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Ternium S.A. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K filing presents the unaudited consolidated condensed interim financial statements for Ternium S.A. for the six-month period ended June 30, 2022. Ternium is a global steel manufacturer organized into two reportable segments: Steel (flat and long products) and Mining (iron ore and pellets). The company operates primarily in Mexico, Brazil, and the Southern Cone region of South America.

Key Financial Metrics (Six Months Ended June 30, 2022)

Note: Gross margin for the six months ended June 30, 2022, was approximately 30.9% compared to 36.5% in the prior year period.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by 21.9% year-over-year, driven by higher steel prices and volumes, particularly in the Mexico and Southern Region segments.
• Profitability Pressure: Despite revenue growth, operating income decreased by 2.2% and net profit attributable to owners declined by 3.1%. This was primarily due to a significant increase in the cost of sales (up 32.7%) and selling, general, and administrative expenses (up 30.1%), outpacing revenue growth.
• Debt Reduction: Total borrowings decreased significantly from $4.14 billion as of December 31, 2021, to $1.09 billion as of June 30, 2022, reflecting substantial debt repayments of $541.5 million during the period.
• Cash Flow: Net cash provided by operating activities decreased by 28.2% to $687 million, largely due to a $1.08 billion net outflow related to income tax accruals and payments, compared to an inflow in the prior year.
• Investment in Non-Consolidated Companies: Equity in earnings from non-consolidated companies (primarily Usiminas) dropped to $108 million from $218 million in the prior year.

Outlook, Risks, and Contingencies

• Dividends: Shareholders approved a total annual dividend of $0.26 per share ($2.60 per ADS). A net dividend of $0.18 per share was paid in May 2022.
• Argentina Foreign Exchange Restrictions: Significant restrictions on foreign exchange transactions in Argentina continue to limit the ability to repatriate dividends or pay royalties at the official exchange rate. Ternium Argentina approved a dividend in kind of $300 million in peso-denominated instruments, which may have a negative effect upon transfer due to these restrictions.
• Geopolitical Risks: The Russia-Ukraine conflict has caused volatility in energy and raw material prices (steel slabs, iron ore, coal). Sanctions may disrupt supply chains and increase input costs.
• Legal Contingencies:
  • CSN Litigation: A lawsuit regarding a tender offer for Usiminas shares is pending before the Superior Court of Justice in Brazil. Ternium believes the claims are groundless and has recorded no provision.
  • Usiminas Shareholder Claims: A determination by the Brazilian securities regulator (CVM) regarding a 2014 acquisition is under appeal. If unsuccessful, Ternium may be required to sell excess shares or launch a tender offer.
• Usiminas Investment: The market value of Ternium's stake in Usiminas ($394.3 million) was below its carrying value ($816.6 million) as of June 30, 2022. An impairment test was performed, resulting in no impairment charges.

Key Facts for Investor Verification

• Verify the sustainability of gross margins given the 32.7% increase in cost of sales versus 21.9% revenue growth.
• Monitor the resolution of the CSN tender offer litigation and the CVM appeal regarding Usiminas shares, as these could result in significant cash outflows or share dilution.
• Assess the impact of Argentina's foreign exchange restrictions on the repatriation of cash and the valuation of the $300 million dividend in kind.
• Track the trajectory of raw material costs (iron ore, coal, energy) amidst the Russia-Ukraine conflict and its effect on future operating income.
• Review the continued reduction in debt levels and the company's liquidity position following the significant cash outflow for dividends and debt repayment.