Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2009 (Unaudited)
Filing Date: May 5, 2009
Business Overview: Ternium is a global steel manufacturer organized into flat steel products, long steel products, and other segments. The company operates primarily in South and Central America, North America, and Europe.
Key Financial Metrics
| Metric (USD Thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | 1,174,655 | 1,942,647 |
| Gross Profit | 130,083 | 494,902 |
| Gross Margin | 11.1% | 25.5% |
| Operating Loss | (26,483) | 359,388 |
| Net Loss (Continuing Ops) | (117,018) | 320,768 |
| Net Loss (Total) | (117,018) | 480,705 |
| EPS (Basic & Diluted) | (0.05) | 0.21 |
| Cash & Equivalents | 1,080,417 | 838,492 |
| Total Borrowings | 2,937,617 | 5,109,783 (Total Liab) |
| Operating Cash Flow | 409,323 | 1,727 |
Note: Total Borrowings for Q1 2009 calculated as sum of Current (863,525) and Non-current (2,074,092) borrowings. Q1 2008 borrowing data is not explicitly broken out in the provided text, though Total Liabilities were 5,109,783.
Material Changes vs. Prior Period
- Revenue Decline: Net sales dropped 39.5% to $1.17 billion, driven by a severe downturn in the global steel market. Flat steel sales fell from $1.66 billion to $996.8 million.
- Profitability Reversal: The company swung from a net profit of $480.7 million in Q1 2008 to a net loss of $117.0 million in Q1 2009. This includes a $159.9 million gain from discontinued operations in 2008 which was absent in 2009.
- Foreign Exchange Impact: A significant non-cash foreign exchange loss of $160.5 million impacted "Other financial expenses," primarily due to USD-denominated borrowings held by Ternium Mexico.
- Impairment Charges: The company recorded a $27.0 million impairment charge on intangible assets related to a steel supply contract with Corus UK Limited, citing that the asset value no longer reflected market conditions.
- Working Capital: Operating cash flow improved significantly to $409.3 million, largely due to a $371.3 million positive change in working capital, compared to a $230.1 million outflow in the prior year.
Outlook, Risks, and Contingencies
- Sidor Nationalization: The Venezuelan government nationalized Sidor (in which Ternium held ~59.7%) in 2008. Ternium ceased consolidating Sidor and classified the investment as an available-for-sale asset valued at $1.3 billion. The company is pursuing arbitration via ICSID for fair compensation and has not recognized an impairment loss, estimating fair value exceeds carrying amount.
- Investment Plan Rescheduling: Due to the financial crisis and demand uncertainty, subsidiary Siderar has rescheduled its expansion investment plan and is renegotiating raw material contracts to reduce cash outflows.
- Debt Structure: Ternium Mexico holds $2.64 billion in USD-denominated loans, creating significant exposure to currency fluctuations.
- Dividend Restrictions: Dividends are payable only to the extent of distributable retained earnings under Luxembourg law. Not all retained earnings in the financial statements are distributable.
Key Facts for Investor Verification
- Sidor Valuation: Verify the ongoing status of the ICSID arbitration and the assumptions used to justify the $1.3 billion carrying value of the Sidor asset amidst nationalization.
- Currency Exposure: Assess the impact of future exchange rate fluctuations on the $2.64 billion USD debt held by Ternium Mexico.
- Market Demand: Monitor the recovery of steel demand in North and South America, which drove the 40% revenue decline.
- Impairment Risks: Watch for further impairment charges on intangible assets or goodwill if market conditions do not improve.
- Liquidity Position: Confirm the sustainability of the $1.08 billion cash balance given the rescheduled capital expenditures and ongoing debt repayments.