Business Context and Reporting Period
Company: Ternium S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Accounting Standards: International Financial Reporting Standards (IFRS), with reconciliations to U.S. GAAP provided.
Overview: Ternium is a leading steel producer in the Americas, operating through subsidiaries in Argentina (Siderar), Venezuela (Sidor), and Mexico (Hylsamex). The 2006 results reflect the full-year consolidation of Amazonia (controlling Sidor) and Hylsamex, which were acquired in 2005. The company is organized under the laws of Luxembourg.
Key Financial Metrics (2006)
| Metric (in thousands USD) | 2006 (IFRS) | 2005 (IFRS) |
|---|---|---|
| Net Sales | 6,568,975 | 4,447,680 |
| Gross Profit | 2,267,591 | 1,958,700 |
| Operating Income | 1,636,569 | 1,392,161 |
| Net Income (Total) | 995,966 | 1,072,813 |
| Net Income Attributable to Equity Holders | 795,424 | 704,406 |
| Basic EPS (Equity Holders) | $0.41 | $0.58 |
| Total Assets | 8,770,539 | 8,659,981 |
| Total Borrowings (Debt) | 1,057,095 | 2,916,277 |
| Cash and Cash Equivalents | 643,352 | 765,630 |
| Capital Expenditures | 405,800 | 244,900 |
Note: 2005 figures are presented on a combined consolidated basis to reflect common control prior to full consolidation.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 47.7% to $6.57 billion, driven primarily by the full-year consolidation of Hylsamex and Amazonia, alongside increased sales volumes and strong steel prices.
- Profitability: Net income attributable to equity holders rose 12.9% to $795.4 million. However, this growth was partially offset by higher raw material costs (iron ore, coal), increased pension charges at Sidor, and labor disruptions (strikes) in Venezuela.
- Debt Reduction: Total borrowings decreased significantly by approximately 63.7% (from $2.92 billion to $1.06 billion). This reduction was achieved through the use of strong operating cash flows and proceeds from the initial public offering (IPO) to prepay debt related to the Hylsamex acquisition.
- Non-Recurring Items: The 2006 results did not include the $188.4 million non-recurring gain recognized in 2005 related to the conversion of Amazonia convertible debt.
- Cost Structure: Cost of sales as a percentage of net sales increased to 65.5% in 2006 from 56.0% in 2005, reflecting higher input costs and a product mix with lower gross margins.
Guidance, Outlook, and Risks
Recent Developments and Outlook
- Grupo Imsa Acquisition: On April 29, 2007, Ternium entered into a definitive agreement to acquire control of Grupo Imsa (operations in Mexico, U.S., and Guatemala) for approximately $1.7 billion. The transaction is expected to close in Q3 2007 and is expected to significantly increase sales and financial expenses.
- Dividends: A dividend of $0.05 per share ($0.50 per ADS), totaling approximately $100 million, was approved and paid in June 2007.
- Capital Expenditures: The company plans to continue investing in capacity expansion and modernization, particularly in Argentina (Siderar) and Venezuela (Sidor), to increase crude steel production capacity.
Key Risks and Contingencies
- Country Risk (Venezuela): Significant political and economic instability, including potential nationalization of assets, exchange controls (CADIVI), and renegotiation of raw material contracts (iron ore prices increased 63% in 2006). Labor strikes at Sidor caused production stoppages.
- Country Risk (Argentina): Natural gas shortages and supply restrictions could curtail production. Exchange controls and inflation remain concerns.
- Commodity Prices: Volatility in raw material (iron ore, coal) and energy prices directly impacts margins. The company faces difficulty passing all cost increases to customers due to competitive pressures.
- Goodwill Impairment: The company holds significant goodwill ($397.9 million related to Hylsamex) which is subject to annual impairment testing.
- Trade Regulations: Exposure to anti-dumping and countervailing duties in key export markets (U.S., Europe).
Investor Verification Checklist
- Debt Maturity Profile: Verify the specific maturity dates of the remaining $1.06 billion in debt to assess refinancing risks, noting that 48% is due within one year.
- Grupo Imsa Financing: Confirm the terms and interest rates of the debt facilities secured to finance the $1.7 billion Grupo Imsa acquisition.
- Venezuelan Operations: Monitor the status of the iron ore supply contract with FMO and the impact of CADIVI exchange controls on the repatriation of earnings from Sidor.
- Argentina Energy Supply: Assess the current status of natural gas supply agreements and the impact of government-imposed rationing on Siderar's production capacity.
- Goodwill Valuation: Review the assumptions used in the annual goodwill impairment test, particularly regarding future cash flow projections for Hylsamex.
- IFRS vs. GAAP Reconciliation: Note the differences in net income and equity between IFRS and U.S. GAAP (e.g., Net Income was $841 million under U.S. GAAP vs. $795 million attributable to equity holders under IFRS).