ANNUAL
REPORT
2016
ANNUAL
REPORT
2012
CONTENTS
2. Ternium
01_
Company Profile and Strategy. page 4
02_
Operating and Financial Highlights. page 6
03_
Chairman’s Letter. page 8
04_
Management Report. page 12
Business Review. page 12
Corporate Governance. page 34
Board of Directors and Senior Management. page 38
Investor Information. page 39
2016 Results. Management’s Discussion and Analysis
of Financial Condition and Results of Operations. page 40
05_
Consolidated Financial Statements. page 50
3. Annual Report 2016
ANNUAL
ANNUAL
REPORT
REPORT
2012
2016
01
COMPANY PROFILE
AND STRATEGY
4. Ternium
Ternium is a leading steel producer in Latin America.
We manufacture and process a broad range of value-
added steel products, including galvanized and electro-
galvanized sheets, pre-painted sheets, tinplate, welded
pipes, hot-rolled flat products, cold-rolled products,
bars and wire rods as well as slit and cut-to-length
offerings through our service centers.
of service and distribution centers throughout Latin
America that provide it with a strong position from
which to serve its core markets. In addition, Ternium
participates in the control group of Usiminas, a
leading steel company in the Brazilian steel market,
and has recently agreed to acquire CSA Siderúrgica do
Atlântico, a Brazilian manufacturer of steel slabs.
Our customers range from large global companies
to small businesses operating in the construction,
automotive, home appliances, capital goods,
container, food and energy industries. We aim to build
close relationships with our customers and recognize
that our success is closely linked with theirs.
Ternium has a deeply ingrained industrial culture.
With approximately 16,700 employees and an annual
production capacity of 11 million tons of finished
steel products, Ternium has production facilities
located in Mexico, Argentina, Colombia, the southern
United States and Guatemala, as well as a network
Our proximity to local steel consuming markets
enables us to differentiate ourselves from our
competitors by offering valuable services to our
customer base across Latin America. Our favorable
access to iron ore sources and proprietary iron ore
mines in Mexico provide operational flexibility, and
our diversified steel production technology enables us
to adapt to fluctuating input-cost conditions.
We operate with a broad and long-term perspective,
and we regularly work towards improving the quality
of life of our employees, their families and the local
communities where we operate.
Ternium S.A. (the “Company”) is a Luxembourg company and its American
Depositary Shares, or ADSs, are listed on the New York Stock Exchange (NYSE:
TX). We refer to Ternium S.A. and its consolidated subsidiaries as “we,” “our”
or “Ternium.”
The financial and operational information contained in this annual report is based
on Ternium’s operational data and on the Company’s consolidated financial
statements, which were prepared in accordance with International Financial
Reporting Standards and IFRIC interpretations as issued by the International
Accounting Standards Board, or IASB and adopted by the European Union (EU),
or IFRS, and presented in U.S. dollars ($) and metric tons.
Some of the statements contained in this annual report are “forward-looking
statements”. Forward-looking statements are based on management’s current
views and assumptions and involve known and unknown risks that could cause
actual results, performance or events to differ materially from those expressed
or implied by those statements. These risks include but are not limited to
risks arising from uncertainties as to gross domestic product, related market
demand, global production capacity, tariffs, cyclicality in the industries that
purchase steel products and other factors beyond Ternium’s control.
Ternium’s results are subject to risks related, among other factors, to changes in
steel demand, prices, input costs and financial conditions. For further information
see our management report and notes 22, 23, 24 and 28 to our consolidated
financial statements included in this annual report.
5. Annual Report 2016
ANNUAL
REPORT
2016
02
OPERATING AND
FINANCIAL HIGHLIGHTS
6. Ternium
STEEL SALES VOLUME (THOUSAND TONS)
Mexico
Southern Region
Other Markets
Total
FINANCIAL INDICATORS ($ MILLION)
Net sales
Operating income
EBITDA (2)
Equity in earnings (losses) of non-consolidated companies (3)
Profit before income tax expense
Profit (loss) for the year attributable to:
Owners of the Parent
Non-controlling interest
Profit (loss) for the year
Capital expenditures
Free cash flow (4)
BALANCE SHEET ($ MILLION)
Total assets
Total financial debt
Net financial debt (5)
Total liabilities
Capital and reserves attributable to the owners of the parent
Non-controlling interest
STOCK DATA ($ PER SHARE / ADS(6))
Basic earnings (losses) per share
Basic earnings (losses) per ADS
Proposed dividend per ADS
Weighted average number of shares outstanding (7)
(thousand shares)
2016
2015
2014
2013
(1)
2012
6,405.2
2,220.8
1,138.1
9,764.0
7,224.0
1,141.7
1,548.6
14.6
1,118.5
595.6
111.3
706.9
435.5
664.1
8,322.9
1,218.6
884.3
3,156.3
4,391.3
775.3
0.30
3.03
1.00
5,933.4
2,552.2
1,114.6
9,600.3
7,877.4
639.3
1,073.1
(272.8)
267.1
8.1
51.7
59.8
466.6
856.8
8,062.6
1,521.0
1,132.3
3,259.6
4,033.1
769.8
0.00
0.04
0.90
5,632.2
2,510.9
1,238.5
9,381.5
8,726.1
1,056.2
1,471.0
(751.8)
234.9
(198.8)
94.6
(104.2)
443.5
62.4
9,690.2
2,164.8
1,801.5
4,055.5
4,697.2
937.5
(0.10)
(1.01)
0.90
4,984.9
2,633.1
1,370.3
8,988.4
8,530.0
1,109.4
1,486.6
(31.6)
942.3
455.4
137.5
592.9
883.3
208.9
4,952.4
2,444.5
1,371.2
8,768.2
8,608.1
920.6
1,291.5
(346.8)
452.1
142.0
48.9
190.9
1,022.6
32.5
10,372.6
10,867.0
2,002.8
1,526.1
4,034.6
5,340.0
998.0
0.23
2.32
0.75
2,424.4
1,703.3
4,432.1
5,369.2
1,065.7
0.07
0.72
0.65
1,963,076.8
1,963,076.8
1,963,076.8
1,963,076.8
1,963,076.8
(1) Starting on January 1, 2013, Peña Colorada and Exiros have been proportionally
consolidated. Comparative amounts for the period ended December 31, 2012 show them
as investments in non-consolidated companies and their results are included within “Equity
in earnings (losses) of non-consolidated companies” in the consolidated income statement.
(2) EBITDA equals operating income adjusted to exclude depreciation and amortization.
(3) Equity in earnings (losses) of non-consolidated companies includes impairment charges on
the Usiminas investment of $191.9 million in 2015, $739.8 million in 2014 and $275.3
million in 2012.
(4) Free cash flow equals net cash provided by operating activities less capital expenditures.
(5) Net financial debt equals total financial debt less cash and cash equivalents plus other
investments.
(6) Each ADS represents 10 shares.
(7) Shares outstanding were 1,963,076,776 as of December 31 of each year.
7. Annual Report 2016
03_CHAIRMAN’S LETTER
In 2016, Ternium celebrated its tenth year as a publicly listed company. It has been an eventful period, in which
it has consolidated itself as a leading steelmaker in the Latin American region. With its strategy of developing high
value steels for industrial and construction applications and working closely with its customers, Ternium is now the
leading steel producer in Mexico and a key protagonist in the fast-growing Pesquería industrial community, where it
has constructed modern, highly efficient cold rolling and galvanizing facilities, participated in the construction of a
new electric power generation facility and established a technical school.
In addition to building our position in Mexico and strengthening the competitiveness of our Argentine operations,
we have established a leading position in Colombia and entered the Brazilian market through a participation
in Usiminas. Now, we are taking a further step with the agreement to acquire, subject to regulatory and other
clearances, the advanced steel slab making facilities of CSA in Brazil. This will provide us a highly competitive
source of high quality slabs, which will allow us to further integrate and expand our production of high value
products for the industrial sector across Latin America.
Ternium is advancing on many fronts and performed well in 2016. In a market, where global consumption
remained flat and consumption in Latin America declined, shipments increased to 9.8 million tons, registering a
fourth consecutive year of growth. Although net sales were affected by lower revenues per ton, EBITDA rose by
44% to $1.5 billion with a margin of 21% on net sales. Cash flow from operations amounted to $1.1 billion and net
debt was reduced to $0.9 billion. Earnings attributable to shareholders rose to $596 million, or $3.03 per ADS.
In Mexico, shipments increased by 8% year on year, as Ternium strengthened its market position by expanding
its product range and displacing imports. The industrial sector continues to expand in Mexico, where steel
consumption per capita is significantly higher than in other Latin American economies, and we continue to
increase capacity to serve this demanding market. Over the past year, we increased the annual processing capacity
of our Churubusco mill by 230,000 tons, and, this month, we announced an investment plan to add new hot-dip
galvanizing and pre-painting lines in our facility in Pesquería. A new 900MW combined cycle natural gas-fired
power plant, in which Ternium has a 48% interest, was commissioned in Pesquería, which will secure a reliable
source of electric power and further integrate operations.
In Argentina, shipments declined by 13% year on year, as the economy began a necessary period of adjustment
and rebalancing of relative prices under a new government. The construction market was affected by lower public
and private investment while the automotive and industrial sectors were affected by the ongoing recession in Brazil.
The economy is, however, showing signs of recovery and shipments increased in the fourth quarter.
In Brazil, we subscribed to a capital increase at Usiminas, investing $111 million and increasing our participation to
20.5% from 16.8%. We expect that the capital increase, in which Usiminas raised BRL1.0 billion, together with the
completion of an ongoing debt restructuring process, should improve the financial situation of the company, wich
returned to profit on operations in the fourth quarter of the year following significant losses in 2015.
In other regions, we increased shipments to the southern USA where we have galvanizing and pre-painting
facilities in Shreveport, Louisiana and we participate in the market for advanced construction and various industrial
applications. In Colombia, we consolidated our operations and market position under the Ternium brand, following
our previous buy out of minority shareholders, and invested in new scrap processing facilities to reduce the
environmental impact of our operations.
8. Ternium
Despite the advances we are making, the global steel industry continues to be affected by the extent of China’s
excess production capacity and falling domestic consumption. Chinese exports of steel products remained above
100 million tons, well in excess of Latin America’s total steel consumption. Without effective trade actions, unfairly
traded imports affect steel pricing and threaten even the most competitive domestic manufacturing and industrial
value chains, with the consequent impact on employment and skills. Many governments, including those in the USA
and Mexico, are taking actions to limit the amount of unfairly traded imports, but constant vigilance is necessary.
Our efforts to strengthen our safety and environmental management systems are a constant priority. Over the last
five years our main safety indicators have improved around 25% and this year we completed the certification of our
main facilities under the ISO 14001 environmental management standard. We continue to introduce new safety
training routines for our employees and those of contractors and started the second stage of our assessment of
critical production processes. In 2016, we completed many environment related investments, particularly in our
Guerrero and San Nicolas plants, modernizing technology and processes and reducing the environmental impact
of our operations with lower emissions, energy efficiency initiatives and increased material recycling and processing
of by-products.
To strengthen steel demand and the industrial value chain in the countries where we operate, we offer support and
training initiatives for small and medium enterprises (SMEs). In 2016, we introduced innovation as a new focus in
this program, which has gained adherents year after year and now has over 1,200 companies participating. Among
this year’s achievements were the increase in ISO certifications obtained by participants related to safety and
quality systems, the development of strategies to counter unfair trading practices and record participation levels in
training activities.
In August, we inaugurated the purpose-built Roberto Rocca Technical School in Pesquería. The school, which
shares teacher training programs and a curriculum with its sister school in Campana, Argentina, has capacity
for 380 students and welcomed 128 students in its first academic year. For the fast-growing industrial center of
Pesquería, where the development of appropriate infrastructure is essential for further development, the new
school will promote excellence in technical education, strengthening local employment opportunities for the
existing community and attracting employees and their families from further afield.
Over the past year, we have made solid progress in strengthening our market position and building on the
achievements of previous years. Considering our solid financial results and financial condition, and a favorable
outlook, we are proposing to increase our annual dividend to shareholders to $1.00 per ADS.
Throughout the company, we are working to differentiate ourselves from our competitors and to sustain a position
of leadership through industrial excellence, product development and customer service. I would like to thank
our employees for their efforts and achievements during the past year. I would also like to thank our customers,
suppliers and shareholders for their continuing support and confidence in our company.
Paolo Rocca
Chairman
March 20, 2017
9. Annual Report 2016
MILESTONES
1969
1992
1998
2005
2006
SIDERAR
Techint acquires
a controlling
interest in state-run
steelmaker Aceros
Paraná. Propulsora
Siderúrgica merges
with Aceros Paraná
to create Siderar.
SIDOR
In a consortium,
Techint wins the
public tender for
Sidor, Venezuela’s
largest steelmaker.
MEXICO
The Techint Group
acquires Hylsamex
in Mexico, wich
together with
Siderar and Sidor
gave birth to
Ternium.
INITIAL PUBLIC
OFFERING
Ternium’s shares
are listed on the
New York Stock
Exchange under
the symbol TX.
THE ORIGINS
Agustín Rocca
sets up Propulsora
Siderúrgica, a
cold-rolling mill
in Ensenada,
Argentina.
10. Ternium
Ternium at the NYSE celebrating its first ten years as a public company.
2007
2008
2010
2012
2013
2016
EXPANSION
Ternium obtains
control of Grupo
IMSA and
consolidates
its position in
Mexico.
BRAZIL
Ternium joins the
controlling group
of Usiminas, a
leading company
in the Brazilian
flat steel market.
COLOMBIA
Purchase
of Ferrasa,
Colombia’s
biggest steel
distributor.
PREVENTION
The “Safety
first” program is
launched.
VENEZUELA
Nationalization of
Sidor.
HIGH END
EXPANSION
Inauguration of
Ternium industrial
center at
Pesquería, Nuevo
León, Mexico.
TECHGEN
900-MW power
plant starts
operations in
Pesquería in
December.
11. Annual Report 2016
ANNUAL
REPORT
2016
04
MANAGEMENT
REPORT
_BUSINESS REVIEW
12. Ternium
Ternium achieved record steel shipment volumes
of 9.8 million tons in 2016, and continued to lead
the Mexican and Argentine flat steel markets, while
keeping a significant position in the Colombian steel
market. Mexico was the company’s driving force, as
Ternium’s steel shipments in that country achieved a
sound 8% year-over-year expansion and a 66% share
in total sales volumes. Shipments in the Southern
Region decreased 13% year-over-year with most
sectors pulling back in 2016. Ternium’s steel shipments
in Other Markets increased 2% year-over-year in 2016,
as shipments increased in the U.S. steel market, but
decreased in Colombia and Central America.
Steel consumption in the Americas decreased in
2016, as most regional steel markets contracted,
to varying degrees and with few exceptions. In the
U.S. market, steel consumption decreased slightly in
2016, reflecting a struggling manufacturing industry
and lower investments in the oil & gas sector. The
Mexican steel market ended on a positive tone in
2016, with modest year-over-year construction and
industrial expansion and weak oil & gas activity.
Argentina’s steel market was relatively weak in
2016, as significant changes were made to long-
term macroeconomic policies and the economy was
affected by a severe recession in the neighboring
Brazilian market, where steel consumption levels
decreased for the third consecutive year.
Ternium achieved very strong results in 2016.
Although shipments grew only 2% year-over-year, as
higher shipments in Mexico and Other Markets were
mostly offset by lower shipments in the Southern
Region, the company’s profitability improved
compared to 2015 as a result of lower costs (only
partially offset by lower revenue per ton). During
the year, we continued developing programs under a
comprehensive approach to increase differentiation,
through the extensive use of best practices and
innovation. During 2016 our programs focused on
integration with our customers and improvements
in labor productivity, logistic costs, contractors’
efficiency, energy efficiency, process productivity and
optimization of working capital.
The use of innovative information technology (IT)
integrated systems helped increase labor productivity
in the commercial area, including supply chain
management and technical assistance, and raised
customer relationships to new levels of integration and
loyalty. Electronic transactions are the option of choice
for most of our customers in Argentina and have been
growing in Mexico, where they still have strong growth
potential. With full cycle service and order tracking, this
differentiating customer service tool has also enabled a
streamlining of the sales back office function.
Among other innovative tools, new IT systems
include those for demand forecasting, smart inventory
planning, optimization models for order management
and intelligent product catalogs. New quality-control
related systems include those for the prediction and
improvement of quality performance of advanced
materials and industrial processes based on big data
projects. In addition, the new inventory planning
systems resulted in lower inventories in terms of days
of shipments.
Ternium’s productivity improvement programs
enabled the company to achieve several production
records during 2016. More than 1,000 employees
participate in these programs, under teams that
include personnel from all levels and disciplines.
A higher degree of automation, the implementation
of best practices and benchmarking, investments
to increase equipment productivity and personnel
training programs, as well as demanding productivity
targets, usually result in most production lines
breaking production records every one or two
years and, in some cases, more than once a year.
Improvements in logistic costs included those obtained
13. Annual Report 2016
from a new traffic monitoring center, which reduced
truck stay hours in our facilities.
During 2016, Ternium achieved meaningful progress
in all its main projects on safety and environment
management initiatives, including the DuPont
technical assistance program, aimed at strengthening
safe management of critical processes, the safety
facilities’ certification program under OHSAS 18001
(which is close to completion) and the environmental
facilities’ certification project under ISO 14001
(also close to completion). Commissioned safety
and environmental care equipment during the year
included those for the improvement of air emissions
such as a secondary de-dusting system for steel shop
furnace emissions cleaning and a new briquetting
facility for iron ore dust recycling in the Guerrero
unit in Mexico; a new by-products plant for coke
oven-generated gas cleaning in the San Nicolás
unit in Argentina; and a new scrap shredder for the
supply of cleaner and dimensioned steel scrap that
reduces emissions in the steel shop in our Manizales
unit in Colombia. In addition, in 2016 Ternium
commissioned a new hydrochloric acid regeneration
plant in the Guerrero unit in Mexico to reduce the
generation of hazardous by-products and to enhance
its quality and process control.
To foster steel demand in its main markets, during
2016 Ternium continued supporting a program to
strengthen small- and medium-sized customers and
suppliers. The number of companies involved in the
program grew in Mexico and Argentina during 2016,
now encompassing approximately 1,240 participants.
The program, launched in the past decade, contributed
to a growing and strengthening network of industrial
companies, technical schools, universities, business
schools and government institutions, working together
to foster high management standards, growth and
innovation in the steel industry value chain. Among the
achievements of the program during 2016 were the ISO
certifications obtained by several small and medium-
sized enterprises (SMEs) related to their quality and
safety systems, the development of defense strategies
against unfair trade practices and new record-
high participation levels in our training activities,
consolidating a broad educational offer targeting
SME’s top managers, middle managers, supervisors,
technicians and workers.
Steel Segment
Ternium’s shipments of steel products reached 9.8
million tons in 2016, a 1.7% increase compared with
the 9.6 million tons achieved in the previous year.
GDP in Latin America contracted 0.6% in the year,
affected mainly by the weak performance of the
Brazilian and Argentine economies, while the U.S.
economy grew 1.6% in 2016, lower than its 2.6%
expansion rate in 2015.
Apparent demand for finished steel in Latin America
decreased 6.2% year-over-year in 2016, reflecting lower
steel consumption in every major steel consuming
market in the region except for the Mexican steel
market. Mexican industry-driven multi-year expansion
in apparent steel demand has increased local per capita
steel consumption to levels that double those of its
Latin American peers. In the United States, apparent
demand for finished steel decreased 1.2% year-over-
year. While the economy continued to expand, steel
demand in the U.S. lagged behind due to a weak
manufacturing industry, affected by a strong currency
and lower activity in the oil & gas sector.
Mexico
During 2016, Ternium was the leading supplier of flat
steel products in Mexico. Shipments to this market
increased 8.0% year-over-year to a new record of 6.4
million tons, representing 66% of Ternium’s total steel
shipments. Our shipment growth in Mexico outpaced
the country’s apparent steel use year-over-year
14. Ternium
expansion of 1.6%. Ternium’s performance was driven
by incrementally improved local manufacturing and
construction activity and a weaker oil & gas sector.
In addition, government trade measures in Mexico
against unfair steel trade practices and the renewal of
a 15% import tariff on several steel product groups
coming from certain countries, provided Ternium with
a level playing field in the Mexican steel market.
With approximately 24.6 million tons of apparent steel
use, the country’s steel market was the largest in Latin
America in 2016. Mexico’s GDP grew 2.3% year-over-
year, in line with growth rates in the previous two years.
Mexican motor vehicle production continued
growing in 2016, though at a slower pace. New
vehicle manufacturing facilities were commissioned
during the year, as the country consolidates its
position as the world’s seventh largest motor vehicle
manufacturing hub.
Ternium’s differentiation strategy during 2016
continued to rely on the expansion of manufacturing
capacity of high-end steel products and on the
development of value-adding services. Following
the completion of the first stage of our investment
project in the Churubusco hot strip mill, which
enabled the production of advanced high-strength
and dual-face steels, during 2016 Ternium developed
new products to meet customers’ high-quality
product requirements in the automotive, metal
mechanic, home appliances, oil & gas and electric
motor industries. In addition, during the year we
launched the second stage of the project, completed
during the first quarter of 2017, which is expected
to increase the annual processing capacity of the hot
strip mill by approximately 230,000 tons.
Construction activity in Mexico grew 1.3% year-
over-year in 2016, slower than the 2.6% expansion
rate recorded in 2015, as a result of low government
15. Annual Report 2016
(8) Source: International Monetary Fund, World Economic Outlook.
(9) Source: World Steel Association and Latin American Steel
Association.
infrastructure spending and a deceleration of private
construction growth. Ternium’s efforts in this
market continued focusing on offering a full range
of steel products and enhancing customer services,
including the development of local presence,
logistics management and the introduction of new
information technology tools. Of note during 2016
was the installation of a second slitting line in our
Churubusco service center, which enabled an increase
in Ternium’s annual processing capacity of slit steel
products by approximately 200,000 tons.
Steel prices in the U.S., which are a significant driver of
steel prices in Mexico, rebounded during the first half
of 2016 and remained at levels that were above those
prevailing in 2015. Service center steel inventories in
the U.S. decreased year-over-year in 2016, as apparent
steel use remained relatively stable, resulting in lower
month-of-supply inventory ratios. Several government
trade measures in the U.S. and Mexico against unfair
steel trade practices resulted in a significant year-over-
year decrease in steel imports during the year.
During 2016, Ternium continued running its
integrated steelmaking facilities in Mexico at high
levels of capacity utilization, while achieving new
record production levels in several facilities. We
continued to maximize the use of direct reduced
iron in the metallic mix of our steel shops (produced
in our natural-gas-based iron ore direct reduction
units), which continued to be a cost efficient input
despite higher natural gas costs, as steel scrap
prices rebounded from the lows seen during the
fourth quarter of 2015. Our downstream facilities,
including our re-rolling facilities, showed significant
increases in production rates in 2016 compared with
those of the previous year, in line with a growing
demand for Ternium’s steel products during the year.
Power supply to our facilities in Mexico was further
secured starting from the fourth quarter of 2016 with
(8) Source: International Monetary Fund, World Economic Outlook.
