Ternium S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K filing, dated February 24, 2009, presents the consolidated financial statements of Ternium S.A. for the fiscal year ended December 31, 2008. 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 have been audited by Price Waterhouse & Co. S.R.L.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | 2008 (USD Thousands) | 2007 (USD Thousands) |
|---|---|---|
| Net Sales | 8,464,885 | 5,633,366 |
| Gross Profit | 2,336,858 | 1,345,695 |
| Operating Income | 1,676,047 | 836,776 |
| Net Income (Total) | 875,164 | 995,796 |
| Net Income (Attributable to Equity Holders) | 715,418 | 784,490 |
| Diluted EPS | $0.36 | $0.39 |
| Operating Cash Flow | 517,513 | 936,418 |
| Total Assets | 10,671,247 | 13,649,082 |
| Total Borrowings | 3,267,327 | 4,082,311 |
| Cash and Cash Equivalents | 1,065,552 | 1,125,830 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 50% to $8.46 billion, driven primarily by the full-year consolidation of the Grupo Imsa acquisition (completed in 2007) and higher steel prices in the first half of 2008.
- Discontinued Operations: A significant portion of 2008 results relates to discontinued operations, specifically the nationalization of Sidor C.A. in Venezuela and the sale of non-strategic U.S. assets. Income from discontinued operations was $157 million in 2008 compared to $580 million in 2007.
- Foreign Exchange Impact: The company recorded a net foreign exchange loss of $632.7 million in "Other financial expenses," primarily due to the devaluation of the Mexican Peso against the U.S. Dollar on USD-denominated borrowings held by Ternium Mexico.
- Debt Reduction: Total borrowings decreased by approximately $815 million to $3.27 billion, reflecting debt repayments and the impact of the Sidor divestiture.
- Asset Base: Total assets declined by $3 billion to $10.67 billion, largely due to the reclassification of Sidor assets to "Available for sale assets" and the sale of U.S. assets.
Outlook, Risks, and Contingencies
- Sidor Nationalization: The Venezuelan government nationalized Sidor C.A. in 2008. Ternium ceased consolidating Sidor's results as of April 1, 2008, and classified the investment as an available-for-sale financial asset. The company is pursuing arbitration under the ICSID convention to recover fair value compensation. The auditor noted uncertainty regarding the final compensation amount.
- Market Conditions: Management noted the severe international financial crisis and its impact on the global steel market, leading to a rescheduling of investment plans at Siderar to reduce cash outflows in 2009.
- Currency Risk: The company remains exposed to foreign exchange volatility, particularly regarding the Mexican Peso and Argentine Peso. A 1% weakening of these currencies against the USD would reduce pre-tax income by approximately $24.3 million.
- Liquidity: The company maintains sufficient cash and credit facilities. The debt-to-equity ratio (debt over debt plus equity) was 0.37 at year-end 2008.
Investor Verification Checklist
- Sidor Compensation: Verify the status of negotiations and arbitration proceedings regarding the fair value compensation for the nationalized Sidor assets.
- FX Exposure: Assess the impact of continued currency volatility in Mexico and Argentina on future earnings and debt service costs.
- Discontinued Operations: Confirm that the $157 million income from discontinued operations is not indicative of recurring core business performance.
- Inventory Valuation: Review the $160.9 million valuation allowance and $124.9 million obsolescence allowance established for inventories in light of potential demand softness.
- Debt Maturity: Review the maturity profile of the $3.27 billion in borrowings, noting that $941 million is due in 2009.