Ternium S.A. Form 6-K Summary: Nine Months Ended September 30, 2023
Business Context and Reporting Period
This Form 6-K reports the unaudited consolidated condensed interim financial statements for Ternium S.A. for the nine-month period ended September 30, 2023. Ternium is a global steel producer with operations primarily in Mexico, Argentina, and Brazil. The reporting period is significantly impacted by the acquisition of a controlling interest in Usiminas (Brazil) in July 2023, which triggered full consolidation of Usiminas' results and balance sheet.
Key Financial Metrics
| Metric ($ thousands) | 9 Months 2023 | 9 Months 2022 |
|---|---|---|
| Net Sales | 12,679,353 | 12,867,983 |
| Gross Profit | 2,667,169 | 3,499,726 |
| Operating Income | 1,616,447 | 2,656,406 |
| Profit for the Period (Net Income) | 432,564 | 2,033,606 |
| Profit Attributable to Owners | 262,170 | 1,727,684 |
| Basic EPS ($) | 0.13 | 0.88 |
| Net Cash from Operating Activities | 1,605,614 | 1,720,751 |
| Cash and Cash Equivalents (End of Period) | 1,815,731 | 1,474,158 |
| Total Borrowings (Current + Non-Current) | 2,164,724 | 3,927,661 (Dec 31, 2022) |
Note: Borrowings decreased significantly from year-end 2022 levels, partly due to the Usiminas acquisition mechanics and debt repayments.
Material Changes vs. Prior Period
- Profitability Decline: Net income attributable to owners dropped 84.8% year-over-year (from $1.73B to $262M). This is primarily due to a one-time non-cash loss of $1.1 billion related to the Usiminas acquisition.
- Usiminas Acquisition Impact:
- Remeasurement Loss: A $441.3 million loss was recognized on the remeasurement of the previously held interest in Usiminas.
- Recycling of OCI: A $934.9 million loss was recognized from recycling accumulated currency translation adjustments (CTA) from Other Comprehensive Income to the income statement.
- Bargain Purchase Gain: A $270.4 million gain was recognized on the bargain purchase of Usiminas.
- Net Effect: The combined "Effect related to the increase of the participation in Usiminas" resulted in a net charge of $171.0 million in the income statement, while the recycling of OCI created a massive non-operating loss impact.
- Operating Performance: Excluding the Usiminas accounting adjustments, underlying operating income declined due to lower steel prices and higher costs, though the Usiminas segment contributed $1.36B in sales since acquisition.
- Balance Sheet Expansion: Total assets increased from $17.5B (Dec 2022) to $24.3B (Sep 2023), driven by the consolidation of Usiminas assets ($3.6B net assets acquired).
Guidance, Outlook, Risks, and Unusual Items
- USMCA Integration Project: Ternium approved a $2.2 billion investment to build a new electric arc furnace (EAF) and direct reduced iron (DRI) module in Pesquería, Mexico. Construction is expected to begin in December 2023, with operations starting in H1 2026.
- Argentina Foreign Exchange Restrictions: Significant risks remain regarding Ternium Argentina's ability to repatriate dividends or pay for imports due to strict Argentine government controls. A dividend in kind (bonds) of $624M was received, but transfer restrictions limit liquidity, resulting in an $183M negative reserve recorded in equity.
- Legal Contingencies:
- CSN Litigation: A lawsuit by Companhia Siderúrgica Nacional (CSN) regarding a 2012 tender offer is pending a final tie-breaking vote at Brazil's Superior Court of Justice. Potential indemnification could reach $0.6 billion for Ternium Investments and $0.2 billion for Ternium Argentina if the claim is upheld.
- Usiminas Contingencies: Upon acquisition, Ternium recognized $856 million in provisions for tax, labor, and civil contingencies associated with Usiminas.
- Geopolitical Risks: The Russia-Ukraine conflict continues to impact raw material supply chains (steel slabs, iron ore, coal), potentially increasing costs and limiting production.
Investor Verification Checklist
- Usiminas Consolidation: Verify the provisional purchase price allocation and the timeline for finalizing the fair value of acquired assets and liabilities.
- Argentina Liquidity: Monitor the status of the $624M dividend-in-kind bonds and the daily transfer limits imposed by the Argentine Securities Commission.
- CSN Litigation Outcome: Track the final ruling by the Superior Court of Justice regarding the potential $0.8 billion aggregate indemnification claim.
- USMCA CapEx: Confirm the start of construction for the $2.2 billion Mexico project in Q4 2023 and monitor for cost overruns or delays.
- Operating Margins: Analyze the "Management View" operating income ($1.75B) versus IFRS operating income ($1.62B) to understand the impact of inventory costing methodologies on reported margins.