(9) Source: World Steel Association, Latin American Steel Association
and Ternium estimates.
(10) Source: Mexican Statistics and Geography Institute.
(11) Source: Mexican Automotive Industry Association.
16. Ternium
the commissioning of Techgen’s new 900 megawatts
power plant in Pesquería, Nuevo León state, Mexico.
Ternium has a 48% equity interest in this natural-gas-
based facility. Built at a cost of $1.1 billion, the plant
is a competitive and reliable supply of electricity and
has the best available environmental care technology,
including zero liquid discharge.
Ternium’s capital expenditures in the steel segment
in Mexico amounted to $197 million in 2016.
The main investments carried out during the period
included those made for the mentioned upgrade and
expansion of the hot strip mill at the Churubusco
unit, the expansion of service center processing
capacity, and the improvement of environmental and
safety conditions at certain facilities of the Guerrero
and Puebla units. Ternium’s ongoing investment
plan in the steel segment in Mexico focuses on
projects aimed at increasing the value added to
production, including the new galvanizing and pre-
painting facilities in Pesquería announced in March
2017, and on projects aimed at enhancing quality
and productivity, reducing costs, and improving
environmental and safety conditions.
Looking forward, steel consumption in Mexico
could soften in 2017, as lingering uncertainties
over NAFTA’s future terms of trade may affect
construction activity and the investment climate
in the country. Notwithstanding this, Ternium
is confident that its leadership in the market and
the opportunity to substitute imports, wich are
significant in Mexico, will support its growth in
shipments into 2017.
Southern Region
The Southern Region encompasses the steel markets
of Argentina, Bolivia, Chile, Paraguay and Uruguay.
During 2016, Ternium was the leading supplier of
flat steel products in Argentina. Shipments in the
Southern Region reached 2.2 million tons in 2016,
lower than shipment levels in 2015, representing 23%
of Ternium’s consolidated steel shipments.
Argentina’s steel market was relatively weak in
2016, with apparent steel demand decreasing 18.0%
year-over-year to approximately 4.3 million tons.
The country faced a significant rebalancing of the
economy’s relative prices in a year of macroeconomic
policy changes, coupled with a recession in the
neighboring Brazilian economy. Lower public
infrastructure investment affected activity levels in the
construction sector, as the new government’s public
infrastructure plan, launched during the first half of
2016, began to gain momentum only by the fourth
quarter of the year. On the other hand, the severe
recession that the Brazilian economy experienced
during 2016 affected activity levels in some export-
driven industrial sectors in Argentina.
Construction activity in Argentina decreased 17.0%
in 2016, as a result of the mentioned decline in
public infrastructure expenditure and lower private
investment. Motor vehicle production decreased a
further 10.3% in 2016, as a continued downward
trend in vehicle exports to the Brazilian market
could not be compensated with higher local
shipments, despite the recovery in vehicle sales
evidenced in the Argentine market in 2016.
Our efforts in Argentina continued to focus on
fostering steel demand through our program to
help SMEs in the steel industry value chain to
grow, and on further strengthening our offering of
steel products and related services so as to fulfill
our customers’ current and new requirements.
New market opportunities in 2016 arose from
the emergence in Argentina of a promising wind
farm industry, the launch of new vehicle models,
requirements for esthetically superior products for
high-end home-appliances, and the manufacturing of
lighter transport equipment.
17. Annual Report 2016
Techgen
New power plant in Mexico
New 900-MW power plant
in Pesquería, Nuevo León, Mexico,
equivalent to the consumption
of 1.5 million households.
A competitive and reliable supply
of electricity for Ternium’s facilities
in Mexico.
Best available environmental care
technology, including zero liquid
discharge.
18. Ternium
900
MW CAPACITY
48%
STAKE IN TECHGEN
JOINT VENTURE
BEGAN
OPERATIONS IN
DECEMBER 2016
ZERO LIQUID
DISCHARGE
19. Annual Report 2016
Ternium’s shipments to the Paraguayan and Bolivian
markets increased in 2016, while shipments to the
Chilean and Uruguayan markets decreased slightly
compared to shipment levels in the previous year.
During 2016, the economies of these countries
continued showing resilience against adverse
conditions in the region’s major economies,
extending a healthy multi-year expansion cycle.
In 2016, Ternium reduced steel production rates
in Argentina compared with the production rates
achieved in 2015. Blast furnace #1 was blown down
in November 2015 for programmed maintenance and
remained off during 2016. The resulting decrease in
pig iron production was partially offset by increased
production rates in blast furnace #2, mitigating the
consequent decrease in steel production volumes.
Downstream facilities also experienced lower
production levels during 2016 compared to production
levels in 2015, including those used for the production
of customized products, as a result of lower steel
demand levels in the local Argentine market.
Ternium’s capital expenditures in the Southern
Region, mainly in Argentina, amounted to $133
million in 2016. During the year, we started up a new
by-products plant in the coking facilities, enabling an
increased processing capacity of metallurgical coal
and cleaner coal by-product gases, and enhanced a
galvanizing facility, resulting in higher processing
capacity and improved product quality. In addition,
we made progress on several projects, including
those for the upgrading of the steel shop facilities,
the revamping of the hot-rolling mill and the
improvement of environmental and safety conditions.
Looking forward, as Argentina’s steel demand started
to rebound in the fourth quarter of 2016, Ternium
believes it will gradually recover during 2017. Some of
Argentina’s steel consuming sectors started to show
positive signs and there are improved expectations
(12) Source: Argentine Statistics Institute.
(13) Source: Argentine Automotive Producers Association.
20. Ternium
for the Brazilian economy. Public infrastructure
investment continues to gain momentum and light
vehicle exports in the fourth quarter of 2016 were
the highest of the last five quarters, although light
vehicle exports declined 21% year-over-year in 2016.
Ternium expects to increase steel shipments in
Argentina as a result and to reduce shipments to other
countries in the Southern Region, keeping utilization
rates relatively unchanged, both in its upstream and
downstream facilities. Capital expenditures in the
Southern Region are planned to continue focusing
on projects aimed at increasing operating efficiency,
enhancing process technology and reliability,
broadening our product range and improving
environmental and safety conditions in our facilities.
Other Markets
Ternium’s sales to the rest of the world are shown
under “Other Markets,” including major shipment
destinations such as Colombia, the United States and
Central America. During 2016, Ternium was a leading
supplier of steel products in Colombia. In addition,
Ternium continued serving customers in the southern
United States, Central America and in other regions
throughout Latin America, Europe and Asia. Shipments
to the Other Markets region, which represent 12% of
Ternium’s total steel shipments, increased 2.1% year-
over-year in 2016, to 1.1 million tons.
Ternium’s steel shipments in Colombia decreased
year-over-year in 2016. The company’s crude steel
production in the country recovered during the year,
growing 12% compared to 2015. Although Colombia’s
GDP continued growing in 2016, the pace of
expansion was the lowest in several years given a mixed
performance, with healthy manufacturing expansion,
decelerating construction activity and a weak oil &
gas sector. Following certain trade measures enacted
by the Colombian Government in response to unfair
trade practices, steel market conditions improved in
Colombia during 2016, although prices remained at
relatively low levels compared to prevailing prices in
other regional markets.
In the U.S. steel market, Ternium’s shipments
increased in 2016 as the company’s galvanized steel
production in the country grew 21% year-over-year.
Although apparent steel use in the country decreased
slightly on slowing economic growth, steel prices
improved significantly during 2016, particularly in the
first half of the year, following the U.S. Government
enactment of several trade measures against unfair
trade practices. In Central America, economic activity
continued to grow at a solid pace during 2016. Despite
a 44% year-over-year increase in galvanized steel
production during the year, Ternium’s steel shipments
in the region decreased as a result of lower steel
exports from our Mexican facilities.
Mining Segment
Ternium has iron ore production facilities in Mexico.
We conduct our mining activities through Las
Encinas, a company in which we have a 100% equity
interest, and Consorcio Peña Colorada, a company
in which we have a 50% interest (with ArcelorMittal
having the other 50% interest). ArcelorMittal
and Ternium each receive 50% of total iron ore
production of Consorcio Peña Colorada. Most of
our iron ore production is consumed internally at
Ternium’s steelmaking facilities in Mexico. In 2016,
Ternium’s mining segment reported shipments of 3.3
million tons of iron ore, a 9% decrease compared to
2015 due to lower iron ore production by Consorcio
Peña Colorada.
Las Encinas
Las Encinas produces iron ore pellets and magnetite
concentrate. As of the end of 2016, Las Encinas was
operating the Aquila open pit iron ore mine, located
in Michoacán. The Las Encinas facilities include two
crushing plants located close to each of the Aquila
21. Annual Report 2016
and El Encino mines, and a concentration and
pelletizing plant located in Alzada, Colima.
Las Encinas’ saleable production (pellets and
concentrates) reached 1.9 million tons in 2016, similar
to saleable production reached in 2015. Iron ore reserves
as of December 31, 2016, were 22 million tons on a
run-of-mine basis (with a 41% average iron grade). Las
Encinas’ combined active mines life was estimated at
eight years as of the end of 2016. Capital expenditures
during the year amounted to $7 million, mainly related
to maintenance activities. During 2017, Las Encinas
expects to start commercial operations in Las Palomas,
a small open pit iron ore mine located in Jalisco.
Consorcio Peña Colorada
Consorcio Peña Colorada produces iron ore pellets and
magnetite concentrate. As of the end of 2016, it was
operating the Peña Colorada open pit iron ore mine,
located in Colima. The Consorcio Peña Colorada
facilities include a concentration plant located at the
mine and a two-line pelletizing plant located near the
Manzanillo seaport on the Pacific coast in Colima.
Consorcio Peña Colorada’s saleable production
was 2.9 million tons in 2016, lower than saleable
production of 3.5 million tons achieved in 2015, mainly
as a result of a decrease in the ore’s iron grade. Iron
ore reserves as of December 31, 2016, were 242 million
tons on a run-of-mine basis (with a 21% average iron
grade). Consorcio Peña Colorada’s combined active
mines life was estimated at 16 years as of the end
of 2016. Ternium’s share in Peña Colorada’s capital
expenditures during the year amounted to $85 million,
mainly related to the expansion of its iron ore crushing,
grinding and concentration facilities, completed during
December 2016, and preparation works at a new iron
ore body in the Peña Colorada mine. During 2017,
Consorcio Peña Colorada is expected to ramp up its
news facilities to raise iron ore concentrate production
levels back to 4.5 million tons per year.
Support Program for Small- and Medium-Sized
Enterprises
As it has been doing for several years, with the aim
at bolstering growth of its domestic steel markets,
Ternium continued sponsoring a SME support
program called ProPymes. The program is focused
on helping SMEs in the steel industry’s value chain
grow through the enhancement of competitiveness
and the stimulus of investments in this sector.
To achieve this, ProPymes provides a variety of
services, including training, industrial assistance,
institutional assistance, commercial support and
financial aid. Through these means, ProPymes has
helped create an industrial network that encourages
the professionalization and quest for excellence of
SMEs which, based on knowledge sharing, reciprocal
learning and exchange of experiences, aims at the
implementation along the whole value chain of the
best practices utilized in the industry. ProPymes
currently assists approximately 1,240 SMEs in
Mexico and Argentina. Ternium supervises the
execution of the ProPymes programs through two
departments operating in Mexico and Argentina.
Mexico
ProPymes in Mexico selects participating SMEs
according to their ability to increase their
competitiveness as suppliers, along with their
capability to add value to steel products and their
potential to increase exports or substitute imports as
customers. Approximately 440 SMEs participate in
ProPymes in Mexico.
During 2016, ProPymes consolidated its training
program for SME middle managers, supervisors,
technicians and workers. Launched during 2015, the
program focuses on leadership and occupational
training. Sponsored by the Instituto Nacional del
Emprendedor (National Entrepreneur Institute), or
INADEM, and ProPymes, it has been jointly designed
by ProPymes and a local university. Likewise, during
22. Ternium
2016 the training program for SME managers
continued. Also sponsored by INADEM and
ProPymes, it has been jointly designed by ProPymes
and a local graduate school.
ProPymes carried out industrial assistance programs
related to technology upgrades, production capacity
expansions and specialized training and consultancy.
In 2016, certain participating SMEs obtained
quality and safety systems ISO certifications under a
program launched in 2014. These initiatives and their
associated capital expenditure plans were supported
by INADEM, as part of its cooperation agreement
with ProPymes. Commercial support for SMEs
continued during 2016, with ProPymes promoting
initiatives aimed at making selected SMEs become
suppliers of large companies. To this purpose, a
development committee, composed of members of
the manufacturing industry’s chamber, Monterrey’s
center for competitiveness and ProPymes, advanced a
program aimed at developing new industrial suppliers
for their members. Furthermore, ProPymes continued
participating in selected conferences and conventions
intended to facilitate commercial ties between SMEs
and potential customers in the automotive sector and
other industries in the steel industry value chain.
In 2017, ProPymes’ industrial assistance programs
are planned to focus on the support of innovation
initiatives, expected to help SMEs accelerate their
learning curves and enhance their competitive
positioning. In addition, ProPymes will seek to further
expand the number of participating SMEs and sponsor
SME employee and manager training programs, as well
as commercial assistance initiatives. ProPymes expects
to organize its second convention in Mexico, an
event in which businessmen and representatives from
the government, universities and industrial clusters
and chambers share know-how and successful SME
experiences, and foster the implementation of the best
practices in the value chain.
Argentina
Approximately 800 SMEs participate in ProPymes
in Argentina. During 2016, SMEs faced a slow local
market and weaker exports, following decreased
economic activity in the region. Notwithstanding
the foregoing, ProPymes’ training programs achieved
new record-high participation levels during the year.
The SME support program for technical schools also
expanded at a solid pace. During 2016, fifty-one SMEs
participating in ProPymes sponsored twenty-two
technical schools, up significantly compared to nine
SMEs and five technical schools participating in the
program in 2013, the year in which the initiative was
launched. Under this program, SMEs offer internships
and training to students and teachers, respectively,
with the aim of improving overall technical education.
ProPymes coordinates these activities through its
corporate social responsibility program, an initiative
aimed at helping SMEs build and consolidate long-
term community relations, and the development of a
qualified labor force in the medium-term.
New subjects under ProPymes’ training program
during 2016 included innovation, aimed at fostering
the implementation of innovative initiatives within
the companies, and renewable energies, a subject that
was particularly valued by participants. ProPymes’
courses, performed in-house or at local educational
institutions, cover an expanding range of SMEs
needs and are continuously updated and broadened
in order to adapt to employees’ requirements of
all levels. The approximately 3,700 participants in
ProPymes’ training program during 2016 represented
a 5% increase compared to the record level achieved
in the previous year.
The program’s consulting area, one of ProPymes’
pillars, continued to prepare diagnostic reports
and provide assistance, reaching activity levels
that were similar to those recorded during 2015.
23. Annual Report 2016
Subjects during 2016 continued to focus on the
use of automation technology, the development
of health and safety protocols, the development
of tools for training and human resources
management, the implementation of management
control systems, assistance for the utilization of
competitive financing lines and the implementation
of maintenance management.
As for ProPymes’ commercial and institutional
assistance efforts, during 2016 the program helped
SMEs develop strategies aimed at ensuring a level
playing field for competition, given the potential
threat of increased unfairly traded imports.
Assistance efforts included those for the setting of
industry chambers, the development of technical
standards for industrial products and institutional
initiatives aimed at improving SME competitiveness.
In 2017, ProPymes intends to consolidate a new
training program specialized in renewable energy,
aimed at helping SMEs adapt to the emerging
requirements of recently approved legislation, and
to expand its management development program.
In addition, it expects to intensify its assistance
activities related to capital expenditure financing,
in response to an expected rise in financing
requirements related to a surge in new SME projects.
Product Research and Development
Product research and development activities at
Ternium are conducted through a central Product
Development Department in coordination with
local teams that operate in several of our facilities.
Applied research efforts are carried out in-house,
in some cases including the participation of
strategic customers, through joint efforts together
with recognized universities or research centers,
or through our participation in international
consortiums.
We have been increasingly engaging universities in
our research efforts in order to expand and further
diversify Ternium’s research network and capabilities.
This initiative fosters the development of fundamental
knowledge and know-how at participating universities
while enabling the optimization of Ternium’s
in-house research resources. The program includes
the development of thesis and presentations in
symposiums organized by Ternium, with the
participation of more than forty under-graduate
and post-graduate students pursuing degrees in
engineering, materials science and metallurgy.
The installation of state-of-the-art cooling
technology in a hot strip mill in Mexico, during the
fourth quarter 2015, opened up the possibility to
develop and process new advanced high-strength steel
(AHSS) grades, including dual phase, ferrite-bainite,
martensitic and complex phase steel grades. Based
on those new capabilities, during 2016 we widened
our high-end product portfolio for customers in the
automotive, metal mechanic, home appliances, oil &
gas and electric motors industries.
New Products
During 2016, we began the development of highly
formable AHSS for several applications, and
developed high-strength steel wire for high-tensile
coil springs, initiatives that will enable us to increase
our share in the high-value automotive and metal
mechanic steel markets. In addition, we continued
certifying steel products with vehicle manufacturers,
including high formability special steels and steel
products required for the assembling of new pickup
truck models in Argentina, a product line that has
outperformed in the Southern Region in an overall
weak automotive market.
In addition, during the year we widened our
product portfolio of high-resistance micro alloyed
steel products for the manufacturing of transport
24. Ternium
equipment. Those steel grades enable the design of
lighter equipment yielding lower fuel consumption
per transported tonnage that result in decreased
freight costs.
Ternium targeted the capital goods sector through
the development of high-strength steel slabs for
plates. In this regard, during 2016 we made progress,
in a combined effort with a strategic customer, on
the development of certain plate qualities suitable
for the manufacturing of road machine blades and
windmill towers. In addition to gaining market share,
with these new products we expect to strengthen our
participation in a new steel market segment that is
emerging in Argentina associated with the expansion
of the local wind farm industry.
Among oil & gas industry applications, during 2016
Ternium developed heat treatable qualities suitable for
coiled tubing, a product required in the development of
shale fields. Product developments for home appliance
customers in Mexico and Argentina included a new
generation of advanced metallic paint systems. The
new products are esthetically superior and incorporate
the required attributes for their processing in newly
developed manufacturing equipment, enabling
Ternium to offer higher-value steel products while
providing its customers a competitive edge in the high-
end appliance market.
During 2016, we continued working with the
Colorado School of Mines and the University
of Pittsburgh, through a consortium, on the
development of the next generation of AHSS for
welded pipe manufacturing and automotive industry
applications. Through the International Zinc
Association, our research projects focused on new
steel coatings, seeking further gains in workability
and performance in order to reduce home-appliance
manufacturers’ production costs and improve the
final product’s quality. With Canadian McMaster
University, research projects during 2016 focused on
the development of AHSS production processes to be
implemented in our steelmaking facilities.
Our projects together with the Mexican Centro de
Investigaciones y Estudios Avanzados (Cinvestav-
Advanced Studies and Research Center) sought the
optimization of AHSS performance for automotive
industry applications and basic research on surface
states for coatings and phase transformation of steels.
With the Argentine Instituto Argentino de Siderurgia
(IAS-Argentine Steel Institute) research projects focused
on the development of production processes for AHSS
casting and hot-rolling for a wide array of applications
in the automotive, transportation, agricultural and oil
& gas industries. In addition, we developed with IAS
and Tenaris Research new prototype tools to improve
the process control required to ensure steel cleanliness.
Applied Research
Ternium’s product research and development
plans are based on current and expected customer
requirements for steel products. Research and
development activities are carried out in close
collaboration with leading steel customers and
institutions, seeking improved performance and new
applications. Complementarily, we seek to develop
new processes and to anticipate the new technologies
that will be required at our facilities associated with
the new products.
Joint projects with universities during 2016 included
the Universidad Autónoma de Nuevo León (Nuevo
León Autonomous University - Mexico) basic
research on steel and steel coatings mechanical
and chemical performance; the Universidad de
Monterrey (Monterrey University - Mexico) applied
research on paints systems with nano-additives
for improved corrosion protection and the design
of testing equipment for the evaluation of steel
performance at low temperatures; the Universidad
Autónoma de San Luis Potosí (San Luis Potosí
25. Annual Report 2016
Autonomous University - Mexico) research and
development of iron ore production processes
related to the concentration and direct reduction
of iron ore; the University of Sheffield (UK) basic
research on steel development; and the Universidad
Politecnica de Cataluña (Cataluña’s Politecnic
University - Spain) development of first and third
generation AHSS.
students from various Latin American universities
continued carrying out internships in different areas
of the company. The purpose of these internships is
to offer students and the universities a professional
experience within an actual business environment,
and to serve as a tool to identify talent and to
promote acquaintance between the company and its
potential employees.
Prospective Developments
During 2017, Ternium expects to continue
developing high-end steel products to increase
shipment volumes to industrial customers, through
the optimization and expansion of its product
portfolio. Our research and development efforts
during the year are planned to obtain enhanced first-
generation high strength steel products and make
progress on projects related to third-generation
high strength steel products. In addition, we intend
to make further progress on the co-development
of plate qualities suitable for the manufacturing
of windmill towers and to intensify our early-
involvement product development strategy in
association with our customers. Particularly for
the automotive industry, we intend to develop new
products suitable for hot stamping. Furthermore, we
will continue our research and development efforts
on new esthetically superior surface finishings,
targeting the home-appliance market and the
construction market’s panel segment.
During 2016, Ternium’s training programs continued
adapting to the specific needs of different business
areas. Of note in the year was the strengthening of
our safety training program, including the redesign
of activities targeting factory personnel and the
implementation of activities for personnel in
leadership positions, focused on safety management
leadership. These initiatives contributed to further
Ternium’s objective of involving personnel of
all Ternium’s areas and of all ranks, aimed at
ensuring a proactive profile on safety behavior.
Ternium also carried on with its “leaders training
program”, which in 2016 included new activities
focused on industrial management. This program
aims at consolidating the development of specific
skills required by personnel carrying leadership
positions. Furthermore, the program for recently-
graduated professionals incorporated new teaching
methodologies during 2016, including new technical
training and language learning activities based on
online course formats.
Human Resources and Communities
Ternium had approximately 16,700 employees as of
December 31, 2016, a figure similar to that at year-
end 2015. During 2016, the company continued its
medium-term personnel recruitment plans in the
different regions, leaning mainly on the program for
recently- graduated professionals, a program that has
contributed a majority of our current management
and technologist positions. In addition, a number of
During 2016, we carried out a training activity for
supervisors, focused on the analysis of the new
features of their role. In addition to creating new
effective management tools, this program fosters
professional networks and enables a first-hand
interaction with the company’s top managers.
Ternium continued funding postgraduate
studies in management and technology to meet
the requirements of employees’ career plans.
For example, in 2016 we added, together with
26. Ternium
traditional training programs from University of
Manchester (UK), Instituto Argentino de Siderurgia
and Universidad Austral (Argentine steel institute
and Austral university - Argentina), the prestigious
master in metallurgy from the University of Sheffield
(UK), under a format that combines on-site and
on-line learning activities.
