Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, filed on February 26, 2008, furnishes Ternium S.A.'s consolidated financial statements for the years ended December 31, 2007, 2006, and 2005. Ternium is a Luxembourg-based holding company engaged in the manufacturing and distribution of flat and long steel products across the Americas. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in thousands of U.S. dollars.
Key Financial Metrics (Year Ended Dec 31, 2007)
- Net Sales: $8,184,381 (24.5% increase from 2006)
- Gross Profit: $2,388,341 (Gross Margin: 29.2%)
- Operating Income: $1,586,408 (3.1% decrease from 2006)
- Net Income: $1,001,166 (0.5% increase from 2006)
- Net Income Attributable to Equity Holders: $784,490
- Earnings Per Share (Basic): $0.39
- Operating Cash Flow: $1,564,201
- Total Assets: $13,767,310
- Total Borrowings: $4,084,901 (Significant increase from $1,057,095 in 2006)
- Cash and Cash Equivalents: $1,126,041
Material Changes vs. Prior Period
- Acquisition of Grupo Imsa: The most significant event in 2007 was the acquisition of Grupo Imsa S.A.B. de C.V. for approximately $1.7 billion. This transaction, consummated in July 2007, added significant revenue ($976.3 million post-acquisition) and assets but also increased debt levels substantially to finance the deal.
- Revenue Growth: Net sales rose by $1.6 billion, driven primarily by the inclusion of Grupo Imsa and favorable market conditions.
- Operating Income Decline: Despite revenue growth, operating income decreased by $50 million compared to 2006. This was largely due to increased Selling, General, and Administrative (SG&A) expenses ($825.8 million vs. $624.8 million) and higher costs associated with the new acquisition.
- Debt Expansion: Total borrowings increased nearly fourfold to over $4 billion, primarily to fund the Grupo Imsa acquisition. The weighted average interest rate on borrowings was 6.15%.
- Discontinued Operations: The company classified certain assets (Steelscape Inc. and related entities) as held for sale, generating $10.8 million in income from discontinued operations.
Outlook, Risks, and Contingencies
- Post-Balance Sheet Event: On February 1, 2008, Ternium completed the sale of its interests in Steelscape Inc., ASC Profiles Inc., Varco Pruden Buildings Inc., and Metl-Span LLC to BlueScope Steel for $726 million. Proceeds are intended to prepay financial debt.
- Energy Supply Risk: An early termination clause was invoked by Iberdrola regarding electricity supply to two Hylsa plants (Puebla and Apodaca), effective March 31, 2008. This affects approximately 22% of the contracted demand.
- Legal and Tax Contingencies:
- PDVSA-Gas Claim: Sidor faces a potential exposure of $160.7 million related to an appeal by PDVSA-Gas regarding gas pricing arbitration.
- Tax Claims: Provisions of $4.8 million (Siderar) and $7.3 million (Sidor) have been recorded for various tax disputes.
- Financial Risk: The company is exposed to foreign exchange volatility (ARS, MXN, VEB) and interest rate fluctuations, with 95% of total borrowings at variable rates. Management utilizes derivative instruments to hedge these risks.
Investor Verification Checklist
- Verify the integration progress and synergies realized from the Grupo Imsa acquisition.
- Monitor the impact of the Iberdrola electricity contract termination on Hylsa's production costs and capacity.
- Assess the status of the $160.7 million PDVSA-Gas litigation exposure.
- Review the deployment of the $726 million proceeds from the Steelscape sale for debt reduction.
- Track the company's ability to service its increased debt load ($4.1 billion) amidst variable interest rates.