TX

Ternium S.A. Q1 2016 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, 2016. Ternium is a global steel and mining company organized into two reportable segments: Steel (flat and long products) and Mining (iron ore and pellets). The company is incorporated in Luxembourg and trades on the NYSE under the symbol "TX".

Key Financial Metrics

Note: All figures are in USD thousands unless otherwise noted. Gross margin for Q1 2016 was approximately 22.3%.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by 22.1% to $1.66 billion, driven primarily by lower volumes and prices in the steel market. The Steel segment sales dropped to $1.66 billion from $2.13 billion, while Mining sales fell to $43.8 million from $57.0 million.
• Profitability Increase: Despite lower revenue, Profit for the Period increased by 29.0% to $123.6 million. This was achieved through significant cost reductions (Cost of Sales decreased 25.5%) and lower SG&A expenses (down 16.9%).
• Financial Items: Other financial expenses net increased significantly due to a foreign exchange loss of $19.1 million in Q1 2016, compared to a gain of $9.1 million in Q1 2015. However, finance expenses (interest) decreased by 47.4% to $12.7 million.
• Equity in Earnings: The company recorded a positive equity in earnings of $2.4 million from non-consolidated companies (primarily Usiminas), compared to a loss of $9.5 million in the prior year.

Outlook, Risks, and Contingencies

• Dividend Proposal: The Board proposed a dividend of $0.09 per share ($0.90 per ADS), totaling approximately $180.4 million, subject to shareholder approval at the May 4, 2016 meeting.
• Usiminas Investment Risk: Ternium holds a 32.9% stake in Usiminas (Brazil). Usiminas faces a "material uncertainty" regarding its ability to continue as a going concern. Usiminas is undergoing a financial debt restructuring and a capital increase. Ternium management believes no additional impairment is required beyond the $191.9 million recorded in Q4 2015, maintaining the carrying value at approximately $241.0 million.
• Legal Contingencies:
  • CSN Litigation: Ongoing lawsuit in Brazil regarding a tender offer requirement for Usiminas shares. Ternium believes claims are groundless; no provision recorded.
  • Tax Claims: Argentine tax authority (AFIP) claims against Siderar totaling ~$1.5 million; a provision of $0.4 million has been recognized. Mexican tax authorities have indicated a potential adjustment of ~$34 million regarding a 2008 tax loss; management believes an unfavorable outcome is not probable.
• Commitments: Significant commitments include a $384 million corporate guarantee for Techgen's syndicated loan and long-term energy and raw material supply contracts.

Investor Verification Checklist

• Usiminas Restructuring: Verify the progress of Usiminas' debt restructuring and capital increase to assess the risk of further impairment on Ternium's investment.
• Foreign Exchange Exposure: Monitor the impact of currency fluctuations on financial results, given the $19.1 million FX loss in Q1 2016.
• Dividend Approval: Confirm shareholder approval of the proposed $180.4 million dividend at the May 4, 2016 meeting.
• Tax Litigation Status: Track the resolution of the Mexican tax audit (potential $34 million exposure) and the CSN tender offer litigation in Brazil.
• Cost Management: Assess the sustainability of the cost reduction measures that allowed profit growth despite a 22% revenue decline.