Furthermore, Ternium continued promoting
financial support and contributions to various joint
industry and university programs, including the
endowment of Chairs at certain universities and
the funding of scholarships and fellowship grants
to talented undergraduate and graduate students
of engineering and applied sciences in selected
countries. Throughout the year, the company
continued to host various courses for graduate and
undergraduate students and fostered conferences on
technical subjects related to the steel industry.
During 2016, Ternium continued its work
attendance program in Argentina, aimed at
increasing work attendance and strengthening
workers’ commitment and industrial culture.
Since the program’s initiation in 2012, attendance
indicators improved 20%, including a 7% increase
in 2016. In addition, perfect attendance awards
increased 8% year-over-year. To foster the quality
of life of its employees inside and outside the
workplace, during 2016 Ternium expanded its
flexible working programs, including, among other
initiatives, the opening of a new office for remote
connection and the lengthening of its flexible
timetable program, encompassing every Monday
and Friday, that now runs all year round instead
of in summertime only. Moreover, the company
launched a new program focused on addictions
control and carried on with its traditional programs,
including those for fostering of sports activity,
clinical examination and disease prevention
campaigns, scholarship and leisure programs for the
employees’ children, and loan programs for home
improvement and special situations.
In addition, during 2016 Ternium made progress
in the implementation of new programs aimed
at the improvement of labor climate in different
areas. These programs address several opportunities
identified from the analysis of a labor climate survey
carried out in 2015. Ternium also conducted its first
labor climate survey for blue collar workers at its
Mexican units.
Community Development Activities
Ternium’s community development programs in
2016 kept their focus of previous years, i.e., to
help strengthen our neighboring communities and
sustain deepening ties with them. We continue
working together with local institutions to determine
priorities and develop projects in the areas of
education and social integration, health and sports,
and culture dissemination.
During 2016, Ternium continued supporting local
technical schools in Mexico, including activities
such as development of teachers’ skills and school
management, expansion and improvement of
school infrastructure, and cash contributions for
the purchase of new equipment or the enhancement
of existing equipment. Likewise, in the Ramallo
and Ensenada industrial areas of Argentina,
we continued supporting a program aimed at
strengthening local technical schools, an endeavor
initiated in 2006 involving the Argentine government,
Ternium, and several technical schools near
Ternium’s facilities. Under this program, which
contributed to a significant improvement of the
graduates’ training, Ternium continued providing
technical internships at its workshops and training
at its operating areas in the industrial centers, and
carried on with its technical training programs in
schools. In addition, we improved the infrastructure
27. Annual Report 2016
of two technical schools, under a joint program
with the Hermanos Agustín y Enrique Rocca
foundation, including the expansion of workshops,
a new workshop, provision of related technological
equipment, a new cafeteria and refurbishment of
administrative offices.
Ternium continued to fund programs aimed
at improving basic education. In Mexico, we
supported basic schools located in San Nicolás de
los Garza and Pesquería, and workshop academies
in Pihuamo, Aquila and Alzada. Likewise, in
Argentina, we continued supporting a program
launched in 2013 in an elementary school located in
Ramallo. Through its volunteer program, in 2016
Ternium’s employees and their families, students’
relatives, school teachers and managers, as well as
neighbors, worked on the maintenance, restoration
and enhancement of the infrastructure of certain
community educational centers located in Aquila
and Monterrey, Mexico, in San Nicolás, Argentina,
and in Barranquilla and Manizales, Colombia. Since
the program was launched in 2014, a total of 14
educational centers located in different cities were
revamped under this initiative. The program was
jointly supported and financed by Ternium and the
Hermanos Agustín y Enrique Rocca foundation, as
well as by other companies operating in the steel
industry value chain.
Also together with the Hermanos Agustín y Enrique
Rocca foundation, Ternium maintain its policy
of financing scholarships for high performance
students from local communities in several
countries. During 2016, this program was also
implemented in Barranquilla, Cali, Manizales and
Medellín, Colombia.
During 2016, Ternium organized health fairs in
several cities aimed at increasing the community’s
awareness and gaining a basic understanding of how
to prevent and take care of various health issues. In
addition, Ternium continued supporting a basic health
care unit in Aquila, Mexico, and helped finance the
infrastructure refurbishing of a hospital in San Nicolás,
Argentina. Among other traditional activities, the
company organized, together with local institutions,
annual local marathons, cinema festivals and sport
championship leagues involving schools in its facilities’
neighboring communities.
Escuela Técnica Roberto Rocca – ETRR (Roberto
Rocca Technical School)
During 2016, Ternium inaugurated the Escuela
Técnica Roberto Rocca - ETRR (Roberto Rocca
Technical School) in Pesquería, with 128 students at
the start of the 2016-2017 school year. The school,
which is a part of Ternium industrial center at
Pesquería, is the first of its kind in Mexico, offering
specializations in electro-mechanics and other
disciplines, and scholarships for all students. Once
fully completed, the school will have capacity for
360 students, with 12 classrooms, 17 workshops, two
labs, a library, a gym, an auditorium, a cafeteria and
other facilities. Ternium gifted $11.1 million to the
school during the fourth quarter of 2016, and expects
to spend in this endeavor a total of approximately
$28.0 million.
Pesquería, formerly a rural area located in Nuevo
León, Mexico, has become a fast growing industrial
center. Back in 2013, Ternium founded its industrial
center at Pesquería, a $1.1 billion greenfield
investment to manufacture high-end steel for the
auto industry. In addition, Techgen, a joint venture
owned by Ternium and its affiliates Tenaris and
Tecpetrol, inaugurated a new power plant. Other
smaller industries also sought to settle in the area,
sparking the construction and retail sectors. As a
result of such an industrial boom, many families
from nearby districts moved to Pesquería in search
28. Ternium
of opportunities and other families came from
elsewhere in the country. The requirements for
infrastructure development multiplied, including a
need for higher quality roads and new schools and
hospitals, among other facilities.
Unlike its peers, the ETRR includes all-day activities
with a more comprehensive and technically-focused
curriculum that we believe increases employability.
In addition, students are given access to internships
at industrial facilities in the region. In a low-income
community were only 20% of the children complete
high school education, the ETRR’s two-year
educational plan enables more children to access
this key education stage towards university studies.
The ETRR is an example of Ternium’s community
development initiatives, which aim at fostering
technical skills and knowledge in the communities in
which Ternium operates.
Environment, Health and Safety
Environmental protection and the individual’s health
and safety is a paramount value for Ternium, and
its personnel has a mandate to observe this value
and to promote and share related policies with the
company’s value chain and with the communities
where it operates. Ternium’s environment, health
and safety policies abide by the World Steel
Association’s policy statement and its principles
for excellence in safety and occupational health,
and by the ISO 14000 environmental management
international standard directives.
Ternium participates in the World Steel Association
forums. These forums, which are focused on
sustainable development, environment, safety
and occupational health, develop consistent
measurements, statistics and databases of selected
variables aiming to enable steelmaking companies
to benchmark performance, share state-of-the-
art best practices and ultimately set industrial
process improvement plans. These forums include
the Climate Change Policy, Life Cycle Assessment,
Carbon Dioxide Data Collection Program, Water
Management, Sustainability Reporting, and Safety
and Occupational Health Committee groups and
their working subgroups. In addition, during 2016,
Ternium hosted the annual air quality workshop
and participated in the fellowship program in the
sustainability reporting expert group of the World
Steel Association.
Ternium’s operations in Mexico revalidated in
2016 their clean industry certificates under the
Mexican Government’s National Environmental
Voluntary Program, including its steel and in-use
mining facilities. In addition, we made progress on
our environmental and safety investment plans at
our Guerrero and San Nicolás units and we are in
our way to complete our ISO 14001 certification
program. Furthermore, during the year, we
continued developing our energy efficiency program,
we completed the diagnosis and identification of
process hazards at critical processes and made
progress on our OHSAS 18001 certification project.
Environmental and safety investments
During 2016, Ternium completed the installation of a
secondary de-dusting system in the steel shop at our
Guerrero unit in Mexico, which enhanced emission
control, and commissioned a new briquetting facility,
which enabled the recycling of metallic fines generated
in several processes. In addition, during the year,
Ternium commissioned a new hydrochloric acid
regeneration plant, which stores and processes acid
used by the pickling lines of the cold-rolling mills,
resulting in reduced by-product rates and improved
product quality and process control.
Ternium also made progress on other improvement
projects and complementary investments in the
29. Annual Report 2016
Roberto Rocca Technical School
Mexico
During 2016, Ternium inaugurated the Roberto Rocca
Technical School (ETRR) in Pesquería, Mexico, with
128 students at the start of the 2016-2017 school year.
The school, which is part of Ternium industrial
center at Pesquería, is the first of its kind in Mexico,
offering specializations in electro-mechanics and other
disciplines, and scholarships for all students.
“ The new school will promote
excellence in technical education,
strengthening local employment
opportunities for the existing community
and attracting employees and
their families from further afield.”
Paolo Rocca, Chairman
Capacity for 360 students
Library (physical and digital)
12 classrooms and 17 workshops
Sport facilities
2 laboratories
Auditorium and outdoor amphitheater
30. Ternium
31. Annual Report 2016
Guerrero unit, including projects related to
processing and handling of steel slag in the steel
shop, replacement of pickling tanks, improvement
in the treatment of sludge and upgrading of raw
material storage yards, and improvement for
vehicular traffic. The resulting improvements in
industrial safety and environmental sustainability,
together with those resulting from the upgrade of
feeding systems of the iron ore direct reduction units
completed during 2015, are helping the Guerrero
unit achieve the most stringent environmental norms
and standards in the world.
Siderar’s San Nicolás unit in Argentina completed
the installation of a new by-products plant in the
coal coking facilities that resulted in cleaner coke
oven gases. In addition, Siderar made progress on
several improvement projects in the San Nicolás unit
related to the reduction of water consumption in the
blast furnace, additional emission control systems
in the steel shop and the capture and treatment
of runoff water in the coal and coking coal yards.
Ternium also commissioned a new scrap shredder
at our Manizales unit in Colombia that resulted in
cleaner emissions due to increased availability of
properly dimensioned steel scrap for the steel shop.
Ternium continues to monitor its facilities through
ongoing programs aimed at maximizing the efficient
use of energy resources, the re-use of by-products
and the appropriate treatment and disposal of
wastes, air emissions and wastewater.
ISO 14001 certification project
Under our ISO 14001 certification project, we
made significant progress during 2016. We are in
our way to complete the project as certificates were
already granted to Ternium’s Guerrero, Pesquería,
Puebla, San Luis, Tenigal and Universidad units in
Mexico, all of its production units in Argentina,
its Manizales and Barranquilla units in Colombia,
(14) Injuries frequency rate refers to total quantity of
injuries per million of hours worked.
(15) Lost time injuries frequency rate refers
to quantity of day-loss injuries per million of
hours worked.
32. Ternium
and its Villa Nueva unit in Guatemala. The standard
was created by ISO, the International Organization
for Standardization, an international network of
national standardization institutes that work together
with governments, the industry and consumer
representatives, with the purpose of supporting the
implementation of an environment management plan
in any public and private organization.
Greenhouse Gas Emissions and Energy Efficiency
The carbon dioxide emission chart shows Ternium’s
estimated emission of carbon dioxide per ton of
liquid steel produced, as reported to worldsteel.
We support the steel industry’s ongoing efforts to
develop innovative solutions to reduce greenhouse
gas (GHG) emissions over the lifecycle of steel
products. According to the Intergovernmental Panel
on Climate Change, the steel industry accounts for
approximately 6-7% of total world GHG emissions.
Under Ternium’s energy efficiency program,
launched during 2014, one hundred fifteen energy-
saving projects were completed. In addition, fifty-
nine additional energy-saving projects are being
developed or undergoing the approval process.
Ternium’s energy efficiency program is a long-term
cost reduction initiative, resulting in lower GHG
emissions, encompassing all of Ternium’s facilities.
which counts with the assistance of DuPont,
a renowned authority in industrial safety that
was retained by Ternium during 2013, has also
contributed to the development of new safety
management tools for critical processes.
OHSAS 18001 certification project
Ternium continued developing its OHSAS 18001
certification program, a project that helped us
find new opportunities to improve our safety
management systems and ensure their compliance
with our health and safety policy. By year-end
2016, we achieved under this program the full
certification of Siderar’s facilities in Argentina
and the certification of most of our industrial
facilities in Mexico. In addition, during 2016, we
started the certification process in our industrial
facilities in Guatemala, in our Manizales unit
in Colombia and, more recently, we started the
certification process at our mining facilities and
the two remaining industrial facilities in Mexico.
The Occupational Health and Safety Assessment
Series (OHSAS) standard is the result of a concerted
effort from a number of the world’s leading national
standards bodies, certification bodies and specialist
consultancies to help develop safety management
systems with the highest level of excellence.
Safety management improvements for critical
production processes
During 2016, Ternium completed the first stage
of this project, consisting of the diagnosis and
identification of process hazards at critical processes
in our mining, steelmaking and steel processing
facilities in Mexico, Argentina and Colombia.
Following the completion of this first stage,
which let us consolidate a safe administration
of critical processes, Ternium started during the
year the second stage of the project, centered in
sustainability. The implementation of the program,
Ternium’s safety indicators in 2016
In the last five years, consolidated average injury
rates showed significant improvements, as shown
in the charts. Our average injuries frequency rate
and lost-time injuries frequency rate were 3.0 and
1.0, respectively, in 2016. These measurements
include both our personnel and the personnel
of third-party contractors, and cover all of
Ternium’s facilities. Our safety initiatives during
the year included the implementation of a new
safety program targeting personnel of third-party
contractors, and the intensification of safety
training programs for our employees.
33. Annual Report 2016
ANNUAL
REPORT
2016
04
MANAGEMENT
REPORT
_CORPORATE GOVERNANCE
34. Ternium
The Company
The Company is a public limited liability company
(société anonyme) organized under the laws of the
Grand Duchy of Luxembourg. Its object and purpose,
as set forth in Article 2 of its articles of association,
is the taking of interests, in any form, in corporations
or other business entities, and the administration,
management, control and development thereof. The
Company is registered under the number B98 668 in
Luxembourg’s Registre du Commerce et des Sociétés.
Shares; Shareholders’ Meetings
The Company’s authorized share capital is set by the
Company’s articles of association, as amended from
time to time, with the approval of shareholders at
an extraordinary general shareholders’ meeting. The
Company has an authorized share capital of a single
class of 3.5 billion shares having a nominal value of
$1.00 per share. The general extraordinary meeting of
shareholders held on May 6, 2015, renewed the validity
of the Company’s authorized share capital until 2020.
As of December 31, 2016, there were 2,004,743,442
shares issued and outstanding, of which 41,666,666 are
held in the Company’s treasury.
The Company’s articles of association authorize
the board of directors or any delegate(s) duly
appointed by the board of directors, to issue shares
within the limits of its authorized share capital
against contributions in cash, contributions in kind
or by way of incorporation of available reserves, at
such times and on such terms and conditions as the
board of directors or its delegates may determine.
The extraordinary general meeting of shareholders
held on May 6, 2015 renewed this authorization
through 2020.
Under Luxembourg law, the Company’s existing
shareholders have a pre-emptive right to subscribe
for any new shares issued for cash. The Company’s
shareholders have authorized the board of directors
to waive, suppress or limit such pre-emptive
subscription rights and related procedures to
the extent it deems such waiver, suppression or
limitation advisable for any issue or issues of shares
within the authorized share capital. However, our
articles of association provide that, if and from the
date the Company’s shares are listed on a regulated
market (and only for as long as they are so listed),
any issuance of shares for cash within the limits of
the authorized share capital shall be subject to the
pre-emptive subscription rights of the then-existing
shareholders, except in the following cases (in which
cases no pre-emptive rights shall apply):
• any issuance of shares for, within, in conjunction
with or related to, an initial public offering of the
Company’s shares on one or more regulated markets
(in one or more instances);
• any issuance of shares against a contribution other
than in cash;
• any issuance of shares upon conversion of convertible
bonds or other instruments convertible into shares;
provided, however, that the pre-emptive subscription
rights of the then existing shareholders shall apply by
provision of the Company’s articles of association in
connection with any issuance of convertible bonds or
other instruments convertible into shares for cash; and
• any issuance of shares (including by way of free
shares or at a discount), up to an amount of 1.5% of
the issued share capital of the Company, to directors,
officers, agents or employees of the Company, its
direct or indirect subsidiaries, or its Affiliates (as
such term is defined in the Company’s articles of
association), including without limitation the direct
issue of shares upon the exercise of options, rights
convertible into shares, or similar instruments
convertible or exchangeable into shares issued for
the purpose of, or in relation to, compensation or
incentive of any such persons.
Our articles of association provide that our annual
ordinary general shareholders’ meetings must
take place in Luxembourg on the first Wednesday
of every May at 2:30 p.m., Luxembourg time. At
these meetings, our annual financial statements are
approved and the members of our board of directors
are elected. No attendance quorum is required at
annual ordinary general shareholders’ meetings and
resolutions are adopted by a simple majority vote of
35. Annual Report 2016
the shares represented at the meeting. There are no
limitations currently imposed by Luxembourg law on
the rights of non-resident shareholders to hold or vote
the Company’s shares.
On May 4, 2016, the annual general meeting of
shareholders of Ternium authorized the board
of directors to delegate the management of the
Company’s day-to-day business and the authority
to represent and bind the Company with his sole
signature in such day-to-day management to Mr.
Daniel Agustin Novegil, and to appoint Mr. Novegil
as chief executive officer (administrateur délégué)
of the Company. Following the adjournment
of such annual general meeting, the board of
directors resolved to delegate such management
and representation authority to Mr. Novegil and
to reappoint Mr. Novegil as chief executive officer
(administrateur délégué) of the Company.
American Depositary Shares (ADSs)
Each ADS represents ten shares. Holders of ADSs
only have those rights that are expressly granted to
them in the deposit agreement dated January 31, 2006,
among the Company, The Bank of New York Mellon
(formerly The Bank of New York), as depositary, and
all owners and beneficial owners from time to time of
ADRs of the Company. ADS holders may not attend
or directly exercise voting rights in shareholders’
meetings, but may instruct the depositary how to
exercise the voting rights for the shares which underlie
their ADSs. Holders of ADSs maintaining non-
certificated positions must follow instructions given by
their broker or custodian bank.
Depositary Shares, or ADSs, at such times and on such
other terms and conditions as may be determined by
the board of directors of the Company or the board
of directors or other governing body of the relevant
Company subsidiary, provided that, among other
conditions, the maximum number of shares, including
shares represented by ADSs, acquired pursuant to the
authorization may not exceed 10% of the Company’s
issued and outstanding shares or, in the case of
acquisitions made through a stock exchange in which
the shares or ADSs are traded, such lower amount
may not be exceeded pursuant to any applicable laws
or regulations of such market, and that the purchase
price per ADS to be paid in cash may not exceed 125%
(excluding transaction costs and expenses), nor may
it be lower than 75% (excluding transaction costs and
expenses), in each case of the average of the closing
prices of the ADSs in the New York Stock Exchange
during the five trading days in which transactions
in the ADSs were recorded on the New York Stock
Exchange preceding (but excluding) the day on which
the ADSs are purchased. In the case of purchases of
shares other than in the form of ADSs, the maximum
and minimum per share purchase prices shall be equal
to the prices that would have applied in case of an ADS
purchase pursuant to the formula above divided by the
number of underlying shares represented by an ADS at
the time of the relevant purchase.
As of the date of this report, Ternium held 41,666,666
of its own shares. Those shares were purchased from
Usiminas on February 15, 2011, concurrently with
the closing of an underwritten public offering by
Usiminas of Ternium ADSs.
Share and ADS Repurchases
The Company may repurchase its own shares in
the cases and subject to the conditions set by the
Luxembourg law of August 10, 1915, as amended.
The ordinary general shareholders’ meeting held
on May 6, 2015 authorized the Company and the
Company’s subsidiaries to acquire shares of the
Company, including shares represented by American
Board of Directors
The Company’s articles of association provide for a
board of directors consisting of a minimum of five
members (when the shares of the Company are listed
on a regulated market, as they currently are) and a
maximum of fifteen. The board of directors is vested
with the broadest powers to act on behalf of the
Company and accomplish or authorize all acts and
transactions of management and disposition that are
36. Ternium
within its corporate purpose and are not specifically
reserved in the articles of association or by applicable
law to the general shareholders’ meeting.
The board of directors is required to meet as often
as required by the interests of the Company and at
least four times per year. In 2016, the Company’s
board of directors met eight times. A majority of the
members of the board of directors in office present
or represented at each board of directors’ meeting
constitutes a quorum, and resolutions may be adopted
by the vote of a majority of the directors present or
represented. In case of a tie, the chairman is entitled to
cast the deciding vote.
Directors are elected at the annual ordinary general
shareholders’ meeting to serve one-year renewable
terms, as determined by the general shareholders’
meeting. The general shareholders’ meeting may
dismiss all or any one member of the board of
directors at any time, with or without cause, by
resolution passed by a simple majority vote. The
Company’s current board of directors is composed
of eight directors, three of whom are independent
directors.
Audit Committee
The board of directors has an audit committee
consisting of three independent directors. The
members of the audit committee are not eligible to
participate in any incentive compensation plan for
employees of the Company or any of its subsidiaries.
Under the Company’s articles of association and the
audit committee charter, the audit committee:
• assists the board of directors in fulfilling its oversight
responsibilities relating to the integrity of the financial
statements of the Company, including periodically
reporting to the board of directors on its activity and
the adequacy of the Company’s systems of internal
control over financial reporting;
• is responsible for making recommendations for the
appointment, compensation, retention and oversight
of, and assessment of the independence of the
Company’s independent auditors;
• reviews material transactions between the Company
or its subsidiaries with related parties (other than
transactions that were reviewed and approved by
the independent members of the board of directors
or other governing body of any subsidiary of the
Company) to determine whether their terms are
consistent with market conditions or are otherwise
fair to the Company and its subsidiaries; and
• performs such other duties imposed by applicable
laws and regulations of the regulated market or
markets in which the shares of the Company are
listed, as well as any other duty entrusted to it by the
board of directors.
The audit committee has the authority to conduct
any investigation appropriate to fulfilling its
responsibilities, and has direct access to the
Company’s internal and external auditors as well
as the Company’s management and employees and,
subject to applicable laws, its subsidiaries.
Auditors
The Company’s articles of association require the
appointment of at least one independent auditor
chosen from among the members of the Luxembourg
Institute of Independent Auditors. Auditors are
appointed by the general shareholders’ meeting, on
the audit committee’s recommendation, through
a resolution passed by a simple majority vote.
Shareholders may determine the number and the
term of the office of the auditors at the ordinary
general shareholders’ meeting, provided however that
an auditor’s term shall not exceed one year and that
any auditor may be reappointed or dismissed by the
general shareholders’ meeting at any time, with or
without cause. As part of their duties, the auditors
report directly to the audit committee.
PricewaterhouseCoopers, Société coopérative
(formerly PricewaterhouseCoopers S.àr.l.),
Cabinet de révision agréé, was appointed as the
Company’s independent auditor for the fiscal year
ended December 31, 2016, at the ordinary general
shareholders’ meeting held on May 4, 2016.
