Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Ternium is a leading steel producer in Latin America, manufacturing flat and long steel products primarily in Mexico and Argentina. The company operates through subsidiaries, including Ternium Mexico and Siderar S.A.I.C. (Argentina). In 2009, the company completed the transfer of its 59.7% interest in Sidor (Venezuela) to the Venezuelan state-owned entity CVG.
Key Financial Metrics (2009)
| Metric | 2009 (USD) | 2008 (USD) |
|---|---|---|
| Net Sales | $4,958,983,000 | $8,464,885,000 |
| Gross Profit | $848,613,000 | $2,336,858,000 |
| Operating Income | $296,383,000 | $1,676,047,000 |
| Net Income (Total) | $767,124,000 | $875,164,000 |
| Net Income (Attributable to Equity Holders) | $717,400,000 | $715,418,000 |
| Basic EPS (Attributable to Equity Holders) | $0.36 | $0.36 |
| Cash and Cash Equivalents | $2,095,798,000 | $1,065,552,000 |
| Total Debt (Borrowings) | $2,326,729,000 | $3,267,327,000 |
| Capital Expenditures | $208,600,000 | $587,900,000 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 41.4% to $5.0 billion, driven by a 15.7% drop in shipments (6.4 million tons vs. 7.5 million tons) and a 30.3% decrease in revenue per ton due to the global economic downturn and lower steel prices.
- Operating Income Compression: Operating income fell 82.3% to $296.4 million. Gross margin contracted from 27.6% in 2008 to 17.1% in 2009 as cost reductions did not fully offset price declines.
- Discontinued Operations: Net income included a significant $428.0 million after-tax gain from discontinued operations related to the transfer of Sidor shares to Venezuela. Without this gain, continuing operations income was lower than the prior year.
- Balance Sheet Strengthening: Total debt decreased by approximately $940 million to $2.3 billion, primarily due to debt repayments funded by operating cash flows and proceeds from the Sidor transaction. Cash and cash equivalents nearly doubled to $2.1 billion.
- Inventory Reduction: Inventory levels decreased by $429.1 million as the company implemented a de-stocking program in response to lower demand.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management expects capital expenditures for 2010 to be approximately $300 million, financed by cash from operations. The company is reassessing the scope and timetable of certain expansion projects in Argentina due to the economic environment. Ternium plans to expand its product range of high-strength steel grades for the automotive and heavy machinery sectors.
Recent Developments:
- Ferrasa Acquisition: Entered a definitive agreement to acquire a 54% interest in Ferrasa (Colombia) for $74.5 million, expected to close in Q3 2010.
- Nippon Steel Joint Venture: Signed a non-binding memorandum of understanding with Nippon Steel Corporation to form a joint venture in Mexico for hot-dip galvanized steel sheets, with an estimated investment of $350 million.
- Dividends: Shareholders approved a dividend of $0.05 per share ($0.50 per ADS), totaling approximately $100.2 million, paid in June 2010.
Key Risks and Contingencies:
- Sidor Receivables: Significant credit concentration risk exists regarding the remaining $458 million receivable from CVG (Venezuela) for the Sidor nationalization. While payments have been made, there is a risk of non-compliance.
- Corus Arbitration: Ongoing arbitration with Corus UK regarding the termination of a steel slab off-take agreement. Corus claims damages exceeding $316 million; Ternium has filed counterclaims exceeding $362 million. The outcome is uncertain.
- Argentina Economic Conditions: Risks include high inflation, exchange controls restricting the transfer of funds, and potential energy supply shortages (natural gas/electricity) that could curtail production.
- Global Steel Market: Continued volatility in steel prices, excess global capacity, and potential trade restrictions (antidumping duties) in key markets.
Investor Verification Checklist
- Sidor Payment Status: Verify the current status of the remaining $458 million receivable from CVG and any delays in scheduled payments.
- Corus Arbitration Progress: Monitor the status of the arbitration proceedings with Corus UK and potential financial exposure from damages or counterclaims.
- Argentina Exchange Controls: Assess the impact of Argentine foreign exchange restrictions on the company's ability to repatriate cash and pay dividends from its Argentine subsidiary (Siderar).
- Energy Supply in Argentina: Confirm the stability of natural gas and electricity supplies to Siderar's facilities, as shortages have historically impacted production.
- Capital Expenditure Execution: Track the execution of the $300 million 2010 capital expenditure plan and the status of the reassessed Argentina expansion projects.