Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K filing, dated August 3, 2011, reports the second quarter (2Q) and first half (1H) 2011 financial results for Ternium S.A., a leading steel manufacturer in Latin America with principal operations in Mexico and Argentina. The results are prepared in accordance with International Financial Reporting Standards (IFRS) and presented in U.S. dollars.
Key Financial Metrics
| Metric | 2Q 2011 | 1H 2011 |
|---|---|---|
| Net Sales (USD million) | 2,345.6 | 4,492.5 |
| Operating Income (USD million) | 348.6 | 639.7 |
| EBITDA (USD million) | 454.8 | 848.5 |
| EBITDA Margin | 19.4% | 18.9% |
| Net Income (USD million) | 246.9 | 490.1 |
| Net Income to Equity Holders (USD million) | 197.7 | 402.4 |
| Earnings per ADS (USD) | 1.01 | 2.04 |
| Shipments (tons) | 2,172,000 | 4,344,000 |
| Net Cash Position (USD billion) | 0.3 (as of June 30, 2011) | N/A |
| Free Cash Flow (USD million) | (346.9) 2Q | (207.9) 1H |
Material Changes vs. Prior Periods
- Revenue Growth: 2Q 2011 net sales increased 22% year-over-year (YoY) and 9% quarter-over-quarter (QoQ), driven by a 7% increase in shipments and a 15% increase in revenue per ton due to higher steel prices.
- Operating Income: 2Q operating income was flat compared to 2Q 2010 (-3%) but rose 20% from 1Q 2011. The YoY decline was primarily due to a $21.3 million non-recurring charge related to an arbitration settlement with Tata Steel.
- Cost Pressures: Operating costs per ton increased by $53 in 2Q 2011 compared to 1Q 2011, driven by higher raw material, labor, and energy costs. For the first half, costs per ton rose $145 YoY.
- Foreign Exchange: The company recorded a $22.8 million non-cash foreign exchange gain in 2Q 2011 (vs. a $32.8 million loss in 2Q 2010), largely due to the revaluation of the Mexican Peso against the U.S. dollar on USD-denominated debt.
- Regional Performance: Shipments in South & Central America increased 20% YoY in 2Q, while North America shipments decreased 3% YoY.
Guidance, Outlook, and Risks
- Outlook: Management expects shipments in the second half of 2011 to remain in line with the first half, citing stable demand and no overstocking. However, quarterly operating income is expected to be lower than the 2Q 2011 level due to price weakness in North American finished products and higher costs for purchased slabs and raw materials.
- Unusual Items: A $21.3 million non-recurring charge was recorded in 2Q 2011 for the settlement of arbitration proceedings with Tata Steel regarding a slab off-take agreement.
- Liquidity: The net cash position decreased from $0.8 billion at the end of March 2011 to $0.3 billion at June 30, 2011. This reduction was driven by increased working capital, significant income tax payments ($316.3 million in 2Q), and dividend payments.
- Risks: Forward-looking statements highlight risks related to GDP uncertainty, market demand, global production capacity, tariffs, and industry cyclicality.
Investor Verification Checklist
- Arbitration Settlement: Verify the finality and potential for future legal exposure regarding the $21.3 million Tata Steel settlement.
- Cost Pass-Through: Assess the company's ability to pass through rising raw material and energy costs to customers, given the guidance for lower operating income in H2 2011.
- Working Capital Trends: Monitor the significant increase in inventory ($488.8 million increase in 1H) and receivables to ensure it aligns with sales growth and does not signal demand softening.
- Currency Exposure: Review the impact of Mexican Peso fluctuations on reported earnings, noting that the $22.8 million FX gain in 2Q was non-cash in USD terms.
- Capital Allocation: Confirm the sustainability of the $150 million share repurchase program and $147.2 million dividend payout amidst negative free cash flow.