37. Annual Report 2016
Board of Directors and Senior Management
Board of Directors
Senior Management
Chairman Paolo Rocca
Chief Executive Officer Daniel Novegil
Ubaldo Aguirre (*)
Roberto Bonatti
Carlos Condorelli
Vincent Decalf (*)
Adrián Lajous (*)
Daniel Novegil
Gianfelice Rocca
Secretary Arturo Sporleder
(*)Audit Committee Members
Chief Financial Officer Pablo Brizzio
Mexico Area Manager Máximo Vedoya
Siderar Executive
Vice President
International Area
Manager
Planning and
Global Business
Development Director
Engineering
and Environment
Director
Martín Berardi
Héctor Obeso Zunzunegui
Oscar Montero
Ricardo Miguel Alí
Human Resources
Director
Rodrigo Piña
Chief Information Officer Roberto Demidchuck
Quality and Product
Director
Rubén Herrera
38. Ternium
Investor Information
Investor Relations Director
IR Inquiries
Sebastián Martí
smarti@ternium.com
U.S. toll free: 866 890 0443
TERNIUM Investor Relations
ir@ternium.com
ADS Depositary Bank
Luxembourg Office
BNY Mellon
29 Avenue de la Porte-Neuve
Proxy services: BNY Mellon Shareowner
L2227 - Luxembourg
Services
Luxembourg
P.O. Box 30170
Phone: +352 2668 3153
College Station, TX 77842-3170
Fax: +352 2659 8349
Stock Information
+1 888 269 2377
New York Stock Exchange (TX)
International calls: +1 201 680 6825
Toll free number for US calls:
CUSIP Number: 880890108
Internet
www.ternium.com
39. Annual Report 2016
ANNUAL
REPORT
2016
04
MANAGEMENT
REPORT
_2016 RESULTS
40. Ternium
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The review of Ternium’s financial condition and
results of operations is based on, and should be read
in conjunction with, the Company’s consolidated
financial statements as of December 31, 2016 and
2015 and for the years ended December 31, 2016,
2015 and 2014 (including the notes thereto), which
are included elsewhere in this annual report.
The financial and operational information contained
in this annual report is based on the operational
data and consolidated financial statements of the
Company, which were prepared in accordance with
IFRS and IFRIC interpretations as issued by IASB
and adopted by the EU, and presented in U.S. dollars
($) and metric tons.
in the Southern Region. Operating margin increased,
mainly reflecting $133 lower operating cost per ton
partially offset by $77 lower revenue per ton. The
decrease in operating cost per ton was mainly due to
lower purchased slabs, raw material, energy and labor
costs. Steel revenue per ton decreased as a result of
lower steel prices in Ternium’s main steel markets,
partially offset by a higher value added product mix.
Net income in 2016 was $706.9 million, compared
to net income of $59.8 million in 2015. The $647.1
million increase in the year-over-year comparison
was mainly due to higher operating income, better
results from non-consolidated companies and lower
net financial expenses, partially offset by consequently
higher income tax expenses.
Overview
Operating income in 2016 was $1.1 billion, 79%
higher than operating income in 2015. Steel shipments
reached 9.8 million tons in 2016, slightly higher year-
over-year mainly as a result of a 472,000 ton increase
in Mexico, partially offset by a 331,000 ton decrease
Net sales
Net sales in 2016 were $7.2 billion, 8% lower than net
sales in 2015. The following table outlines Ternium’s
consolidated net sales for 2016 and 2015. For a
discussion on the drivers of the increase or decrease of
sales in each region, see “Business Review.”
$ million
Mexico
Southern Region
Other Markets
Total steel products net sales
Other products (16)
Total steel segment net sales
Total mining segment net sales
Intersegment eliminations
Total net sales
(16) The item “Other products” primarily includes pig iron.
2016
2015
4,477.6
4,354.8
1,865.9
864.4
7,208.0
13.8
7,221.8
204.9
(202.7)
7,224.0
2,567.2
905.4
7,827.4
47.7
7,875.2
203.1
(200.8)
7,877.4
Dif.
3%
-27%
-5%
-8%
-71%
-8%
1%
-8%
41. Annual Report 2016
Cost of sales
Cost of sales was $5.4 billion in 2016, a decrease of $1.1
billion compared to 2015. This was principally due to
a $969.6 million, or 20%, decrease in raw material and
consumables used, mainly reflecting lower iron ore,
coking coal, scrap, energy and purchased slabs costs;
and to a $123.3 million decrease in other costs, mainly
including a $50.2 million decrease in maintenance
expenses, a $39.5 million decrease in labor cost, a $28.9
million decrease in depreciation of property, plant and
equipment and amortization of intangible assets, and
a $9.2 million decrease in services and fees, partially
offset by a 2% increase in steel shipments volume.
Selling, general and administrative expenses (SG&A)
SG&A expenses in 2016 were $687.9 million, or 9.5%
of net sales, a decrease of $82.3 million compared
to SG&A expenses in 2015, mainly due to lower
taxes and contributions (other than income tax),
labor costs, freight and transportation expenses, and
services and fees expenses.
Other net operating income
Other net operating expense in 2016 was a $9.9 million
loss, compared to a $9.5 million gain in 2015. Other
net operating expense in 2016 included an $11.1 million
gift related to the Roberto Rocca technical school in
Pesquería.
Operating income
Operating income in 2016 was $1.1 billion, or 15.8%
of net sales, compared to operating income of $639.3
million, or 8.1% of net sales, in 2015. The following
table outlines Ternium’s operating income by segment
for 2016 and 2015.
$ million
Net Sales
Cost of sales
SG&A expenses
Other operating income (expenses), net
Operating income (loss)
STEEL SEGMENT
MINING SEGMENT
INTERSEGMENT ELIMINATIONS
TOTAL
2016
2015
2016
2015
2016
2015
2016
2015
7,221.8
7,875.2
204.9
203.1
(202.7)
(200.8)
7,224.0
7,877.4
(5,391.0)
(6,456.6)
(677.0)
(757.1)
(9.5)
1,144.2
9.2
670.7
(192.0)
(10.9)
(0.4)
1.5
(214.7)
(13.2)
0.3
(24.5)
198.7
–
–
(4.0)
(4.0)
194.0
–
–
(6.9)
(5,384.4)
(6,477.3)
(687.9)
(9.9)
1,141.7
(770.3)
9.5
639.3
(6.9)
1,548.6
1,073.1
EBITDA
1,505.8
1,055.0
46.7
24.9
42. Ternium
Steel reporting segment
The steel segment’s operating income was $1.1 billion
in 2016, an increase of $473.5 million compared to
operating income in 2015, reflecting lower operating
cost, partially offset by lower net sales.
Net sales of steel products in 2016 decreased 8%
compared to net sales in 2015, reflecting a $77
decrease in steel revenue per ton, partially offset by
a 164,000 tons increase in shipments. Revenue per
ton decreased 9% reflecting lower steel prices in
Ternium’s main steel markets, partially offset by a
better product mix. Shipments increased 2% year-
over-year in 2016 mainly due to higher shipments in
Mexico and Other Markets, partially offset by lower
shipments in the Southern Region.
NET SALES ($ MILLION)
SHIPMENTS (THOUSAND TONS)
REVENUE / TON ($/TON)
2016
2015
Dif.
2016
2015
Dif.
2016
2015
Dif.
Mexico
Southern Region
Other Markets
Total steel products
4,477.6
4,354.8
1,865.9
864.4
7,208.0
2,567.2
905.4
7,827.4
Other products (16)
Steel segment
13.8
47.7
7,221.8
7,875.2
3%
-27%
-5%
-8%
-71%
-8%
6,405.2
5,933.4
2,220.8
1,138.1
9,764.0
2,552.2
1,114.6
9,600.3
8%
-13%
2%
2%
699
840
760
738
734
1,006
812
815
-5%
-16%
-6%
-9%
Operating cost decreased 16% due to a 17% decrease
in operating cost per ton partially offset by the
above-mentioned 2% increase in shipment volumes.
The decrease in operating cost per ton was mainly
due to lower raw material, purchased slabs, energy
and labor costs.
Mining reporting segment
The mining segment’s operating income was a gain
of $1.5 million in 2016, compared to a loss of $24.5
million in 2015, mainly reflecting lower operating cost,
with iron ore sales remaining relatively stable. Net sales
of mining products in 2016 were 1% higher than those
in 2015, with 11% higher revenue per ton offset by 9%
lower shipments.
MINING SEGMENT
2016
2015
Dif.
Net Sales ($ million)
204.9
203.1
Shipments (thousand tons)
3,309.6
3,635.6
Revenue per ton ($/ton)
62
56
1%
-9%
11%
43. Annual Report 2016
Operating cost decreased 11% year-over-year, mainly
due to the above mentioned 9% decrease in shipment
volumes and 2% decrease in operating cost per ton.
EBITDA2
EBITDA in 2016 was $1.5 billion, or 21.4% of net
sales, compared with $1.1 billion, or 13.6% of net
sales, in 2015.
Net financial results
Net financial expenses were $37.9 million in 2016,
compared to $99.4 million in 2015. During 2016,
Ternium’s net interest results totaled a loss of $75.8
million, compared with a loss of $81.5 million in 2015.
Net foreign exchange results was a gain of $20.3
million in 2016 compared to a loss of $5.2 million in
2015. Change in fair value of financial instruments
included in net financial results was a $19.3 million
gain in 2016 compared to a $10.2 million loss in 2015.
Equity in results of non-consolidated companies
Equity in results of non-consolidated companies was
a gain of $14.6 million in 2016, compared to a loss of
$272.8 million in 2015. The equity in results of non-
consolidated companies in 2015 included a $191.9
million loss related to an impairment of Ternium’s
investment in Usiminas. For further information
on our investment in Usiminas, see note 3 to our
consolidated financial statements included elsewhere
in this annual report.
Income tax expense
Income tax expense in 2016 was $411.5 million, or
37% of income before income tax, compared to an
income tax expense of $207.3 million, or 78% of
income before income tax, in 2015. Effective tax
rate in 2016 included a non-cash charge on deferred
taxes due to the 17% devaluation of the Mexican
peso against the U.S. dollar during the period, which
reduces, in U.S. dollar terms, the tax base used to
calculate deferred tax at our Mexican subsidiaries
(which have the U.S dollar as their functional
currency). Effective tax rate in 2015 was mainly
affected by the impact of non-taxable losses stemming
from the investment in Usiminas, among other non-
cash effects on deferred taxes.
Net gain attributable to non-controlling interest
Net gain attributable to non-controlling interest in
2016 was $111.3 million, compared to a net gain of
$51.7 million in 2015.
Liquidity and capital resources
We obtain funds from our operations, as well
as from short-term and long-term borrowings
from financial institutions. These funds are
primarily used to finance our working capital and
capital expenditures requirements, as well as our
acquisitions. We hold money market investments,
time deposits and variable-rate or fixed-rate
securities. During 2016 we decreased our financial
indebtedness, from $1.5 billion at the end of 2015 to
$1.2 billion at the end of 2016.
Ternium has in place non-committed credit facilities
and management believes it has adequate access to
the credit markets. Considering this fact and the
funds provided by operating activities, management
believes that it has sufficient resources to satisfy our
current working capital needs, service our debt and
pay approved dividends. Management also believes
that our liquidity and capital resources give us
adequate flexibility to manage our planned capital
44. Ternium
spending programs and to address short-term
changes in business conditions.
The following table shows the changes in our
cash and cash equivalents for each of the periods
indicated below:
In $ thousands
FOR THE YEAR ENDED DECEMBER 31,
2016
2015
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
1,099,595
(554,670)
(508,699)
36,226
(4,254)
151,491
183,463
1,323,491
(572,061)
(809,634)
(58,204)
(3,608)
213,303
151,491
During 2016, Ternium’s primary source of funding
was cash provided by operating activities. Cash
and cash equivalents as of December 31, 2016
were $183.5 million, a $32.0 million increase from
$151.5 million at the end of the previous year. The
increase is mainly attributable to net cash provided
by operating activities of $1.1 billion, partially
offset by net cash used in investing activities of
$554.7 million and net cash used in financing
activities of $508.7 million. In addition to cash and
cash equivalents, as of December 31, 2016 we held
other investments with maturities of more than
three months for a total amount of $150.9 million,
decreasing $86.3 million compared with December
31, 2015.
Operating activities
Net cash provided by operating activities was $1.1
billion in 2016, lower than the $1.3 billion recorded
in 2015, including an increase in working capital of
$162.4 million in 2016 and a decrease in working
capital of $509.1 million in 2015.
The increase in working capital during 2016 was
the result of an aggregate $149.7 million increase
in trade and other receivables and a $114.7 million
increase in inventories, partially offset by an
aggregate $102.0 million increase in accounts payable
and other liabilities.
45. Annual Report 2016
Inventories increased as shown in the table below:
$ million
CHANGE IN INVENTORY DEC’16 / DEC’15
Finished goods
Goods in process
Raw materials, supplies and allowances
Total
Price
16.6
50.8
157.6
225.0
Volume
10.5
(40.7)
(80.1)
(110.3)
Total
27.1
10.1
77.5
114.7
Investing activities
Net cash used in investing activities in 2016 was $554.7
million, primarily attributable to the following:
• capital expenditures of $435.5 million;
• contribution to Usiminas, in connection with its
capital increase process, totaling $114.4 million; and
• loans granted to Techgen totaling $92.5 million;
partially offset by
• $86.3 million decrease in other investments.
Financing activities
Net cash used in financing activities was $508.7 million
in 2016, primarily attributable to the following:
• net repayments of borrowings of $281.2 million in
2016; and
• total dividend payments of $227.5 million ($176.7
million to the Company’s shareholders and $50.8
million to non-controlling interest).
Principal sources of funding
Funding policy
Management’s policy is to maintain a high degree of
flexibility in operating and investment activities by
maintaining adequate liquidity levels and ensuring
access to readily available sources of financing. We
obtain financing primarily in U.S. dollars, Argentine
pesos and Colombian pesos. Whenever feasible,
management bases its financing decisions, including the
election of currency, term and type of the facility, on
the intended use of proceeds for the proposed financing
and on costs. For information on our financial risk
management please see note 28 “Financial risk
management” to our consolidated financial statements
included in this annual report.
Financial liabilities
Our financial liabilities consist of loans with
financial institutions and some pre-accorded
overdraft transactions. As of December 31, 2016,
these facilities were mainly denominated in U.S.
dollars (76.5% of total financial liabilities) and
Argentine pesos (19.2% of total financial liabilities).
Total financial debt (inclusive of principal and
interest accrued thereon) decreased by $302.4 million
in the year, from $1.5 billion as of December 31,
2015, to $1.2 billion as of December 31, 2016. As of
December 2016, current borrowings were 67.4% of
total borrowings, none of which corresponded to
borrowings with related parties. Net financial debt
(total financial debt less cash and cash equivalents
plus other investments) decreased by $248.0 million
46. Ternium
in 2016, from $1.1 billion as of December 31,
2015, to $0.9 billion as of December 31, 2016. Net
financial debt as of December 31, 2016, equaled 0.6
times 2016 EBITDA2.
in average interest rates was due mainly to higher
participation of Argentine Peso denominated debt
in the currency mix, as nominal interest rates in
Argentina reflect high local inflation rates.
Ternium’s weighted average interest rate for 2016 was
6.92%, an increase compared to the 3.37% average
interest rate in 2015. This rate was calculated using
the rates set for each instrument in its corresponding
currency and weighted using the U.S. dollar-equivalent
outstanding principal amount of each instrument as
of December 31, 2016. The year-over-year increase
Most significant borrowings and financial commitments
Our most significant borrowings as of December 31,
2016 were those incurred under Ternium México’s
2013 syndicated loan facility and under Tenigal’s
syndicated loan facility, in order to finance the
construction of a hot-dipped galvanizing mill in
Pesquería.
$ million
DATE
BORROWER
TYPE
November 2013
Ternium México
2012/2013
Tenigal
Syndicated loan
Syndicated loan
Original
principal
amount
800
200
Outstanding principal
amount as of
December 31, 2016
Maturity
360
150
November 2018
July 2022
The main covenants in our syndicated loan
agreements are limitations on liens and encumbrances,
limitations on the sale of certain assets and
compliance with financial ratios (e.g., leverage ratio
and interest coverage ratio). As of December 31, 2016,
we were in compliance with all covenants under our
loan agreements.
Our most significant financial commitments as of
December 31, 2016, were
• A corporate guarantee covering 48% of the
obligations of Techgen under a syndicated loan
agreement. Proceeds from the syndicated loan were
used by Techgen for the construction of its facilities. As
of December 31, 2016, Ternium’s guarantee amounted
to approximately $384 million, based on a total loan
amount of $800 million. The main covenants under
the corporate guarantee are limitations on the sale of
certain assets and compliance with financial ratios (e.g.
leverage ratio). As of December 31, 2016, Techgen was
in compliance with all of its covenants.
• A corporate guarantee covering 48% of the
outstanding value of transportation capacity
agreements entered into by Techgen with Kinder
Morgan Gas Natural de Mexico, S. de R.L. de C.V.,
Kinder Morgan Texas Pipeline LLC and Kinder
Morgan Tejas Pipeline LLC starting on August 1,
2016 and ending during the second half of the year
2036. As of December 31, 2016, the outstanding
value of this commitment was approximately $279
million. Our exposure under the guarantee in
connection with these agreements amounts to $133.9
47. Annual Report 2016
million, corresponding to 48% of the outstanding
value of the agreements as of December 31, 2016.
For further information on our derivative financial
instruments, borrowings and financial commitments
please see notes 22, 23, 24 and 28 to our consolidated
financial statements included in this annual report.
Recent Developments
Acquisition of CSA Siderúrgica do Atlântico
On February 21, 2017, Ternium S.A. entered into
a definitive agreement with thyssenkrupp AG
(“tkAG”) to acquire a 100% ownership interest
in thyssenkrupp Slab International B.V. (“tkSI”)
and its wholly-owned subsidiary CSA Siderúrgica
do Atlântico Ltda. (“CSA”). In addition, tkAG
will assign to Ternium an agreement to supply 2.0
million tons per year of slabs to thyssenkrupp’s
former Calvert re-rolling facility in Alabama,
U.S. (“Calvert”). The price of the transaction
was set using €1.5 billion as enterprise value and
September 30, 2016 as a locked-box date, and is
subject to agreed-upon adjustments at closing. The
transaction, which will require antitrust clearance in
several jurisdictions, including Brazil, Germany and
the U.S., and other conditions, is expected to close
on or before September 30, 2017. Ternium intends to
finance this acquisition entirely with debt.
In calendar year 2016 the assets to be acquired had
consolidated annual sales of €1.6 billion, shipments
of 4.3 million tons and EBITDA of €256 million.
CSA is a steel slab producer with a steelmaking
facility located in the state of Rio de Janeiro, Brazil,
and has an annual production capacity of 5 million
tons of high-end steel slabs, a deep-water harbor and
a 490 MW combined cycle power plant.
New galvanizing and pre-painting lines in Mexico
On March 1, 2017, Ternium announced its plans to
build a hot-dip galvanizing line and a pre-painting
line in its facility in Pesquería. The new lines will
target Mexico’s household appliances, lighting and
metal-mechanic industries in Mexico, deepening the
Company’s import substitution strategy. Ternium’s new
hot-dip galvanizing and pre-painting lines will have
annual production capacity of 300,000 and 120,000
metric tons, respectively, and is expected to require a
total investment of approximately USD260 million.
Annual dividend proposal
On February 21, 2017, the Company’s board of
directors proposed that an annual dividend of $0.10 per
share ($1.00 per ADS), or approximately $196.3 million
in the aggregate, be approved at the Company’s annual
general shareholders’ meeting, which is scheduled
to be held on May 3, 2017. If the annual dividend is
approved, it will be paid on May 12, 2017.
48. Ternium
This page has been intentionally left blank.
ANNUAL
REPORT
2016
05
FINANCIAL
STATEMENTS
TERNIUM S.A. CONSOLIDATED
FINANCIAL STATEMENTS
As of December 31, 2016
and 2015 and for the years
ended December 31,
2016, 2015 and 2014
50. Ternium
29, Avenue de la Porte-Neuve
3rd floor
L-2227
R.C.S. Luxembourg: B 98 668
Ternium S.A.
Index to The Consolidated
Financial Statements
52
54
55
56
57
60
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the years ended December 31, 2016,
2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2016, 2015 and 2014
Consolidated Statements of Financial Position as of December 31, 2016 and 2015
Consolidated Statements of Changes in Equity for the years ended
December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31,
2016, 2015 and 2014
61
Index to the Notes to the Consolidated Financial Statements
51. Annual Report 2016
Audit Report
To the Board of Directors and Shareholders of
Ternium S.A.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Ternium S.A.
and its subsidiaries, which comprise the consolidated statement of financial position as
at 31 December 2016, and the consolidated income statement, consolidated statement
of comprehensive income, consolidated changes in equity and consolidated statement of
cash flows for the year then ended and a summary of significant accounting policies and
other explanatory information.
Board of Directors’ responsibility for the consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial Reporting
Standards as adopted by the European Union, and for such internal control as the Board
of Directors determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Responsibility of the “Réviseur d’entreprises agréé”
Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. We conducted our audit in accordance with International Standards
on Auditing as adopted for Luxembourg by the “Commission de Surveillance du Secteur
Financier”. Those standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the consolidated financial statements. The procedures selected depend
on the judgment of the “Réviseur d’entreprises agréé” including the assessment of the
risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the “Réviseur d’entreprises agréé”
considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by the
Board of Directors, as well as evaluating the overall presentation of the consolidated
financial statements.
PricewaterhouseCoopers Société coopérative, 2 Rue Gerhard Mercator, B.P. 1443, L-1014 Luxembourg
T: +352 494848 1, F:+352 494848 2900, www.pwc.lu
Cabinet de révision agréé. Expert-comptable (autorisation gouvernementale n°10028256)
R.C.S. Luxembourg B 65 477 - TVA LU25482518
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the
consolidated financial position of Ternium S.A. and its subsidiaries as of 31 December
2016, and of its consolidated financial performance and its cash flows for the year then
ended in accordance with International Financial Reporting Standards as adopted by the
European Union.
Other information
The Board of Directors is responsible for the other information. The other information
comprises the information included in the management report but does not include the
consolidated financial statements and our audit report thereon.
Our opinion on the consolidated financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility
is to read the other information and, in doing so, consider whether the other information
is materially inconsistent with the consolidated financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If, based on the
work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report this fact. We have nothing to report in this regard.
Report on other legal and regulatory requirements
The management report, is consistent with the consolidated financial statements and has
been prepared in accordance with the applicable legal requirements.
