TX

Ternium S.A. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K filing by Ternium S.A. (NYSE: TX) presents unaudited consolidated condensed interim financial statements for the nine-month period ended September 30, 2018, and the three-month period ended September 30, 2018. Ternium is a global steel producer with operations primarily in Mexico, Brazil, and the Southern Cone (Argentina, Paraguay, Chile, Bolivia, Uruguay). The company operates two reportable segments: Steel and Mining. A significant accounting change occurred during this period with the application of IAS 29 (Financial Reporting in Hyperinflationary Economies) to Argentine subsidiaries effective July 1, 2018.

Key Financial Metrics (Nine Months Ended Sept 30, 2018)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 23.4% year-over-year, driven by higher volumes and prices in the Steel segment, particularly in Mexico and Brazil.
• Profitability Expansion: Operating income rose 53.6% to $1.70 billion. Gross margin improved by nearly 3 percentage points due to favorable product mix and operational efficiency.
• Financial Expenses: "Other financial income (expenses), net" showed a significant loss of $165.6 million in 2018 compared to $75.5 million in 2017. This was primarily due to a $170.2 million net foreign exchange loss, partially offset by a $97.9 million gain from inflation adjustments in Argentina.
• Debt Reduction: Total borrowings decreased by approximately $280 million compared to the prior year, reflecting debt repayments exceeding new borrowings.
• Accounting Policy Change: The adoption of IAS 29 for Argentina resulted in a $242.5 million negative adjustment to operating income in the reconciliation between management view and IFRS, though the overall financial performance remained strong.

Outlook, Risks, and Contingencies

Management Commentary & Outlook: The filing does not contain explicit forward-looking guidance for the full year 2018 or 2019. However, management highlighted the successful integration of the acquired Brazilian assets (CSA/thyssenkrupp) and the operational stability of the Techgen power plant in Mexico.

Key Risks and Contingencies:

• Legal Proceedings (Usiminas): Ongoing litigation in Brazil regarding a tender offer requirement for Usiminas shares. Ternium believes claims are groundless; no provision has been recorded.
• Tax Matters: Potential income tax adjustments in Mexico estimated at approximately $85.3 million (combined for 2008 and 2011 audits). Ternium believes an unfavorable outcome is not probable.
• Acquisition Contingencies: Provisions related to the 2017 acquisition of CSA include $19.3 million for fishermen claims and $45.3 million for ICMS tax credit assessments. A significant provision of $512.3 million remains for potential ICMS deferral tax benefit unconstitutionality risks, partially offset by a recoverable asset.
• Commitments: Significant off-balance sheet commitments include long-term energy supply contracts (Techgen, Iberdrola), raw material supply agreements (Vale, Air Liquide), and guarantees for Techgen's debt ($288 million).

Investor Verification Checklist

• Argentina Inflation Impact: Verify the sustainability of the $97.9 million inflation adjustment gain and the long-term impact of IAS 29 adoption on future earnings volatility.
• Foreign Exchange Exposure: Assess the $170.2 million FX loss and the company's hedging strategies given the multi-currency operational footprint.
• Usiminas Valuation: Review the market value ($706.6 million) vs. carrying value ($429.6 million) of the Usiminas investment and the status of the shareholder agreement exit mechanism.
• Debt Covenants: Confirm compliance with leverage ratios on the $1.5 billion acquisition facility and the new $1.0 billion syndicated loan facility.
• Tax Litigation: Monitor the status of the Mexican tax audits and the Brazilian ICMS unconstitutionality case, which could impact future cash flows.