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Ternium S.A. Q1 2020 Financial 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 three-month period ended March 31, 2020. Ternium is a global steel and mining company with operations primarily in Mexico, Brazil, Argentina, and other Latin American markets. The reporting period coincides with the onset of the global COVID-19 pandemic, which significantly impacted operational capacity and market demand.

Key Financial Metrics

Note: Borrowings figure for Q1 2019 is derived from the sum of current and non-current borrowings in the comparative period context, though the filing explicitly lists Q1 2020 borrowings as $2.31 billion. Net debt as of March 31, 2020, is stated as $1.3 billion.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by approximately 17% to $2.27 billion, driven by lower volumes and pricing in the steel segment due to reduced demand, particularly in the automotive sector.
• Profitability Reversal: The company reported a net loss of $19.4 million compared to a net profit of $224.9 million in Q1 2019. This was primarily due to a significant increase in income tax expense ($267.3 million vs. $70.3 million) and lower operating income.
• Foreign Exchange Impact: A substantial net foreign exchange gain of $109.2 million contributed to "Other financial income," partially offsetting operating declines. This contrasts with a loss in the prior year.
• Accounting Policy Change: Effective January 1, 2020, the functional currency of the Argentine subsidiary changed from the local currency to the US dollar, ceasing the application of IAS 29 (Hyperinflationary Economies).
• Investment Valuation: The carrying value of the investment in Usiminas decreased to $377.3 million from $486.6 million at year-end 2019, largely due to currency translation adjustments.

Outlook, Risks, and Management Commentary

• COVID-19 Impact: Operations in Argentina and Colombia were reduced to technical minimums or ceased for non-essential sectors due to mandatory lockdowns. Mexico and Brazil facilities operated at reduced capacity. Management has slowed or postponed capital expenditure projects to preserve liquidity.
• Liquidity Position: Management asserts a strong liquidity position with $1.0 billion in cash and manageable debt amortization. Non-committed credit facilities are in place.
• Dividend Withdrawal: Due to economic uncertainty, the Board of Directors withdrew the previously announced annual dividend proposal for fiscal year 2019.
• Legal Contingencies: Significant ongoing litigation includes a tender offer dispute with CSN regarding Usiminas shares (pending review by Brazil's Superior Court of Justice) and a putative class action in the U.S. regarding the "Notebooks Case." No provisions have been recorded for these matters as management believes claims are groundless.
• Impairment Testing: Management performed impairment tests on goodwill and other assets as of March 31, 2020, resulting in no impairment charges.

Investor Verification Checklist

• Tax Expense Volatility: Verify the composition of the $267 million income tax expense, which significantly exceeded pre-tax profit, to understand the specific tax events or adjustments driving the net loss.
• Usiminas Valuation: Monitor the market value vs. carrying value of the Usiminas investment, which showed a significant gap ($271.7 million market value vs. $377.3 million carrying value) as of March 31, 2020.
• Operational Recovery: Track the timeline for the resumption of full operations in Argentina and Colombia as lockdown measures are relaxed.
• Capital Expenditure Deferral: Assess the long-term impact of postponed CAPEX projects on future production capacity and growth.
• Legal Outcomes: Monitor the status of the CSN tender offer litigation and the U.S. class action, as adverse rulings could result in material financial liabilities.