PricewaterhouseCoopers, Société coopérative
Represented by
Luxembourg, 20 March 2017
Marc Minet
Consolidated Income Statements
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
All amounts in USD thousands
YEAR ENDED DECEMBER 31,
NOTES
2016
2015
2014
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating income (expenses), net
Operating income
Finance expense
Finance income
Other financial income (expenses), net
5
6
7
9
10
10
10
Equity in earnings (losses) of non-consolidated companies
3 & 14
Profit before income tax expense
11
Income tax expense
Profit (Loss) for the year
Attributable to:
Owners of the parent
Non-controlling interest
Profit (Loss) for the year
7,223,975
(5,384,390)
1,839,585
(687,942)
(9,925)
1,141,718
(89,971)
14,129
37,957
14,624
1,118,457
(411,528)
706,929
595,644
111,285
706,929
7,877,449
(6,477,272)
1,400,177
(770,292)
9,454
639,339
(89,489)
7,981
(17,922)
(272,810)
267,099
(207,320)
59,779
8,127
51,652
59,779
8,726,057
(6,925,169)
1,800,888
(816,478)
71,751
1,056,161
(117,866)
7,685
40,731
(751,787)
234,924
(339,105)
(104,181)
(198,751)
94,570
(104,181)
Weighted average number of shares outstanding
1,963,076,776
1,963,076,776
1,963,076,776
Basic and diluted (losses) earnings per share for profit
attributable to the owners of the parent (expressed in
USD per share)
0.30
0.00
(0.10)
The accompanying notes are an integral part of these restated consolidated financial statements.
54. Ternium
Consolidated Statements
of Comprehensive Income
All amounts in USD thousands
YEAR ENDED DECEMBER 31,
Profit (Loss) for the year
Items that may be reclassified subsequently to profit or loss:
Currency translation adjustment
Currency translation adjustment from participation in
non-consolidated companies
Changes in the fair value of derivatives classified as cash flow
hedges and available-for-sale financial instruments
Income tax relating to cash flow hedges and available-for-sale
financial instruments
Changes in the fair value of derivatives classified as cash flow
hedges from participation in non-consolidated companies
Other comprehensive income items
Other comprehensive income items from participation in
non-consolidated companies
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of post employment benefit obligations
Income tax relating to remeasurement of post employment
benefit obligations
Remeasurement of post employment benefit obligations from
participation in non-consolidated companies
2016
706,929
(141,665)
53,858
641
(192)
–
(1,542)
1,523
(14,735)
2,571
(16,286)
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
2015
59,779
(409,767)
(230,774)
1,277
(371)
–
–
973
5,277
(1,946)
(5,113)
2014
(104,181)
(270,773)
(119,808)
(3,016)
638
154
–
(28)
(27,561)
7,711
(5,614)
Other comprehensive loss for the year, net of tax
(115,827)
(640,444)
(418,297)
Total comprehensive income (loss) for the year
591,102
(580,665)
(522,478)
Attributable to:
Equity holders of the Company
Non-controlling interest
Total comprehensive income (loss) for the year
534,827
56,275
591,102
(457,750)
(122,915)
(580,665)
(495,603)
(26,875)
(522,478)
The accompanying notes are an integral part of these restated consolidated financial statements.
55. Annual Report 2016
Consolidated Statements
of Financial Position
All amounts in USD thousands
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
BALANCES AS OF DECEMBER 31,
NOTES
2016
2015
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment, net
Intangible assets, net
Investments in non-consolidated companies
Other investments
Deferred tax assets
Receivables, net
Trade receivables, net
CURRENT ASSETS
Receivables
Derivative financial instruments
Inventories, net
Trade receivables, net
Other investments
Cash and cash equivalents
Non-current assets classified as held for sale
Total Assets
EQUITY
Capital and reserves attributable to the owners of the parent
Non-controlling interest
Total Equity
LIABILITIES
NON-CURRENT LIABILITIES
Provisions
Deferred tax liabilities
Other liabilities
Trade payables
Borrowings
CURRENT LIABILITIES
Current income tax liabilities
Other liabilities
Trade payables
Derivative financial instruments
Borrowings
Total Liabilities
Total Equity and Liabilities
The accompanying notes are an integral part of these restated consolidated financial statements.
56. Ternium
12
13
14
18
20
15
16
15
22
17
16
18
18
19
20
21
23
21
22
23
4,135,977
4,207,566
842,557
418,379
5,998
85,795
132,580
888,206
250,412
–
98,058
36,147
1,270
5,622,556
–
5,480,389
79,820
316
1,647,869
633,745
144,853
89,484
1,787
1,579,120
511,464
237,191
183,463
2,690,066
151,491
2,570,537
10,248
2,700,314
8,322,870
4,391,298
775,295
5,166,593
11,667
2,582,204
8,062,593
4,033,148
769,849
4,802,997
6,950
609,004
302,784
9,305
8,142
609,514
320,673
13,413
396,742
1,324,785
607,237
1,558,979
178,112
228,081
603,119
287
41,064
156,654
568,478
20,635
821,893
1,831,492
913,786
1,700,617
3,156,277
3,259,596
8,322,870
8,062,593
Consolidated Statements
of Changes in Equity
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
All amounts in USD thousands
ATTRIBUTABLE TO THE OWNERS OF THE PARENT
(1)
Capital
stock
(2)
Treasury
shares
(2)
Initial public
offering
expenses
Reserves
(3)
Capital
stock issue
discount
(4)
Currency
translation
adjustment
Retained
earnings
Total
Non-
controlling
interest
Total
Equity
BALANCE AT JANUARY 1, 2016
2,004,743
(150,000)
(23,295)
1,444,394
(2,324,866)
(2,300,335)
5,382,507
4,033,148
769,849
4,802,997
Profit for the period
Other comprehensive income (loss) for the year
Currency translation adjustment
Remeasurement of post employment benefit obligations
Cash flow hedges and others, net of tax
Others
595,644
595,644
111,285
706,929
(26,185)
229
1,733
(36,594)
(36,594)
(26,185)
229
1,733
(51,213)
(87,807)
(2,265)
(28,450)
220
(1,752)
449
(19)
Total comprehensive income (loss) for the year
–
–
–
(24,223)
–
(36,594)
595,644
534,827
56,275
591,102
Dividends paid in cash (5)
Dividends paid in cash to non-controlling interest (6)
Balance at December 31, 2016
2,004,743
(150,000)
(23,295)
1,420,171
(2,324,866)
(2,336,929)
5,801,474
4,391,298
775,295
5,166,593
(176,677)
(176,677)
–
(176,677)
–
(50,829)
(50,829)
(1) Shareholders’ equity determined in accordance with accounting principles generally
accepted in Luxembourg is disclosed in Note 24 (III).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares
having a nominal value of USD 1.00 per share. As of December 31, 2016, there
were 2,004,743,442 shares issued. All issued shares are fully paid. Also, as of
December 31, 2016, the Company held 41,666,666 shares as treasury shares.
(3) Include mainly legal reserve under Luxembourg law for USD 200.5 million,
undistributable reserves under Luxembourg law for USD 1.4 billion, hedge
accounting reserve, net of tax effect, for USD 0.1 million and reserves related to the
acquisition of non-controlling interest in subsidiaries for USD (88.5) million.
(4) Represents the difference between book value of non-monetary contributions
received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.090 per share (USD 0.90 per ADS). Related to the dividends
distributed on May 4, 2016, and as 41,666,666 shares are held as treasury shares
by Ternium, the dividends attributable to these treasury shares amounting to USD
3.7 million were included in equity as less dividend paid.
(6) Corresponds to the dividends paid by Siderar S.A.I.C.
Dividends may be paid by Ternium to the extent distributable retained earnings
calculated in accordance with Luxembourg law and regulations exist. Therefore,
retained earnings included in these consolidated financial statements may not be
wholly distributable. See Note 24 (III). The accompanying notes are an integral part
of these consolidated financial statements.
5
7
.
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
6
5
8
.
T
e
r
n
i
u
m
Consolidated Statements
of Changes in Equity
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
All amounts in USD thousands
ATTRIBUTABLE TO THE OWNERS OF THE PARENT
(1)
BALANCE AT JANUARY 1, 2015
2,004,743
(150,000)
(23,295)
1,475,619
(2,324,866)
(1,836,057)
5,551,057
4,697,201
937,502
5,634,703
Capital
stock
(2)
Treasury
shares
(2)
Initial public
offering
expenses
Reserves
(3)
Capital
stock issue
discount
(4)
Currency
translation
adjustment
Retained
earnings
Total
Non-
controlling
interest
Total
Equity
Profit for the period
Other comprehensive income (loss) for the year
Currency translation adjustment
Remeasurement of post employment benefit obligations
Cash flow hedges and others, net of tax
Others
Total comprehensive loss for the year
Dividends paid in cash (5)
Dividends paid in cash to non-controlling interest (6)
Contributions from non-controlling shareholders in consolidated
subsidiaries (7)
Sale of participation in subsidiary companies (8)
Acquisition of non-controlling interest (9)
Balance at December 31, 2015
8,127
8,127
51,652
59,779
(464,278)
(464,278)
(176,263)
(640,541)
(3,218)
1,436
(1,782)
714
905
192
68
906
973
(3,218)
714
905
–
–
–
(1,599)
–
(464,278)
8,127
(457,750)
(122,915)
(580,665)
(176,677)
(176,677)
–
(176,677)
–
–
–
(32,743)
(32,743)
30,870
30,870
1,509
1,509
2,004,743
(150,000)
(23,295)
1,444,394
(2,324,866)
(2,300,335)
5,382,507
4,033,148
769,849
4,802,997
(29,626)
(29,626)
(44,374)
(74,000)
(1) Shareholders’ equity determined in accordance with accounting principles generally
(4) Represents the difference between book value of non-monetary contributions
accepted in Luxembourg is disclosed in Note 24 (III).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares
having a nominal value of USD 1.00 per share. As of December 31, 2015, there
were 2,004,743,442 shares issued. All issued shares are fully paid. Also, as of
December 31, 2015, the Company held 41,666,666 shares as treasury shares.
(3) Include mainly legal reserve under Luxembourg law for USD 200.5 million,
undistributable reserves under Luxembourg law for USD 1.4 billion, hedge
accounting reserve, net of tax effect, for USD (0.4) million and reserves related to
the acquisition of non-controlling interest in subsidiaries for USD (88.5) million.
received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.090 per share (USD 0.90 per ADS). Related to the dividends
distributed on May 6, 2015, and as 41,666,666 shares are held as treasury shares
by Ternium, the dividends attributable to these treasury shares amounting to USD
3.7 million were included in equity as less dividend paid.
(6) Corresponds to the dividends paid by Siderar S.A.I.C.
(7) Corresponds to the contribution made by Nippon Steel Corporation in connection
with its participation in Tenigal, S.R.L. de C.V..
(8) Corresponds to the sale of the participation in Ferrasa Panamá S.A. See note 2.B.
(9) Corresponds to the acquisition on the non-controlling interest in Ferrasa S.A.S. See
note 2.B.
Dividends may be paid by Ternium to the extent distributable retained earnings
calculated in accordance with Luxembourg law and regulations exist. Therefore,
retained earnings included in these consolidated financial statements may not be
wholly distributable. See Note 24 (III). The accompanying notes are an integral part
of these consolidated financial statements.
Consolidated Statements
of Changes in Equity
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
All amounts in USD thousands
ATTRIBUTABLE TO THE OWNERS OF THE PARENT
(1)
Capital
stock
(2)
Treasury
shares
(2)
Initial public
offering
expenses
Reserves
(3)
Capital
stock issue
discount
(4)
Currency
translation
adjustment
Retained
earnings
Total
Non-
controlling
interest
Total
Equity
BALANCE AT JANUARY 1, 2014
2,004,743
(150,000)
(23,295)
1,499,976
(2,324,866)
(1,563,562)
5,897,039
5.340.035
998,009
6.338.044
Loss for the year
Other comprehensive income (loss) for the year
Currency translation adjustment
Remeasurement of post employment benefit obligations
Cash flow hedges and others, net of tax
Others
Total comprehensive loss for the year
Dividends paid in cash (5)
Dividends paid in cash to non-controlling interest (6)
Balance at December 31, 2014
(198,751)
(198.751)
94,570
(104.181)
(272,495)
(272.495)
(118,086)
(390.581)
(22.981)
(1.327)
(49)
(2,483)
(25.464)
(897)
21
(2.224)
(28)
(22,981)
(1,327)
(49)
–
–
–
(24,357)
–
(272,495)
(198,751)
(495.603)
(26,875)
(522.478)
(147,231)
(147.231)
–
(147.231)
–
(33,632)
(33.632)
2,004,743
(150,000)
(23,295)
1,475,619
(2,324,866)
(1,836,057)
5,551,057
4.697.201
937,502
5.634.703
(1) Shareholders’ equity determined in accordance with accounting principles generally
accepted in Luxembourg is disclosed in Note 24 (III).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares
having a nominal value of USD 1.00 per share. As of December 31, 2014, there
were 2,004,743,442 shares issued. All issued shares are fully paid. Also, as of
December 31, 2014, the Company held 41,666,666 shares as treasury shares.
(3) Include mainly legal reserve under Luxembourg law for USD 200.5 million,
undistributable reserves under Luxembourg law for USD 1.4 billion, hedge
accounting reserve, net of tax effect, for USD (0.4) million and reserves related to
the acquisition of non-controlling interest in subsidiaries for USD (58.9) million.
(4) Represents the difference between book value of non-monetary contributions
received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.075 per share (USD 0.75 per ADS). Related to the dividends
distributed on May 7, 2014, and as 41,666,666 shares are held as treasury shares
by Ternium, the dividends attributable to these treasury shares amounting to USD
3.1 million were included in equity as less dividend paid.
(6) Corresponds to the dividends paid by Siderar S.A.I.C.
Dividends may be paid by Ternium to the extent distributable retained earnings
calculated in accordance with Luxembourg law and regulations exist. Therefore,
retained earnings included in these consolidated financial statements may not be
wholly distributable. See Note 24 (III). The accompanying notes are an integral part
of these consolidated financial statements.
5
9
.
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
6
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
NOTES
2016
2015
2014
706,929
59,779
(104,181)
12 & 13
26 (B)
3 & 14
26 (B)
2 (B)
19
26 (B)
12 & 13
3 & 14
14
18
406,890
182,332
(14,624)
12,699
–
1,678
(162,373)
(33,936)
433,788
(23,932)
272,810
5,496
1,739
3,180
509,144
61,487
1,099,595
1,323,491
(435,460)
(114,449)
(92,496)
86,340
1,212
183
–
(466,643)
(9,600)
(10,416)
(85,946)
1,217
–
(673)
414,797
(39,529)
751,787
5,162
–
92
(550,980)
28,696
505,844
(443,463)
(252,042)
–
18,258
1,473
–
–
(554,670)
(572,061)
(675,774)
(176,677)
(50,829)
–
–
910,577
(176,677)
(32,743)
30,870
(74,000)
822,663
(1,191,770)
(1,379,747)
(508,699)
36,226
151,491
(4,254)
36,226
183,463
(809,634)
(58,204)
213,303
(3,608)
(58,204)
151,491
(147,231)
(33,632)
–
–
1,038,820
(773,396)
84,561
(85,369)
307,218
(8,546)
(85,369)
213,303
Consolidated Statements
of Cash Flows
All amounts in USD thousands
YEAR ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Profit (Loss) for the year
Adjustments for:
Depreciation and amortization
Income tax accruals less payments
Equity in (earnings) losses of non-consolidated companies
Interest accruals less payments
Results on the sale of participation in subsidiary companies
Changes in provisions
Changes in working capital (1)
Net foreign exchange results and others
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Investment in non-consolidated companies
Loans to non-consolidated companies
Decrease (Increase) in other investments
Proceeds from the sale of property, plant and equipment
Dividends received from non-consolidated companies
Sale of participation in subsidiary company, net of cash disposed
2 (B)
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid in cash to company’s shareholders
Dividends paid in cash to non-controlling interests
Contributions from non-controlling shareholders in consolidated subsidiaries
Acquisition of non-controlling interest
2 (B)
Proceeds from borrowings
Repayments of borrowings
Net cash (used in) provided by financing activities
Increase (Decrease) in cash and cash equivalents
MOVEMENT IN CASH AND CASH EQUIVALENTS
At January 1,
Effect of exchange rate changes
Increase (Decrease) in cash and cash equivalents
Cash and cash equivalents at December 31, (2)
(1) The working capital is impacted by non-cash movement of USD (73.8) million as of December 31, 2016 (USD
(210.6) million and USD (149.9) million as of December 31, 2015 and 2014, respectively) due to the variations
in the exchange rates used by subsidiaries with functional currencies different from the US dollar.
(2) It includes restricted cash of USD 83, USD 88 and USD 93 as of December 31, 2016, 2015 and 2014,
respectively. In addition, the Company had other investments with a maturity of more than three months for
USD 150,851, USD 237,191 and USD 149,995 as of December 31, 2016, 2015 and 2014, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
60. Ternium
Index to the Notes to the Consolidated
Financial Statements
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2016 and 2015 and for the years
ended December 31, 2016, 2015 and 2014
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
General information. page 62
Basis of presentation. page 62
Acquisition of business – Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS page 65
Accounting policies page 66
Segment information page 80
Cost of sales page 84
Selling, general and administrative expenses page 85
Labor costs (included in cost of sales and selling, general and administrative expenses) page 85
Other operating income (expenses), net page 86
Other financial income (expenses), net page 86
Income tax expense page 87
Property, plant and equipment, net page 88
Intangible assets, net page 90
Investments in non-consolidated companies page 91
Receivables, net - non-current and current page 94
Trade receivables, net – non-current and current page 95
Inventories, net page 96
Cash, cash equivalents and other investments page 96
Allowances and provisions – non-current and current page 97
Deferred income tax page 98
Other liabilities – non-current and current page 100
Derivative financial instruments page 103
Borrowings page 105
Contingencies, commitments and restrictions on the distribution of profits page 106
Related party transactions page 111
Other required disclosures page 112
Recently issued accounting pronouncements page 113
Financial risk management page 114
Subsequent events - Agreement for the acquisition of CSA Siderúrgica do Atlântico Ltda. page 121
61. Annual Report 2016
Notes to the Consolidated
Financial Statements
TERNIUM S.A.
1. General information
Ternium S.A. (the “Company” or “Ternium”), was
incorporated on December 22, 2003 to hold investments
in flat and long steel manufacturing and distributing
companies. The Company has an authorized share capital
of a single class of 3.5 billion shares having a nominal
value of USD 1.00 per share. As of December 31, 2016,
there were 2,004,743,442 shares issued. All issued shares
are fully paid.
Following a corporate reorganization carried out during
fiscal year 2005, in January 2006 the Company successfully
completed its registration process with the United States
Securities and Exchange Commission (“SEC”).
Ternium’s ADSs began trading on the New York Stock
Exchange under the symbol “TX” on February 1, 2006.
The Company’s initial public offering was settled on
February 6, 2006.
The Company was initially established as a public limited
liability company (société anonyme) under Luxembourg’s
1929 holding company regime. Until termination of
such regime on December 31, 2010, holding companies
incorporated under the 1929 regime (including the
Company) were exempt from Luxembourg corporate and
withholding tax over dividends distributed to shareholders.
On January 1, 2011, the Company became an ordinary
public limited liability company (société anonyme) and,
effective as from that date, the Company is subject to
all applicable Luxembourg taxes (including, among
others, corporate income tax on its worldwide income)
and its dividend distributions will generally be subject
to Luxembourg withholding tax. However, dividends
received by the Company from subsidiaries in high income
tax jurisdictions, as defined under Luxembourg law, will
continue to be exempt from corporate income tax in
Luxembourg under Luxembourg’s participation exemption.
As part of the Company’s corporate reorganization
in connection with the termination of Luxembourg’s
1929 holding company regime, on December 6, 2010,
the Company contributed its equity holdings in all its
subsidiaries and all its financial assets to its Luxembourg
wholly-owned subsidiary Ternium Investments S.à.r.l.,
or Ternium Investments, in exchange for newly issued
corporate units of Ternium Investments. As the assets
contributed were recorded at their historical carrying
amount in accordance with Luxembourg GAAP, the
Company’s December 2010 contribution of such assets to
Ternium Investments resulted in a non-taxable revaluation
of the accounting value of the Company’s assets under
Luxembourg GAAP. The amount of the December 2010
revaluation was equal to the difference between the
historical carrying amounts of the assets contributed
and the value at which such assets were contributed and
amounted to USD 4.0 billion. However, for the purpose
of these consolidated financial statements, the assets
contributed by Ternium to its wholly-owned subsidiary
Ternium Investments were recorded based on their
historical carrying amounts in accordance with IFRS, with
no impact on the financial statements.
Following the completion of the corporate reorganization,
and upon its conversion into an ordinary Luxembourg
holding company, the Company voluntarily recorded a
special reserve exclusively for tax-basis purposes.
As of December 31, 2016 and 2015, this special tax
reserve amounted to USD 6.9 billion and USD 7.1 billion,
respectively. The Company expects that, as a result of its
corporate reorganization, its current overall tax burden
will not increase, as all or substantially all of its dividend
income will come from high income tax jurisdictions.
In addition, the Company expects that dividend distributions
for the foreseeable future will be imputed to the special
reserve and therefore should be exempt from Luxembourg
withholding tax under current Luxembourg law.
2. Basis of presentation
A. Basis of presentation
These consolidated financial statements have been
prepared in accordance with IFRS (International Financial
Reporting Standards) issued and effective or issued and
early adopted as at the time of preparing these statements
(February 2017), as issued by the International Accounting
Standards Board and in conformity with International
Financial Reporting Standards as adopted by the European
Union (“EU”). These consolidated financial statements are
presented in thousands of United States dollars (“USD”),
except otherwise indicated.
62. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
These Consolidated financial statements fairly present the
consolidated equity and consolidated financial situation
of Ternium as of December 31, 2016, and the consolidated
results of its operations, the Changes in the Consolidated
Statement of Comprehensive Income, the Changes in
Consolidated Net Equity and the Consolidated Cash
Flows of Ternium for the year then ended.
and financial assets and financial liabilities (including
derivative instruments) at fair value through profit or loss.
Certain comparative amounts have been reclassified to
conform to changes in presentation in the current year.
These reclassifications do not have a material effect on the
Company’s consolidated financial statements.
Elimination of all material intercompany transactions
and balances between the Company and their respective
subsidiaries has been made in consolidation.
These consolidated financial statements have been
approved for issue by the Board of Directors on February
21, 2017.
These consolidated financial statements have been
prepared under the historical cost convention, as modified
by the revaluation of available-for-sale financial assets,
Detailed below are the companies whose financial
statements have been consolidated and accounted for
interest in these consolidated financial statements.
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Ternium S.A.
Ternium Investments S.à.r.l.
