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Ternium S.A. Q1 2019 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, 2019. Ternium is a global steel and mining company organized into two reportable segments: Steel (flat and long steel products) and Mining (iron ore and pellets). The financial statements are prepared in accordance with IFRS and reflect the adoption of IFRS 16 (Leases) effective January 1, 2019, without restating comparative periods.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by approximately 2.1% year-over-year, driven primarily by the Southern Region (Argentina, Paraguay, Chile, Bolivia, Uruguay), where sales dropped from $473.9 million to $390.3 million. This decline is largely attributed to the application of IAS 29 (Hyperinflationary Economies) in Argentina, which negatively impacted reported sales by approximately $26 million.
• Profitability Compression: Operating income fell by 31.1% to $307.3 million. Gross margin contracted from 23.7% to 19.0% due to higher cost of sales relative to revenue and inflation adjustments.
• Debt Reduction: Total borrowings decreased significantly from $3.24 billion in Q1 2018 to $1.99 billion in Q1 2019, reflecting net repayments of borrowings ($210 million) exceeding proceeds ($166 million) during the quarter.
• Cash Flow Improvement: Net cash provided by operating activities more than doubled to $478.5 million, primarily due to a favorable change in working capital of $166.6 million compared to a negative $212.6 million in the prior year.
• Accounting Policy Change: The adoption of IFRS 16 resulted in the recognition of right-of-use assets of $300.3 million and lease liabilities of $300.3 million on the balance sheet as of January 1, 2019.

Outlook, Risks, and Contingencies

Management Commentary: The filing does not contain explicit forward-looking guidance or outlook statements for the full year 2019. Management notes that the Chief Operating Decision Maker reviews performance using a direct cost methodology that differs from IFRS, resulting in different operating income figures for internal management views versus reported IFRS results.

Key Risks and Contingencies:

• Usiminas Litigation (CSN Tender Offer): A lawsuit filed by Companhia Siderúrgica Nacional (CSN) in Brazil alleges Ternium was required to launch a tender offer for Usiminas shares. The case is currently pending review by the Superior Court of Justice. Ternium believes the claims are groundless and has recorded no provision.
• Usiminas Shareholder Claims: The Brazilian securities regulator (CVM) staff previously determined that a 2014 acquisition by Ternium triggered a tender offer requirement. Ternium has appealed this decision, and the Board of Commissioners is expected to rule in 2019.
• ICMS Tax Benefit: A significant tax incentive in Rio de Janeiro faces a constitutional challenge. While the State of Rio de Janeiro has reconfirmed the benefit under new legislation, the Federal Supreme Court has not yet ruled on the unconstitutionality action. A provision of $651.8 million (including penalties) was recorded as of the acquisition date, with a potential total risk exposure of $1.63 billion.
• Putative Class Action: A class action complaint was filed in the U.S. District Court for the Eastern District of New York regarding alleged improper payments related to the Sidor expropriation. The company believes it has meritorious defenses but cannot predict the outcome.

Investor Verification Checklist

• Argentina Inflation Impact: Verify the specific impact of IAS 29 hyperinflation adjustments on the Southern Region's revenue and cost of sales, as this significantly distorts year-over-year comparisons.
• Usiminas Valuation: Review the market value ($747.2 million) versus carrying value ($487.9 million) of the Usiminas investment and monitor the status of the pending litigation regarding tender offers.
• Debt Maturity Profile: Analyze the maturity schedule of the remaining $1.99 billion in borrowings to assess liquidity requirements in the coming quarters.
• ICMS Litigation Status: Monitor updates from the Brazilian Federal Supreme Court regarding the constitutionality of the Rio de Janeiro tax incentive, which represents a material contingent liability.
• Working Capital Volatility: Investigate the drivers behind the $166.6 million positive change in working capital, noting that $10.9 million of this was due to non-cash exchange rate variations.