. Additionally, there are expansion commitments of $130.3 million and a suspended gas supply agreement with Alasa.
- Strategic Expansion: A subsequent event disclosed an agreement with Nippon Steel to form a joint venture in Mexico (Tenigal) to manufacture automotive steel sheets, requiring an investment of approximately $350 million with production expected in 2013.
Investor Verification Checklist
- Verify the collectability and payment schedule of the $253.7 million Sidor receivable from CVG.
- Monitor the status of the arbitration with Corus UK regarding the off-take agreement termination.
- Assess the impact of raw material price commitments on future margins if steel prices decline.
- Review the integration and performance of the newly acquired Ferrasa assets in Colombia.
- Confirm the funding sources and timeline for the $350 million Mexico joint venture investment.