Ternium Solutions A.G. (1)
Ternium Brasil S.A. (1)
Luxembourg
Luxembourg
Switzerland
Brazil
Ternium Investments Switzerland AG (1)
Switzerland
Holding
Holding
Services
Holding
Holding
Ternium Internacional España S.L.U. (1)
Ternium USA Inc. (1)
Siderar S.A.I.C. (2)
Impeco S.A. (3)
Prosid Investments S.A. (3)
Ternium Mexico S.A. de C.V. (4)
Hylsa S.A. de C.V. (5)
Las Encinas S.A. de C.V. (5)
Ferropak Comercial S.A. de C.V. (5)
Galvacer America Inc (5)
Galvamet America Corp (5)
Transamerica E. & I. Trading Corp. (5)
Técnica Industrial S.A. de C.V. (5)
Acedor, S.A. de C.V. (5)
Spain
USA
Argentina
Argentina
Uruguay
Mexico
Mexico
Mexico
Mexico
USA
USA
USA
Mexico
Mexico
Marketing of steel products
Manufacturing and selling of steel
products
Manufacturing and selling of flat steel
products
Manufacturing of pipe products
Holding
Holding
Manufacturing and selling of steel
products
Exploration, exploitation and
pelletizing of iron ore
Scrap services company
Distributing company
Manufacturing and selling of insulated
panel products
Scrap services company
Services
Holding
2016
2015
2014
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
60.94%
60.94%
60.94%
60.97%
60.94%
88.78%
88.78%
60.97%
60.94%
88.72%
88.72%
60.97%
60.94%
88.72%
88.72%
88.78%
88.72%
88.72%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
88.72%
63. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Ternium Gas México S.A. de C.V. (6)
Mexico
Energy services company
Ternium Internacional Guatemala S.A. (7)
Guatemala
Selling of steel products
Consorcio Minero Benito Juarez Peña
Colorada S.A.de C.V. (8)
Mexico
Exploration, exploitation and
pelletizing of iron ore
Peña Colorada Servicios S.A. de C.V. (8)
Mexico
Services
Exiros B.V. (8)
Netherlands
Procurement and trading services
Servicios Integrales Nova de Monterrey S.A.
de C.V. (9)
Mexico
Medical and Social Services
Ternium Internacional Nicaragua S.A.
Nicaragua
Ternium Internacional Honduras S.A. de C.V.
Honduras
Ternium Internacional El Salvador S.A. de C.V.
El Salvador
Ternium Internacional Costa Rica S.A.
Costa Rica
Ferrasa S.A.S. (10)
Ternium del Cauca S.A.S. (formerly
Perfilamos del Cauca S.A.S.) (10)
Colombia
Colombia
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
2016
2015
2014
88.78%
99.98%
44.39%
44.39%
50.00%
66.14%
88.72%
99.98%
44.36%
44.36%
50.00%
66.09%
88.72%
99.98%
44.36%
44.36%
50.00%
66.09%
99.38%
99.38%
99.38%
99.18%
99.18%
99.18%
99.92%
99.91%
99.91%
99.98%
99.98%
99.98%
100.00%
100.00%
54.00%
100.00%
100.00%
54.00%
Ternium Siderúrgica de Caldas S.A.S.
(formerly Siderúrgica de Caldas S.A.S.) (10)
Colombia
Manufacturing and selling of steel
products
100.00%
100.00%
54.00%
Tenigal S. de R.L. de C.V. (11)
Mexico
Ternium Internacional S.A. (12)
Uruguay
Manufacturing and selling of steel
products
Holding and marketing of steel
products
Ternium Procurement S.A. (12)
Ternium International Inc. (12)
Ternium Treasury Services S.A. (12)
Uruguay
Panama
Uruguay
Procurement services
Marketing of steel products
Financial Services
Ternium International USA Corporation (13)
USA
Marketing of steel products
Ternium Internacional de Colombia S.A.S. (13)
Colombia
Marketing of steel products
Ternium Internationaal B.V. (14)
Netherlands
Marketing of steel products
Technology & Engineering Services S.A. (15)
Uruguay
Engineering and other services
Argentina
Engineering and other services
51.00%
51.00%
51.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
–
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
–
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Ternium Ingeniería y Servicios de Argentina
S.A. (16)
Ternium Ingeniería y Servicios de México
S.A. de C.V.
Mexico
Engineering and other services
100.00%
100.00%
100.00%
Soluciones Integrales de Gestión S.A. (17)
Argentina
Other services
Ferrasa Panamá, S.A. (18)
Panama
Manufacturing and selling of steel
products
100.00%
100.00%
100.00%
–
–
54.00%
64. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Aceros Transformados de Panamá, S.A. (18)
Panama
Manufacturing and selling of steel
products
Procesadora de Materiales Industriales S.A. (19)
Colombia
Scrap services company
Ferropak Servicios S.A. de C.V. (20)
Corporativo Grupo Imsa S.A. de C.V. (20)
Mexico
Mexico
Services
Services
Ternium International Ecuador S.A. (21)
Ecuador
Marketing of steel products
2016
2015
2014
–
–
–
–
–
–
54.00%
100.00%
88.72%
88.72%
54.00%
88.72%
88.72%
100.00%
100.00%
(1) Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%.
(2) Indirectly through Ternium Internacional España S.L.U. Total voting rights held:
60.94%.
(15) Since second quarter 2016, indirectly through Ternium Investments
Switzerland AG. Total voting rights held 100.00%. Before that, indirectly through
Ternium Internacional Inc.
(3) Indirectly through Siderar S.A.I.C and Ternium Internacional S.A. Total voting
(16) Merged with Soluciones Integrales de Gestión S.A. during the third quarter of
rights held 100.00%.
2015.
(4) Indirectly through Siderar S.A.I.C., Ternium Internacional S.A. and Ternium
Internacional España S.L.U. Total voting rights held 100.00%.
(5) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 100.00%.
(6) Indirectly through Ternium Mexico S.A. de C.V. and Tenigal S. de R.L. de C.V. Total
voting rights held: 100.00%.
(7) Indirectly through Ternium Internacional España S.L.U. Total voting rights held:
(17) Since third quarter 2016, indirectly through Ternium Investments S.à.r.l. and
Technology & Engineering Services S.A. Total voting rights held: 100.00%.
Since third quarter 2015, indirectly through Ternium Investments S.à.r.l.,Ternium
Internacional España S.L.U. and Technology & Engineering Services S.A. Before
that, indirectly through Ternium Investments S.à.r.l. and Ternium Treasury
Services S.A.
100%.
(8) Total voting rights held: 50.00%. See note 5.
(9) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 74.50%.
(10) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held:
100.00%. See note 2 (B).
(11) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held:
51.00%.
(12) Indirectly through Ternium Investments Switzerland AG. Total voting rights held:
100.00%.
(13) Indirectly through Ternium Internacional S.A. Total voting rights held 100.00%.
(14) Since fourth quarter 2014, indirectly through Ternium Investments Switzerland AG
(100,00%). Total voting rights held: 100.00%. Before that, indirectly through
Ternium Internacional S.A.
(18) These companies were sold during the first quarter of 2015.
(19) This company was dissolved as of December 6, 2016.
(20) Merged with Hylsa S.A. de C.V. during the fourth quarter of 2016.
(21) This company was dissolved as of September 27, 2016.
The most important non-controlling interest is related to the investment in Siderar
S.A.I.C., which is a company listed in the Buenos Aires Stock Exchange. Siderar
stated in its annual accounts as of and for the year ended December 31, 2016,
that revenues amounted to USD 1,892 million (2015: USD 2,543 million), net
profit from continuing operations to USD 251 million (2015: USD 190 million),
total assets to USD 2,415 million (2015: USD 2,346 million), total liabilities to USD
607 million (2015: USD 532 million) and shareholders’ equity to USD 1,807
million (2015: USD 1,814 million). All the information related to this investment
could be found in the Buenos Aires Stock Exchange webpage.
B. Acquisition of non-controlling interest in Ferrasa S.A.S.
3. Acquisition of business - Usinas Siderúrgicas de Minas
On January 20, 2015, Ternium entered into an agreement
to acquire the remaining 46% interest in Ferrasa for a
total consideration of USD 74.0 million. The Ferrasa
transaction closed on April 7, 2015 and it was accounted
for as an acquisition of non-controlling interest resulting
in a decrease of equity attributable to the owners of
the parent company amounting to USD 29.6 million.
In addition, on January 20, 2015, Ternium sold its 54%
interest in Ferrasa Panamá S.A. for a total consideration
of USD 2.0 million, with no significant impact in these
financial statements.
Gerais S.A. - Usiminas
On January 16, 2012, the Company’s wholly-owned
Luxembourg subsidiary Ternium Investments S.à r.l.
(“Ternium Investments”), together with the Company’s
Argentine majority-owned subsidiary Siderar S.A.I.C.
(“Siderar”), Siderar’s wholly-owned Uruguayan subsidiary
Prosid Investments S.A. (“Prosid”), and Confab
Industrial S.A., a Brazilian subsidiary of Tenaris S.A.
(“TenarisConfab”), joined Usiminas’ existing control
group through the acquisition of 84.7, 30.0, and 25.0
million ordinary shares, respectively. The rights and
obligations of the control group members are governed
by a shareholders’ agreement. As a result of these
transactions, the control group, which holds ordinary
shares representing the majority of Usiminas’ voting
rights, is formed as follows: Nippon Steel & Sumitomo
65. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Metal Corporation Group (“NSSMC”, formerly Nippon
Group), with 46.1% of the voting rights within the
control group; T/T Group (comprising TenarisConfab,
Prosid, Siderar and Ternium Investments), with 43.3%;
and Previdência Usiminas (Usiminas’ employee pension
fund), with the remainder 10.6%.
On October 2, 2014, Ternium Investments entered into
a purchase agreement with Caixa de Previdência dos
Funcionários do Banco do Brasil – PREVI for the
acquisition of 51.4 million ordinary shares of Usiminas
at a price of BRL 12 per share, for a total amount of BRL
616.7 million. On October 30, 2014, Ternium Investments
completed the acquisition. These additional shares are not
subject to the Usiminas shareholders agreement, but must
be voted in accordance with the control group decisions.
subscription process. On July 19, 2016, following the
completion of the subscription process, Usiminas’
extraordinary general shareholders’ meeting
homologated the capital increase, and Ternium (through
Ternium Investments, Siderar and Prosid) was issued, in
the aggregate, 76.4 million ordinary shares for a total
subscription price of BRL 382.2 million (approximately
USD 110.9 million). Following the issuance of these
ordinary shares, Ternium (through Ternium Investments,
Siderar and Prosid) owns a total of 242.6 million
ordinary shares and 8.5 million preferred shares,
representing 20.5% of Usiminas’ capital, and the T/T
Group owns 39.6% of Usiminas’ ordinary shares and
1.8% of Usiminas’ preferred shares. Ternium continues
to hold 35.6% of Usiminas’ voting rights within the
control group.
Following discussions with the Staff of the U.S. Securities
and Exchange Commission, the Company re-evaluated
and revised the assumptions used to calculate the carrying
value of the Usiminas investment at September 30, 2014
and, as a result, wrote down the carrying value of its
investment in Usiminas by USD 739.8 million.
As of September 30, 2014, the discount rate used to test the
investment in Usiminas for impairment was 10.4%.
As of December 31, 2016, the closing price of the Usiminas
ordinary and preferred shares, as quoted on the BM&F
Bovespa Stock Exchange, was BRL 8,26 (approximately
USD 2,53) per ordinary share and BRL 4,10
(approximately USD 1,26) per preferred share, respectively.
Accordingly, as of December 31, 2016, Ternium’s
ownership stake had a market value of approximately USD
625.5 million and a carrying value of USD 411.1 million.
Usiminas’ financial statements as of December 31, 2015
described a downgraded economic scenario for the
company that caused a significant impact on its financial
leverage and cash generation. Consequently, Ternium, in a
conservative approach, assessed the recoverable value of its
investment in Usiminas based on Usiminas ordinary shares
average market price for December 2015, and impaired its
investment by USD 191.9 million.
On April 20, 2016, Ternium (through Ternium Investments,
Siderar and Prosid) subscribed, in the aggregate, to 8.5
million preferred shares for a total subscription price
of BRL 10.9 million (approximately USD 3.1 million).
These preferred shares were issued on June 3, 2016.
The Company reviews periodically the recoverability of
its investment in Usiminas. To determine the recoverable
value, the Company estimates the value in use of the
investment by calculating the present value of the expected
cash flows or its fair value less costs of disposal.
Management believes that the capital increase amounting
to BRL 1,000 million and the completion of the debt
restructuring process are likely to contribute to improve
Usiminas’ financial situation. Management has noted an
increase in the share price of the investment since June
2016. All these factors may lead to an improvement in the
value of the investment in future periods.
On April 18, 2016, Usiminas’ extraordinary general
shareholders’ meeting approved an issuance of 200
million ordinary shares for an aggregate amount of
BRL 1 billion and Usiminas launched a multi-round
These Consolidated Financial Statements have been
prepared following the same accounting policies used in
the preparation of the audited Consolidated Financial
Statements for the year ended December 31, 2015.
4. Accounting policies
66. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The following is a summary of the principal accounting
policies followed in the preparation of these consolidated
financial statements:
A. Group accounting
1. Subsidiary companies and transactions with non-
controlling interests
Subsidiaries are all entities over which the Company
has control. The Company controls an entity when the
Company is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability
to affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on
which control is transferred to the Company. They are
deconsolidated from the date that control ceases.
acquisition-date fair value of any previous equity interest
in the acquiree over the fair value of the Company’s
share of the identifiable net assets acquired is recorded
as goodwill. If this is less than the fair value of the net
assets of the subsidiary acquired in the case of a bargain
purchase, the difference is recognized directly in the
income statement.
The measurement period is the earlier of the date that
the acquirer receives the information that it is looking
for or cannot obtain the information and one year after
the acquisition date. Where the accounting for a business
combination is not complete by the end of the reporting
period in which the business combination occurred
provisional amounts are reported.
The Company uses the acquisition method of accounting
to account for business combinations. The consideration
transferred for the acquisition of a subsidiary is the fair
values of the assets transferred, the liabilities incurred
and the equity interests issued by the Company.
The consideration transferred includes the fair value of any
asset or liability resulting from a contingent consideration
arrangement. Acquisition-related costs are expensed as
incurred. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination
are measured initially at the fair values at the acquisition
date. Indemnification assets are recognized at the same
time that the Company recognizes the indemnified item
and measures them on the same basis as the indemnified
item, subject to the need for a valuation allowance for
uncollectible amounts. The Company measures the value
of a reacquired right recognized as an intangible asset on
the basis of the remaining contractual term of the related
contract regardless of whether market participants would
consider potential contractual renewals in determining its
fair value.
On an acquisition-by-acquisition basis, the Company
recognizes any non-controlling interest in the acquiree at
the non-controlling interest’s proportionate share of the
acquiree’s net assets.
The excess of the consideration transferred, the amount
of any non-controlling interest in the acquiree and the
The Company treats transactions with non-controlling
interests as transactions with equity owners of the
Company. For purchases from non-controlling interests, the
difference between any consideration paid and the relevant
share acquired of the carrying value of net assets of the
subsidiary is recorded in equity. Gains or losses on disposals
to non-controlling interests are also recorded in equity.
When the Company ceases to have control or significant
influence, any retained interest in the entity is remeasured
to its fair value, with the change in carrying amount
recognized in profit or loss. The fair value is the initial
carrying amount for the purposes of subsequently
accounting for the retained interest as an associate, joint
venture or financial asset. In addition, any amounts
previously recognized in other comprehensive income in
respect of that entity are accounted for as if the group had
directly disposed of the related assets or liabilities.
This may mean that amounts previously recognized in other
comprehensive income are reclassified to profit or loss.
Inter-company transactions, balances and unrealized
gains on transactions between group companies are
eliminated. Unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of
the transferred asset. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency
with the policies adopted by the group. However, the fact
that the functional currency of some subsidiaries is their
67. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
respective local currency, generates some financial gains
(losses) arising from intercompany transactions, that are
included in the consolidated income statement under
Other financial expenses, net.
2. Investments in non-consolidated companies
Associated companies are those entities in which Ternium
has significant influence, but which it does not control.
Joint arrangements are understood as combinations in
which there are contractual agreements by virtue of which
two or more companies hold an interest in companies
that undertake operations or hold assets in such a way
that any financial or operating decision is subject to the
unanimous consent of the partners. A joint arrangement
is classed as a joint operation if the parties hold rights to
its assets and have obligations in respect of its liabilities or
as a joint venture if the venturers hold rights only to the
investee’s net assets.
Investments in non-consolidated companies (associated
companies and joint ventures) are accounted for using
the equity method of accounting. Under this method,
interests in joint ventures and associates are initially
recognized in the consolidated statement of financial
position at cost and adjusted thereafter to recognize
the Company’s share of the post-acquisition profits or
losses in the income statement, and its share of post-
acquisition changes in reserves recognized in reserves
and in other comprehensive income in the income
statement. Unrealized gains on transactions among
the Company and its non-consolidated companies are
eliminated to the extent of the Company’s interest in
such non-consolidated companies; unrealized losses
are also eliminated unless the transaction provides
evidence of an impairment of the transferred asset.
When the Company’s share of losses in a non-
consolidated company equals or exceeds its interest in
such non-consolidated company, the Company does
not recognize further losses unless it has incurred
obligations or made payments on behalf of such non-
consolidated company.
The Company’s investment in associates and joint ventures
includes notional goodwill identified on acquisition.
The Company determines at each reporting date whether
there is any objective evidence that the investment is
impaired. If this is the case, the group calculates the
amount of impairment as the difference between the
recoverable amount of the investment and its carrying
value and recognizes the amount within “Equity on
earnings (losses) of non-consolidated companies”.
B. Foreign currency translation
1. Functional and presentation currency
Items included in the financial statements of each of the
Company’s subsidiaries and associated companies are
measured using the currency of the primary economic
environment in which the entity operates (the “functional
currency”). Except for the Argentine and the Brazilian
subsidiaries and non-consolidated companies whose
functional currencies are their local currencies, Ternium
determined that the functional currency of its subsidiaries
is the U.S. dollar. Although Ternium is located in
Luxembourg, it operates in several countries with different
currencies. The USD is the currency that best reflects
the economic substance of the underlying events and
circumstances relevant to Ternium as a whole.
2. Subsidiary companies
The results and financial position of all the group entities
(none of which operates in a hyperinflationary economy)
that have a functional currency different from the
presentation currency, are translated into the presentation
currency as follows:
(i) assets and liabilities are translated at the closing rate of
each statement of financial position;
(ii) income and expenses for each income statement are
translated at average exchange rates (unless this average is
not a reasonable approximation of the cumulative effect of
the rates prevailing on the transaction dates, in which case
income and expenses are translated at the rate on the dates
of the transactions); and
(iii) all resulting translation differences are recognized
within other comprehensive income.
In the case of a sale or other disposition of any such
subsidiary, any accumulated translation differences would
be recognized in the income statement as part of the gain
or loss on sale.
68. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
3. Transactions in currencies other than the functional currency
Transactions in currencies other than the functional
currency are translated into the functional currency
using the exchange rates prevailing at the date of the
transactions or valuation where items are re-measured.
At the end of each reporting period: (i) monetary items
denominated in currencies other than the functional
currency are translated using the closing rates, (ii) non-
monetary items that are measured in terms of historical
cost in a currency other than the functional currency are
translated using the exchange rates prevailing at the date
of the transactions; and (iii) non-monetary items that
are measured at fair value in a currency other than the
functional currency are translated using the exchange rates
prevailing at the date when the fair value was determined.
Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation
at year-end exchange rates of monetary assets and
liabilities denominated in currencies other than the
functional currency are recorded as gains and losses
from foreign exchange and included in “Other financial
income (expenses), net” in the consolidated income
statement, except when deferred in equity as qualifying
cash flow hedges and qualifying net investment hedges.
Translation differences on non-monetary financial assets
and liabilities such as equities held at fair value through
profit or loss are recognized in profit or loss as part of the
“fair value gain or loss,” while translation differences on
non-monetary financial assets such as equities classified
as available for sale are included in the “available for sale
reserve” in equity. Ternium had no such assets or liabilities
for any of the periods presented.
C. Financial instruments
Non derivative financial instruments
Non derivative financial instruments comprise investments
in equity and debt securities, trade and other receivables,
cash and cash equivalents, loans and borrowings, and
trade and other payables. Ternium non derivative financial
instruments are classified into the following categories:
• Financial instruments at fair value through profit or
loss: comprises mainly cash and cash equivalents and
investments in debt securities held for trading;
• Held-to-maturity instruments: measured at amortized
cost using the effective interest method less impairment
losses. As of December 31, 2016 and 2015, there are USD
14.7 million and no amounts classified under this category,
respectively;
• Loans and receivables: measured at amortized cost using
the effective interest method less impairment losses;
• Available-for-sale (“AFS”) financial assets: gains and
losses arising from changes in fair value are recognized
within other comprehensive income (“OCI”) with the
exception of impairment losses, interest calculated using
the effective interest method and foreign exchange gains
and losses on monetary assets, which are recognized
directly in profit or loss. Where the investment is disposed
of or is determined to be impaired, the cumulative gain
or loss previously recognized in OCI is included in the
income statement for the period. As of December 31, 2016
and 2015, there are no AFS amounts classified under this
category, respectively;
• Other financial liabilities: measured at amortized cost
using the effective interest method.
The classification depends on the nature and purpose of
the financial assets and is determined at the time of initial
recognition.
Financial assets and liabilities are recognized and
derecognized on the settlement date.
Financial assets are initially measured at fair value, net of
transaction costs, except for those financial assets classified
as financial assets at fair value through profit or loss.
Financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs and
subsequently measured at amortized cost using the
effective interest method, with interest expense recognized
on an effective yield basis.
Impairment of financial assets
The Company assesses at the end of each reporting period
whether there is objective evidence that a financial asset
or group of financial assets is impaired. A financial asset
or a group of financial assets is impaired and impairment
69. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
losses are incurred only if there is objective evidence
of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a “loss
event”) and that loss event (or events) has an impact on
the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated.
The Company first assesses whether objective evidence of
impairment exists.
For loans and receivables category and for held-to-
maturity investments, the amount of the loss is measured
as the difference between the asset’s carrying amount
and the present value of estimated future cash flows
(excluding future credit losses that have not been
incurred) discounted at the financial asset’s original
effective interest rate. The carrying amount of the asset
is reduced and the amount of the loss is recognized in the
consolidated income statement.
If, in a subsequent period, the amount of the impairment
loss decreases and the decrease can be related objectively
to an event occurring after the impairment was
recognized, the reversal of the previously recognized
impairment loss is recognized in the consolidated
income statement.
Ordinary maintenance expenses on manufacturing
properties are recorded as cost of products sold in the
period in which they are incurred.
Where a tangible fixed asset comprises major components
having different useful lives, these components are
accounted for as separate items.
Leases where the lessor retains a significant portion of the
risks and rewards of ownership are classified as operating
leases. Payments made under operating leases (net of any
incentives received from the lessor) are charged to the
income statement on a straight-line basis over the period
of the lease.
Depreciation method is reviewed at each year end.
Depreciation is calculated using the straight-line method
to amortize the cost of each asset to its residual value over
its estimated useful life as follows:
Land
Buildings and improvements
Production equipment
Vehicles, furniture and fixtures and other equipment
No Depreciation
10-50 years
5-40 years
5-20 years
Derivative financial instruments
Information about accounting for derivative financial
instruments and hedging activities is included in Note 28
“Financial Risk management” and Note 4 (X).
D. Property, plant and equipment
Land and buildings comprise mainly factories and offices.
All property, plant and equipment are recognized
at historical acquisition or construction cost less
accumulated depreciation and accumulated impairment
(if applicable), except for land, which is carried at
acquisition cost less accumulated impairment
(if applicable). There are no material residual values for
property, plant and equipment items.
Major overhaul and rebuilding expenditures are
recognized as a separate asset when future economic
benefits are expected from the item, and the cost can be
measured reliably.
Property, plant and equipment used in mining activities are
depreciated over its useful life or over the remaining life of
the mine if shorter and there is no alternative use possible.
The assets’ useful lives are reviewed, and adjusted if
appropriate, at each year end. The re-estimation of assets
useful lives by the Company did not materially affect
depreciation charges in 2016, 2015 and 2014.
Gains and losses on disposals are determined by
comparing the proceeds with the corresponding carrying
amounts and are included in the income statement.
If the carrying amount of an asset were greater than its
estimated recoverable amount, it would be written down
to its recoverable amount (see Note 4 (F) “Impairment”).
Amortization charges are included in cost of sales, selling,
general and administrative expenses.
70. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
E. Intangible assets
1. Information system projects
Generally, costs associated with developing or
maintaining computer software programs are recognized
as an expense as incurred. However, costs directly related
to the acquisition and implementation of information
systems are recognized as intangible assets if they have
a probable economic benefit exceeding the cost beyond
one year and comply with the recognition criteria of
IAS 38.
Information system projects recognized as assets are
amortized using the straight-line method over their useful
lives, not exceeding a period of 3 years. Amortization
charges are included in cost of sales, selling, general and
administrative expenses.
2. Mining assets
Mining assets include:
(a) Mining licenses acquired;
(b) Capitalized exploration and evaluation costs,
reclassified from exploration and evaluation costs
(see Note 4 (E) 3); and
(c) Capitalized developmental stripping costs (see Note 4 (T)).
Mining licenses were recognized as separate intangible
assets upon the acquisition of the investment in Mexico
and comprise the right to exploit the mines and are
recognized at its fair value at acquisition date less
accumulated amortization.
These mining concessions were granted for a 50-year
period; following the expiration of the initial concession
term, the concessions are renewable for an additional
50-year term in accordance with, and subject to the
procedures set forth in, applicable Mexican mining law.
Amortization charge is calculated by using the unit-
of-production method, on the basis of actual mineral
extracted in each period compared to the estimated
mineral reserves, and is included in cost of sales.
Any change in the estimation of reserves is accounted for
prospectively. The resulting amortization rate for the years
ended December 31, 2016, 2015 and 2014, is approximately
7%, 10% and 10% per year, respectively.
3. Exploration and evaluation costs
Exploration and evaluation activities involve the search
for iron ore resources, the determination of technical
feasibility and the assessment of commercial viability of
an identified resource.
Exploration and evaluation costs are measured at
cost. Costs directly associated with exploration and
evaluation activities are capitalized as intangible assets
until the determination of reserves is evaluated. The costs
associated to the acquisition of machinery and equipment
are recognized as property, plant and equipment. If it is
determined that commercial discovery has been achieved,
costs incurred are reclassified into Mining assets and
amortization starts once production begins.
Exploration costs are tested for impairment when there
are indicators that impairment exists. Indicators of
impairment include, but are not limited to:
• Rights to explore in an area have expired or will expire in
the near future without renewal;
• No further exploration and evaluation is planned or
budgeted;
• A decision to discontinue exploration and evaluation in
an area because of the absence of commercial reserves; and
• Sufficient data exists to indicate that the book value will not
be fully recovered from future development and production.
When analyzing the existence of impairment indicators,
the exploration and evaluation areas from the mining cash-
generating units will be evaluated.
4. Goodwill
Goodwill represents the excess of the acquisition cost
over the fair value of Ternium’s participation in acquired
companies’ net assets at the acquisition date. Under IFRS
3, goodwill is considered to have an indefinite life and not
amortized, but is subject to annual impairment testing.
Goodwill is allocated to Cash-generating units (“CGU”)
for the purpose of impairment testing. The allocation is
made to those cash-generating units expected to benefit
from the business combination which generated the
goodwill being tested. The impairment losses on goodwill
cannot be reversed.
71. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
As of December 31, 2016 and 2015, the carrying amount
of goodwill allocated to the Mexico CGUs was USD 662.3
million, of which USD 619.8 million corresponds to steel
operations and USD 42.5 million to mining operations.
5. Research and development
Research expenditures are recognized as expenses as
incurred. Development costs are recorded as cost of
sales in the income statement as incurred because they
do not fulfill the criteria for capitalization. Research and
development expenditures for the years ended December
31, 2016, 2015 and 2014 totaled USD 9.2 million, USD 6.2
million and USD 8.0 million, respectively.
6. Customer relationships acquired in a business combination
In accordance with IFRS 3 and IAS 38, Ternium has
recognized the value of customer relationships separately
from goodwill in connection with the acquisitions of
Grupo Imsa and Ferrasa S.A.S..
Customer relationships are amortized using the straight-
line method over a useful life of approximately 10 years.
7. Trademarks acquired in a business combination
In accordance with IFRS 3 and IAS 38, Ternium has
recognized the value of trademarks separately from
goodwill in connection with the acquisitions of Grupo
Imsa and Ferrasa S.A.S.
To carry out these tests, assets are grouped at the lowest
levels for which there are separately identifiable cash
flows (each, a CGU). When evaluating long-lived assets
for potential impairment, the Company estimates the
recoverable amount based on the value in use of the
corresponding CGU. The value in use of each CGU is
determined on the basis of the present value of net future
cash flows which will be generated by the assets tested.
Determining the present value of future cash flows involves
highly sensitive estimates and assumptions specific to the
nature of each CGU’s activities, including estimates and
assumptions relating to amount and timing of projected
future cash flows, expected changes in market prices,
expected changes in the demand of Ternium products and
services, selected discount rate and selected tax rate.
Ternium uses cash flow projections for the next five
years based on past performance and expectations of
market development; thereafter, it uses a perpetuity rate.
Application of the discounted cash flow (DCF) method
to determine the value in use of a CGU begins with a
forecast of all expected future net cash flows. Variables
considered in forecasts include the gross domestic
product (GDP) growth rates of the country under study
and their correlation with steel demand, level of steel
prices and estimated raw material costs as observed in
industry reports.
Trademarks are amortized using the straight-line method
over a useful life of between 5 to 10 years.
F. Impairment
Assets that have an indefinite useful life (including
goodwill) are not subject to amortization and are tested
annually for impairment or whenever events or changes in
circumstances indicate that the carrying amount may not
be recoverable. Assets that are subject to amortization
and investments in affiliates are reviewed for impairment
whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by
which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s
fair value less cost to sell and the value in use.
Cash flows are discounted at rates that reflect specific
country and currency risks associated with the cash
flow projections. The discount rates used are based on
the weighted average cost of capital (WACC), which is
considered to be a good indicator of cost of capital. As of
December 31, 2016 the discount rate used to test goodwill
allocated to the Steel and Mining Mexico CGUs for
impairment was 10.82% (as of December 31, 2015, 9.59%).
As a result of the above factors, actual cash flows and
values could vary significantly from the forecasted future
cash flows and related values derived using discounting
techniques. Based on the information currently available,
however, Ternium believes that it is not reasonably possible
that the variation would cause the carrying amount to
exceed the recoverable amount of the CGUs.
72. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Except for the impairment in connection with the
investment in Usiminas in 2015 and 2014, during the years
2016, 2015 and 2014, no impairment provisions were
recorded in connection with assets that have an indefinite
useful life (including goodwill).
comprises raw materials, direct labor, depreciation,
other direct costs and related production overhead costs.
It excludes borrowing costs. Goods acquired in transit at
year end are valued at supplier’s invoice cost.
G. Other investments
Other investments consist primarily of investments in
financial debt instruments and equity investments where
the Company holds a minor equity interest and does not
exert significant influence.
The cost of iron ore produced in our mines comprises all
direct costs necessary to extract and convert stockpiled
inventories into raw materials, including production
stripping costs, depreciation of fixed assets related to the
mining activity and amortization of mining assets for
those mines under production.
All purchases and sales of investments are recognized on
the settlement date, which is not significantly different
from the trade date, which is the date that Ternium
commits to purchase or sell the investment.
The Company assesses the recoverability of its inventories
considering their selling prices, if the inventories are
damaged, or if they have become wholly or partially
obsolete (see Note 4 (AA) (4)).
Income from financial instruments at fair value through
profit or loss is recognized in Other financial income
(expenses), net in the consolidated income statement.
The fair value of quoted investments is based on current
bid prices. If the market for a financial investment is
not active or the securities are not listed, the Company
estimates the fair value by using standard valuation
techniques. Dividends from investments in equity
instruments are recognized in the income statement when
the Company’s right to receive payments is established.
Certain fixed income financial instruments purchased by
the Company have been categorized as available for sale if
designated in this category or not classified in any of the
other categories. The results of these financial investments
are recognized in Finance Income in the Consolidated
Income Statement using the effective interest method.
Unrealized gains and losses other than impairment
and foreign exchange results are recognized in Other
comprehensive income. On maturity or disposal, net gain
and losses previously deferred in Other comprehensive
income are recognized in Finance Income in the
Consolidated Income Statement.
I. Trade receivables and other receivables
Trade and other receivables are recognized initially
at fair value, generally the original invoice amount.
The Company analyzes its trade receivables on a regular
basis and, when aware of a specific counterparty’s
difficulty or inability to meet its obligations, impairs
any amounts due by means of a charge to an allowance
for doubtful accounts. Additionally, this allowance is
adjusted periodically based on the aging of receivables.
J. Cash and cash equivalents
Cash and cash equivalents and highly liquid short-term
securities are carried at fair market value or at a historical
cost which approximates fair market value.
For purposes of the cash flow statement, cash and cash
equivalents comprise cash, bank current accounts and
short-term highly liquid investments (original maturity of
three months or less at date of acquisition) and overdrafts.
In the consolidated statement of financial position, bank
overdrafts are included in borrowings within current
liabilities.
H. Inventories
K. Non current assets (disposal groups) classified as held
Inventories are stated at the lower of cost (calculated using
the first-in-first-out “FIFO” method) or net realizable
value. The cost of finished goods and goods in process
for sale
Non-current assets (disposal groups) are classified as
assets held for sale, complying with the recognition criteria
73. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
of IFRS 5, and stated at the lower of carrying amount
and fair value less cost to sell if their carrying amount is
recovered principally through a sale transaction rather
than through continuing use.
Deferred tax assets are recognized to the extent it is
probable that future taxable income will be available to
offset temporary differences.
The carrying value of non-current assets classified as
held for sale, at December 31, 2016 and 2015 totals USD
10.2 million and USD 11.7 million, respectively, which
corresponds principally to land and other real estate
items. Sale is expected to be completed within a one-
year period.
L. Borrowings
Borrowings are recognized initially for an amount equal
to the net proceeds received. In subsequent periods,
borrowings are stated at amortized cost following the
effective interest method.
M. Income taxes – current and deferred
The current income tax charge is calculated on the basis
of the tax laws in force in the countries in which Ternium
and its subsidiaries operate. Management evaluates
positions taken in tax returns with respect to situations
in which applicable tax regulation could be subject to
interpretation. A liability is recorded for tax benefits that
were taken in the applicable tax return but have not been
recognized for financial reporting.
Deferred income taxes are calculated using the liability
method on temporary differences arising between the
tax bases of assets and liabilities and their carrying
amounts in the financial statements. Deferred income
tax is not accounted for if it arises from initial
recognition of an asset or liability in a transaction
other than a business combination that at the time of
the transaction affects neither accounting, nor taxable
profit or loss. The principal temporary differences arise
on fixed assets, intangible assets, inventories valuation
and provisions for pensions. Deferred tax assets and
liabilities are measured at the tax rates that are expected
to apply in the period when the asset is realized or the
liability is settled, based on tax rates and tax laws that
have been enacted or substantially enacted at year end.
Under IFRS, deferred income tax assets (liabilities) are
classified as non-current assets (liabilities).
Deferred income tax is provided on temporary differences
arising on investments in subsidiaries and associated
companies, except where the timing of the reversal of the
temporary difference is controlled by the Company and it
is probable that the temporary difference will not reverse
in the foreseeable future.
Deferred tax assets and liabilities are re-estimated if tax
rates change. These amounts are charged or credited to
the consolidated income statement or to the item “Other
comprehensive income for the year” in the consolidated
statement of comprehensive income, depending on the
account to which the original amount was charged or
credited.
N. Employee liabilities
1. Post-employment obligations
The Company has defined benefit and defined contribution
plans. A defined benefit plan is a pension plan that defines
an amount of pension benefit that an employee will receive
on retirement, usually dependent on one or more factors
such as age, years of service and compensation.
The liability recognized in the statement of financial
position in respect of defined benefit pension plans is
the present value of the defined benefit obligation at the
end of the reporting period less the fair value of plan
assets. The defined benefit obligation is calculated
annually (at year end) by independent actuaries using the
projected unit credit method. The present value of the
defined benefit obligation is determined by discounting
the estimated future cash outflows using interest rates of
high-quality corporate bonds that are denominated in
the currency in which the benefits will be paid, and that
have terms to maturity approximating to the terms of
the related pension obligation. In countries where there
is no deep market in such bonds, the market rates on
government bonds are used.
Actuarial gains and losses arising from experience
adjustments and changes in actuarial assumptions are
74. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
charged or credited to equity in other comprehensive
income in the period in which they arise.
vested rights according to the years of service and the
cause of retirement.
Past-service costs are recognized immediately in income.
Argentina
For defined benefit plans, net interest income/expense is
calculated based on the surplus or deficit derived by the
difference between the defined benefit obligations less
plan assets.
For defined contribution plans, the Company pays
contributions to publicly or privately administered pension
insurance plans on a mandatory, contractual or voluntary
basis. The Company has no further payment obligations
once the contributions have been paid. The contributions
are recognized as employee benefit expense when they are
due. Prepaid contributions are recognized as an asset to
the extent that a cash refund or a reduction in the future
payments is available.
Mexico
Ternium Mexico has defined benefit and defined
contribution plans.
Siderar implemented an unfunded defined benefit
employee retirement plan for certain senior officers.
The plan is designed to provide certain benefits to those
officers (additional to those contemplated under applicable
Argentine labor laws) in case of termination of the
employment relationship due to certain specified events,
including retirement. This unfunded plan provides defined
benefits based on years of service and final average salary.
2. Termination benefits
Termination benefits are payable when employment is
terminated before the normal retirement date, or whenever
an employee accepts voluntary redundancy in exchange
for these benefits. The Company recognizes termination
benefits when it is demonstrably committed to either:
(i) terminating the employment of current employees
according to a detailed formal plan without possibility of
withdrawal or (ii) providing termination benefits as a result
of an offer made to encourage voluntary redundancy.
The valuation of the liabilities for the defined benefit
employee retirement plans (pensions and seniority
premiums) covers all employees and is based primarily
on their years of service, their present age and their
remuneration at the date of retirement. The cost of the
employee retirement plans (pension, health-care expenses
and seniority premiums) is recognized as an expense in
the year in which services are rendered in accordance
with actuarial studies made by independent actuaries.
The formal retirement plans are congruent with and
complementary to the retirement benefits established by
the Mexican Institute of Social Security. Additionally,
the Company has established a plan to cover health-
care expenses of retired employees. The Company has
established a commitment for the payment of pensions and
seniority premiums, as well as for health-care expenses.
The defined contribution plans provide a benefit
equivalent to the capital accumulated with the company’s
contributions, which are provided as a match of
employees’ contributions to the plan. The plan provides
3. Other compensation obligations
Employee entitlements to annual leave and long-service
leave are accrued as earned.
During 2007, Ternium launched an incentive retention
program (the “Program”) applicable to certain senior
officers and employees of the Company, who will be
granted a number of Units throughout the duration of
the Program. The value of each of these Units is based on
Ternium’s shareholders’ equity (excluding non-controlling
interest). Also, the beneficiaries of the Program are entitled
to receive cash amounts based on (i) the amount of
dividend payments made by Ternium to its shareholders,
and (ii) the number of Units held by each beneficiary to
the Program. Units vest ratably over a period of four years
and will be redeemed by the Company ten years after grant
date, with the option of an early redemption at seven years
after grant date. As the cash payment of the benefit is tied
to the book value of the shares, and not to their market
value, Ternium valued this long-term incentive program as
a long term benefit plan as classified in IAS 19.
75. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
As of December 31, 2016 and 2015, the outstanding
liability corresponding to the Program amounts to USD
23.4 million and USD 19.5 million, respectively. The total
value of the units granted to date under the program,
considering the number of units and the book value per
share as of December 31, 2016 and 2015, is USD 24.1
million and USD 21.4 million, respectively.
defined by the risk transfer provision of the sales contracts
has occurred, and collectability is reasonably assured.
Revenues are shown net of value-added tax, returns,
rebates and discounts and after eliminating sales within
the group.
Interest income is recognized on an effective yield basis.
Under Mexican law, Ternium’s subsidiaries are required to
pay their employees an annual benefit which is determined
as a percentage of taxable profit for the year.
4. Social security contributions
Social security laws in force in the countries in which the
Company operates provide for pension benefits to be paid
to retired employees from government pension plans and/
or private fund managed plans to which employees may
elect to contribute. As stipulated by the respective laws,
Siderar and Ternium Mexico make monthly contributions
calculated based on each employee’s salary to fund such
plans. The related amounts are expensed as incurred.
No additional liabilities exist once the contributions are paid.
O. Provisions and other liabilities
Ternium has certain contingencies with respect to existing
or potential claims, lawsuits and other proceedings.
Unless otherwise specified, Ternium accrues a provision
for a present legal or constructive obligation as a result
of a past event, when it is probable that future cost could
be incurred and that cost can be reasonably estimated.
Generally, accruals are based on developments to date,
Ternium’s estimates of the outcomes of these matters and
the advice of Ternium’s legal advisors.
R. Borrowing Costs
The Company capitalizes the borrowing costs incurred
to finance construction, acquisition or production of
qualifying assets. In the case of specific borrowings,
Ternium determines the amount of borrowing costs eligible
for capitalization as the actual borrowing costs incurred
on that borrowing during the period less any investment
income on the temporary investment of those borrowings.
For general borrowings, Ternium determines the amount
of borrowing costs eligible for capitalization by applying
a capitalization rate to the expenditures on that asset.
The capitalization rate is the weighted average of the
borrowing costs applicable to the borrowings that are
outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset.
The amount of borrowing costs that Ternium capitalizes
during a period will not exceed the amount of borrowing
costs incurred during that period. At December 31, 2016,
2015 and 2014, the capitalized borrowing costs are not
material.
S. Cost of sales, selling, general and administrative expenses
Cost of sales and expenses are recognized in the income
statement on the accrual basis of accounting.
P. Trade payables
Trade payables are recognized initially at fair value
and subsequently measured at amortized cost using
the effective interest method.
Commissions, freight and other selling expenses, including
shipping and handling costs, are recorded in Selling,
general and administrative expenses in the Consolidated
Income Statement.
Q. Revenue recognition and other income
T. Stripping costs
Revenues are recognized as sales when revenue is earned
and is realized or realizable. This includes satisfying all of
the following criteria: the arrangement with the customer
is evident, usually through the receipt of a purchase
order; the sales price is fixed or determinable; delivery as
Stripping costs are the costs associated with the removal
of overburden and other waste materials and can be
incurred before the mining production commences
(“development stripping”) or during the production stage
(“production stripping”).
76. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Development stripping costs that contribute to the future
economic benefits of mining operations are capitalized
as intangible assets (Mining assets). Production stripping
costs which are part of on-going activities are included
in the cost of the inventory produced (that is extracted)
at each mine during the period in which they are
incurred.
Capitalization of development stripping costs
finishes when the commercial production of the mine
commences. At that time, all development stripping
costs are presented within Mining assets and depreciated
on a unit-of-production basis. It is considered that
commercial production begins when the production
stage of mining operations begins and continues
throughout the life of a mine.
U. Mining development costs
Mining development costs are the costs associated to the
activities related to the establishment of access to the
mineral reserve and other preparations for commercial
production. These activities often continue during
production.
Development expenditures are capitalized and classified
as Work in progress. On completion of development,
all assets included in Work in progress are individually
reclassified to the appropriate category of property, plant
and equipment and depreciated accordingly.
V. Asset retirement obligations
Ternium records asset retirement obligations (“ARO”)
initially at the fair value of the legal or constructive
obligation in the period in which it is incurred and
capitalizes the ARO by increasing the carrying amount
of property, plant and equipment. The fair value of the
obligation is determined as the discounted value of the
expected future cash flows and is included in Provisions.
The liability is accreted to its present value through net
financing cost and the capitalized cost is depreciated
based in the unit of production method.
W. Earnings per share
Earnings per share are calculated by dividing the net
income attributable to shareholders by the daily weighted
average number of ordinary shares issued during the
year, excluding the average number of shares of the
parent Company held by the Group. There are no dilutive
securities for the periods presented.
X. Derivative financial instruments and hedging activities
Ternium designates certain derivatives as hedges of
a particular risk associated with a recognized asset
or liability or a highly probable forecast transaction.
These transactions are classified as cash flow hedges
(mainly interest rate swaps, collars, currency forward
contracts on highly probable forecast transactions and
commodities contracts). The effective portion of the
fair value of derivatives that are designated and qualify
as cash flow hedges is recognized in OCI. Amounts
accumulated in OCI are recognized in the income
statement in the same period as any offsetting losses and
gains on the hedged item. The gain or loss relating to
the ineffective portion is recognized immediately in the
income statement. The fair value of Ternium derivative
financial instruments (asset or liability) continues to be
reflected in the statement of financial position.
For transactions designated and qualifying for hedge
accounting, Ternium documents the relationship between
hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking
various hedge transactions. At December 31, 2016 and
2015, the effective portion of designated cash flow
hedges (net of taxes) amounted to USD 0.1 million and
USD (0.4) million, respectively, and were included under
“changes in the fair value of derivatives classified as cash
flow hedges” line item in the statement of comprehensive
income (see Note 26 (A)).
More information about accounting for derivative
financial instruments and hedging activities is included in
Note 28 “Financial risk management”.
Y. Treasury shares
Acquisitions of treasury shares are recorded at
acquisition cost, deducted from equity until disposal.
The gains and losses on disposal of treasury shares
are recognized under “Reserves” in the consolidated
statement of financial position.
77. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Z. Cash flow
The consolidated statements of cash flows have been
prepared using the indirect method and contain the use of
the following expressions and their respective meanings:
are based on Ternium’s weighted average cost of capital
adjusted for specific country and currency risks associated
with the cash flow projections. The discount rate used at
December 31, 2016 was 10.82% and no impairment charge
resulted from the impairment test performed.
a) Operating activities: activities that constitute ordinary
Group revenues, as well as other activities that cannot be
qualified as investing or financing.
b) Investing activities: acquisition, sale or disposal by other
means of assets in the long-term and other investments not
included in cash and cash equivalents.
c) Financing activities: activities that generate changes in
the size and composition of net equity and liabilities that
do not form part of operating activities.
AA. Critical Accounting Estimates
The preparation of financial statements requires
management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues
and expenses, and the related disclosure of contingent
assets and liabilities. Estimates and judgments are
continually evaluated and are based on historical
experience and other factors, including expectations of
future events that are believed to be reasonable under
the circumstances. Management makes estimates and
assumptions concerning the future. Actual results may
differ significantly from these estimates under different
assumptions or conditions.
The principal estimates and assumptions that have a
significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next
financial year are addressed below.
1. Goodwill impairment test
Assessment of the recoverability of the carrying value
of goodwill requires significant judgment. Management
evaluates goodwill allocated to the operating units for
impairment on an annual basis or whenever there is an
impairment indicator.
Goodwill is tested at the level of the CGUs. Impairment
testing of the CGUs is carried out and the value in use
determined in accordance with the accounting policy
stated in Note 4 (F). The discount rates used for these tests
2. Income taxes
Management calculates current and deferred income taxes
according to the tax laws applicable to each subsidiary in
the countries in which such subsidiaries operate. However,
certain adjustments necessary to determine the income tax
provision are finalized only after the balance sheet is issued.
In cases in which the final tax outcome is different from the
amounts that were initially recorded, such differences will
impact the income tax and deferred tax provisions in the
period in which such determination is made.
Also, when assessing the recoverability of tax assets,
management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax
planning strategies.
3. Loss contingencies
Ternium is subject to various claims, lawsuits and
other legal proceedings that arise in the ordinary
course of business, including customer claims in which
a third party is seeking reimbursement or indemnity.
The Company’s liability with respect to such claims,
lawsuits and other legal proceedings cannot be estimated
with certainty. Periodically, management reviews the
status of each significant matter and assesses potential
financial exposure. If the potential loss from the claim or
proceeding is considered probable and the amount can be
reasonably estimated, a liability is recorded. Management
estimates the amount of such liability based on the
information available and the assumptions and methods
it has concluded are appropriate, in accordance with
the provisions of IFRS. Accruals for such contingencies
reflect a reasonable estimate of the losses to be incurred
based on information available, including the relevant
litigation or settlement strategy, as of the date of
preparation of these financial statements. As additional
information becomes available, management will reassess
its evaluation of the pending claims, lawsuits and other
proceedings and revise its estimates.
78. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The loss contingencies provision amounts to USD 7.0
million and USD 8.1 million as of December 31, 2016 and
2015, respectively.
4. Allowance for obsolescence of supplies and spare parts
and slow-moving inventory
different than the useful lives so determined. Furthermore,
management believes that this accounting policy involves a
critical accounting estimate because it is subject to change
from period to period as a result of variations in economic
conditions and business performance.
Management assesses the recoverability of its inventories
considering their selling prices or whether they are
damaged or have become wholly or partly obsolete.
When assessing whether an impairment indicator may
exist, the Company evaluates both internal and external
sources of information, such as the following:
Net realizable value is the estimated selling price in the
ordinary course of business, less the costs of completion
and selling expenses.
The Company establishes an allowance for obsolete or
slow-moving inventory in connection with finished goods
and goods in process. The allowance for slow-moving
inventory is recognized for finished goods and goods
in process based on management’s analysis of their
aging. In connection with supplies and spare parts, the
calculation is based on management’s analysis of their
aging, the capacity of such materials to be used based on
their levels of preservation and maintenance, and their
potential obsolescence due to technological change.
As of December 31, 2016 and 2015, the Company
recorded no allowance for net realizable value and
USD 33.4 million and USD 32.4 million, respectively, as
allowance for obsolescence.
5. Useful Lives and Impairment of Property, Plant and
Equipment and Other Long-lived Assets
In determining useful lives, management considered,
among others, the following factors: age, operating
condition and level of usage and maintenance.
Management conducted visual inspections for the purpose
of (i) determining whether the current conditions of such
assets are consistent with normal conditions of assets of
similar age; (ii) confirming that the operating conditions
and levels of usage of such assets are adequate and
consistent with their design; (iii) establishing obsolescence
levels and (iv) estimating life expectancy, all of which were
used in determining useful lives. Management believes,
however, that it is possible that the periods of economic
utilization of property, plant and equipment may be
• whether significant changes with an adverse effect on the
entity have taken place during the period, or will take place
in the near future, in the technological, market, economic
or legal environment in which the entity operates or in the
market to which an asset is dedicated;
• whether market interest rates or other market rates of
return on investments have increased during the period,
and those increases are likely to affect the discount rate
used in calculating an asset’s value in use and decrease the
asset’s recoverable amount materially;
• whether the carrying amount of the net assets of the
entity is more than its market capitalization;
• whether evidence is available of obsolescence or physical
damage of an asset.
• whether significant changes with an adverse effect on the
entity have taken place during the period, or are expected
to take place in the near future, in the extent to which, or
manner in which, an asset is used or is expected to be used.
These changes include the asset becoming idle, plans to
discontinue or restructure the operation to which an asset
belongs, plans to dispose of an asset before the previously
expected date, and reassessing the useful life of an asset as
finite rather than indefinite; and
• whether evidence is available from internal reporting that
indicates that the economic performance of an asset is, or
will be, worse than expected.
Considering that no impairment indicators were
identified as of December 31, 2016, the Company only
tested the value of the goodwill for impairment, resulting
in no impairment charges to be recognized.
6. Allowances for doubtful accounts
Management makes estimates of the uncollectibility
of our accounts receivable. Management analyses the
79. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
trade accounts receivable on a regular basis and, when
aware of a third party’s inability to meet its financial
commitments to the Company, managements impairs
the amount due by means of a charge to the allowance
for doubtful accounts. Management specifically analyses
accounts receivable and historical bad debts, customer
creditworthiness, current economic trends and changes in
customer payment terms when evaluating the adequacy
of the allowance for doubtful accounts.
Allowances for doubtful accounts are adjusted periodically
in accordance with the aging of overdue accounts.
For this purpose, trade accounts receivable overdue
by more than 90 days, and which are not covered by
a credit collateral, guarantee or similar surety, are
fully provisioned. As of December 31, 2016 and 2015,
allowance for doubtful accounts totals USD 6.0 million
and USD 7.6 million, respectively.
7. Mining reserve estimates
Reserves are estimates of the amount of product that can
be economically and legally extracted from the Company’s
mining concessions. In order to estimate reserves, a range
of geological, technical and economic factors is required
to be considered. Estimating the quantity and/or grade
of reserves requires complex and difficult geological
judgments to interpret the data. Because the economic
assumptions used to estimate reserves change from period
to period, and because additional geological data is
generated during the course of operations, estimates of
reserves may change from period to period.
Changes in reported reserves may affect the Company’s
financial results and financial position, including the
following:
• Asset carrying amounts may be affected due to changes
in estimated future cash flows.
• Depreciation and amortization charges may change
where such charges are determined by the units of
production basis, or where the useful economic lives of
assets change.
• Stripping costs recognized in Mining assets or charged
to results may change due to changes in stripping ratios or
the units of production basis of depreciation.
• Asset retirement obligations may change where changes
in estimated reserves affect expectations about the timing
or cost of these activities.
8. Post-employment obligation estimates
The Company estimates at each year-end the provision
necessary to meet its post-employment obligations in
accordance with the advice from independent actuaries.
The calculation of post-employment and other
employee obligations requires the application of various
assumptions. The main assumptions for post-employment
and other employee obligations include discount rates,
compensation growth rates, pension growth rates and life
expectancy. Changes in the assumptions could give rise
to adjustments in the results and liabilities recorded and
might have an impact on the post-employment and other
employee obligations recognized in the future.
5. Segment information
Reportable operating segments
The Company is organized in two reportable segments:
Steel and Mining.
The Steel segment includes the sales of steel products,
which comprises slabs, hot rolled coils and sheets, cold
rolled coils and sheets, tin plate, welded pipes, hot dipped
galvanized and electro-galvanized sheets, pre-painted
sheets, billets (steel in its basic, semi-finished state), wire
rod and bars and other tailor-made products to serve its
customers’ requirements.
The Steel segment comprises three operating segments:
Mexico, Southern Region and Other markets. These three
segments have been aggregated considering the economic
characteristics and financial effects of each business
activity in which the entity engages; the related economic
environment in which it operates; the type or class of
customer for the products; the nature of the products; and
the production processes. The Mexico operating segment
comprises the Company’s businesses in Mexico. The
Southern region operating segment manages the businesses
in Argentina, Paraguay, Brazil, Chile, Bolivia and Uruguay.
The Other markets operating segment includes businesses
mainly in United States, Colombia, Guatemala, Costa
Rica, Honduras, El Salvador and Nicaragua.
80. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The Mining segment includes the sales of mining
products, mainly iron ore and pellets, and comprises
the mining activities of Las Encinas, an iron ore mining
company in which Ternium holds a 100% equity interest
and the 50% of the operations and results performed
by Peña Colorada, another iron ore mining company in
which Ternium maintains that same percentage over its
equity interest. Both mining operations are located in
Mexico. For Peña Colorada, the Company recognizes its
assets, liabilities, revenue and expenses in relation to its
interest in the joint operation.
operating and financial performance information is
reviewed, including financial information that differs from
IFRS principally as follows:
• The use of direct cost methodology to calculate the
inventories, while under IFRS is at full cost, including
absorption of production overheads and depreciation.
• The use of costs based on previously internally defined
cost estimates, while, under IFRS, costs are calculated at
historical cost (with the FIFO method).
• Other timing and non-significant differences.
Ternium’s Chief Operating Decision Maker (CEO) holds
monthly meetings with senior management, in which
Most information on segment assets is not disclosed as it is
not reviewed by the CODM.
YEAR ENDED DECEMBER 31, 2016
Steel
Mining
Inter-segment
eliminations
Total
IFRS
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating income, net
Operating income - IFRS
MANAGEMENT VIEW
Net sales
Operating income
Reconciliation items:
Differences in Cost of sales
Operating income - IFRS
Financial income (expense), net
Equity in (losses) earnings of non-consolidated companies
Income before income tax expense - IFRS
7,221,751
204,894
(202,670)
7,223,975
(5,391,038)
(192,038)
198,686
(5,384,390)
1,830,714
12,856
(3,984)
1,839,585
(677,007)
(10,935)
(9,543)
1,144,164
(382)
1,539
–
–
(687,942)
(9,925)
(3,984)
1,141,718
7,221,751
208,230
(206,006)
7,223,975
936,164
3,871
269
940,303
201,415
1,141,718
(37,885)
14,624
1,118,457
Depreciation and amortization - IFRS
(361,685)
(45,205)
–
(406,890)
81. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
YEAR ENDED DECEMBER 31, 2015
Steel
Mining
Inter-segment
eliminations
Total
IFRS
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating income, net
Operating income - IFRS
MANAGEMENT VIEW
Net sales
Operating income
Reconciliation items:
Differences in Cost of sales
Operating income - IFRS
Financial income (expense), net
Equity in (losses) earnings of non-consolidated companies
Income before income tax expense - IFRS
7,875,161
203,105
(200,817)
7,877,449
(6,456,584)
(214,651)
193,963
(6,477,272)
1,418,577
(11,546)
(6,854)
1,400,177
(757,078)
(13,214)
9,151
303
–
–
(770,292)
9,454
670,650
(24,457)
(6,854)
639,339
7,875,161
216,095
(213,807)
7,877,449
1,012,282
(3,490)
(640)
1,008,152
(368,813)
639,339
(99,430)
(272,810)
267,099
Depreciation and amortization - IFRS
(384,380)
(49,408)
–
(433,788)
82. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
YEAR ENDED DECEMBER 31, 2014
Steel
Mining
Inter-segment
eliminations
Total
IFRS
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating income, net
Operating income - IFRS
MANAGEMENT VIEW
Net sales
Operating income
Reconciliation items:
Differences in Cost of sales
Operating income - IFRS
Financial income (expense), net
Equity in (losses) earnings of non-consolidated companies
Income before income tax expense - IFRS
8,700,521
313,157
(287,621)
8,726,057
(6,960,009)
(255,216)
290,056
(6,925,169)
1,740,512
57,941
2,435
1,800,888
(799,844)
(16,634)
70,725
1,011,393
1,026
42,333
–
–
(816,478)
71,751
2,435
1,056,161
8,700,521
333,718
(308,182)
8,726,057
830,312
65,671
(1,504)
894,479
161,682
1,056,161
(69,450)
(751,787)
234,924
Depreciation and amortization - IFRS
(369,197)
(45,600)
–
(414,797)
Geographical information
There are no revenues from external customers
attributable to the Company’s country of incorporation
(Luxembourg).
For purposes of reporting geographical information,
net sales are allocated based on the customer’s location.
Allocation of depreciation and amortization is based on
the geographical location of the underlying assets.
YEAR ENDED DECEMBER 31, 2016
Net sales
Non-current assets (1)
YEAR ENDED DECEMBER 31, 2015
Net sales
Non-current assets (1)
YEAR ENDED DECEMBER 31, 2014
Net sales
Non-current assets (1)
(1) Includes Property, plant and equipment and Intangible assets.
Mexico
Southern
region
Other
markets
Total
4,491,761
1,867,622
864,592
7,223,975
4,108,539
634,048
235,947
4,978,534
4,395,273
2,572,723
909,453
7,877,449
4,166,148
682,705
246,919
5,095,772
4,911,989
2,648,512
1,165,556
8,726,057
4,248,087
916,447
265,379
5,429,913
83. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Revenues by product
YEAR ENDED DECEMBER 31,
2016
2015
2014
Semi-finished (1)
Hot rolled (2)
Cold rolled
Coated (3)
Roll-formed and tubular (4)
STEEL PRODUCTS
Other products (5)
Total Sales
19,878
2,763,403
1,110,671
2,900,009
413,991
7,207,952
88,264
3,049,433
1,176,019
3,004,700
509,034
7,827,450
209,061
3,581,566
1,297,969
3,061,580
514,586
8,664,762
16,023
49,999
61,295
7,223,975
7,877,449
8,726,057
(1) Semi-finished includes slabs, billets and round bars.
(2) Hot rolled includes hot rolled flat products, merchant bars, reinforcing bars,
(4) Roll-formed and tubular includes tubes, beams, insulated panels, roofing and
cladding, roof tiles, steel decks and pre-engineered metal building systems.
stirrups and rods.
(3) Coated includes tin plate and galvanized products.
(5) Other products include mainly pig iron.
6. Cost of sales
YEAR ENDED DECEMBER 31,
2016
2015
2014
INVENTORIES AT THE BEGINNING OF THE YEAR
Translation differences
PLUS: CHARGES FOR THE YEAR
1,579,120
(82,515)
2,134,034
(204,512)
1,941.130
(161.983)
Raw materials and consumables used and other movements
4,060,783
4,548,219
5,718,736
Services and fees
Labor cost
Depreciation of property, plant and equipment
Amortization of intangible assets
Maintenance expenses
Office expenses
Insurance
(Recovery) Charge of obsolescence allowance
Recovery from sales of scrap and by-products
Others
LESS: INVENTORIES AT THE END OF THE YEAR
Cost of Sales
77,698
560,513
314,649
40,225
457,734
7,112
8,432
4,600
(21,010)
24,918
(1,647,869)
5,384,390
86,874
599,989
335,302
48,442
507,895
6,683
9,435
(4,816)
(31,096)
19,943
(1,579,120)
6,477,272
95,940
601,258
330,866
34,988
484,929
7,238
12,310
15,924
(39,846)
17,713
(2,134,034)
6,925,169
84. Ternium
7. Selling, general and administrative expenses
YEAR ENDED DECEMBER 31,
Services and fees (1)
Labor cost
Depreciation of property, plant and equipment
Amortization of intangible assets
Maintenance and expenses
Taxes
Office expenses
Freight and transportation
(Decrease) Increase of allowance for doubtful accounts
Others
Selling, general and administrative expenses
2016
65,965
193,118
13,589
38,427
3,092
90,166
36,223
234,801
288
12,273
687,942
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2015
69,434
214,352
13,761
36,283
4,957
130,061
40,487
246,762
(824)
15,019
770,292
2014
75,057
232,837
10,957
37,986
5,785
133,383
39,831
263,682
1,287
15,673
816,478
(1) For the year ended December 31, 2016, it includes fees accrued for professional
services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to
USD 3,385, including USD 2,869 for audit services, USD 99 for audit-related
services, USD 251 for tax services and USD 166 for all other services.
For the year ended December 31, 2015, it includes fees accrued for professional
services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to
USD 3,888, including USD 3,535 for audit services, USD 114 for audit-related
services, USD 217 for tax services and USD 22 for all other services.
For the year ended December 31, 2014, it includes fees accrued for professional
services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to
USD 3,927, including USD 3,450 for audit services, USD 74 for audit-related
services, USD 204 for tax services and USD 199 for all other services.
8. Labor costs (included cost of sales and selling,
general and administrative expenses)
YEAR ENDED DECEMBER 31,
Wages salaries and social security costs
Termination benefits
Post-employment benefits (Note 21 (I))
Labor costs
2016
698,825
27,048
27,758
753,631
2015
754,063
30,888
29,390
814,341
2014
778,932
25,348
29,815
834,095
As of December 31, 2016, 2015 and 2014, the quantity
of employees was 16,725, 16,739 and 16,919, respectively.
85. Annual Report 2016
9. Other operating income (expenses), net
YEAR ENDED DECEMBER 31,
Results of sundry assets
Collection of insurance (1)
Other operating income
Other operating income
Provision for legal claims and other matters (Note 19 and 24 (II))
Other operating income
Other operating expense
Other operating (expenses) income, net
(1) Corresponds to insurance collection in Argentina.
10. Other financial income (expenses), net
YEAR ENDED DECEMBER 31,
Interest expense
Finance expense
Interest income
Finance income
Net foreign exchange (loss) gain
Change in fair value of financial assets
Derivative contract results
Others
Other financial income (expenses), net
2016
1,270
–
–
1,270
(1,678)
(9,517)
(11,195)
(9,925)
2016
(89,971)
(89,971)
14,129
14,129
20,334
7,663
11,614
(1,654)
37,957
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2015
2,009
–
10,625
12,634
(3,180)
–
(3,180)
9,454
2014
(89,489)
(89,489)
7,981
7,981
(5,181)
(8,143)
(2,058)
(2,540)
(17,922)
2014
4,111
57,500
10,232
71,843
(92)
–
(92)
71,751
2013
(117,866)
(117,866)
7,685
7,685
26,664
(1,970)
19,748
(3,711)
40,731
86. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
11. Income tax expense
Income tax expense for each of the years presented
is as follows:
YEAR ENDED DECEMBER 31,
2016
2015
2014
Current tax
Deferred tax (Note 20)
Deferred tax
Effect of changes in tax law on deferred income tax (1)
Withholding tax on dividend distributions (2)
Recovery of income tax (3)
Income tax expense
(394,045)
(234,040)
(336,176)
(16,821)
2,028
(2,690)
–
(411,528)
19,463
3,080
4,177
–
(207,320)
2,363
(12,702)
(10,474)
17,884
(339,105)
(1) For 2016, it includes mainly the effects of the Colombian tax rate reform and
(2) It includes the 10% withholding tax on dividend distributions made by Argentine
of the Mexican mining tax. For 2015, it includes mainly the effects of the Mexican
mining tax. For 2014, it includes mainly the effects of the Colombian tax rate reform
which introduced an increase from 34% to 39% in 2015, 40% in 2016, 42% in
2017 and 43% in 2018 and of the Mexican mining tax.
companies to foreign beneficiaries since 2013.
(3) The amounts recorded in 2014 corresponded to the capitalization of tax losses
carried forward generated and not recognized in previous years.
Income tax expense for the years ended December 31,
2016, 2015 and 2014 differed from the amount computed
by applying the statutory income tax rate in force in each
country in which the company operates to pre-tax income
as a result of the following:
YEAR ENDED DECEMBER 31,
Income before income tax
Income tax expense at statutory tax rate
Non taxable income
Non deductible expenses
Effect of currency translation on tax base (1)
Withholding tax on dividend distributions
Recovery of income tax
Effect of changes in tax law
Income tax expense
2016
1,118,457
(324,592)
606
(5,838)
(81,042)
(2,690)
–
2,028
(411,528)
2015
267,099
(135,974)
4,980
(19,408)
(64,175)
4,177
–
3,080
(207,320)
2014
234,924
(254,548)
2,073
(25,413)
(55,925)
(10,474)
17,884
(12,702)
(339,105)
(1) Ternium applies the liability method to recognize deferred income tax on temporary
differences between the tax bases of assets and their carrying amounts in the
financial statements. By application of this method, Ternium recognizes gains and
losses on deferred income tax due to the effect of the change in the value on the
tax basis in subsidiaries, which have a functional currency different to their local
currency, mainly Mexico.
87. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Tax rates used to perform the reconciliation between
tax expense (income) and accounting profit are those in
effect at each relevant date or period in each applicable
jurisdiction.
12. Property, plant and equipment, net
YEAR ENDED DECEMBER 31, 2016
Land
Buildings and
improvements
Production
equipment
Vehicles,
furniture
and fixtures
Work in
progress
Spare
parts
Total
Values at the beginning of the year
COST
528,435
1,505,296
4,066,687
95,202
456,132
87,858
6,739,610
Accumulated depreciation
–
(500,464)
(1,950,353)
Net book value at January 1, 2016
528,435
1,004,832
2,116,334
(70,437)
24,765
–
(10,790)
(2,532,044)
456,132
77,068
4,207,566
Opening net book value
Translation differences
Additions
Capitalized borrowing costs
Disposals / Consumptions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
COST
528,435
1,004,832
2,116,334
24,765
456,132
77,068
4,207,566
(1,429)
(50,903)
(38,985)
8,161
–
(2,048)
1,539
–
(265)
(1,516)
5,908
–
(1,234)
(29,336)
371,575
1,759
(660)
(4,809)
(126,978)
19,075
406,869
–
1,759
(16,232)
(21,656)
157,454
266,704
30,617
(461,656)
945
(3,345)
611
–
(1,217)
2,591
–
(65,981)
(254,000)
(14,862)
–
6,605
(328,238)
528,991
1,051,515
2,091,327
43,678
337,814
82,652
4,135,977
528,991
1,590,063
4,238,201
165,590
337,814
82,652
6,943,311
Accumulated depreciation
–
(538,548)
(2,146,874)
(121,912)
–
–
(2,807,334)
Net book value at December 31, 2016
528,991
1,051,515
2,091,327
43,678
337,814
82,652
4,135,977
88. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
YEAR ENDED DECEMBER 31, 2015
Land
Buildings and
improvements
Production
equipment
Vehicles,
furniture
and fixtures
Work in
progress
Spare
parts
Total
Values at the beginning of the year
COST
527,467
1,717,832
4,306,227
113,623
352,625
85,811
7,103,585
Accumulated depreciation
–
(575,347)
(1,952,468)
(86,251)
–
(8,492)
(2,622,558)
Net book value at January 1, 2015
527,467
1,142,485
2,353,759
27,372
352,625
77,319
4,481,027
Opening net book value
Translation differences
Additions
Capitalized borrowing costs
Disposals / Consumptions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
COST
527,467
1,142,485
2,353,759
27,372
352,625
77,319
4,481,027
(3,484)
(142,409)
(108,255)
4,452
–
–
–
–
172
–
(2,316)
84,338
1,424
–
(441)
128,430
(77,438)
(258,583)
(3,461)
3,493
(71,027)
(12,963)
(341,599)
398,143
31,906
439,590
–
331
–
331
(1,176)
7,665
(9,128)
(2,131)
(16,656)
(22,720)
(221,809)
1,376
–
–
(3,914)
(349,063)
528,435
1,004,832
2,116,334
24,765
456,132
77,068
4,207,566
528,435
1,505,296
4,066,687
95,202
456,132
87,858
6,739,610
Accumulated depreciation
–
(500,464)
(1,950,353)
(70,437)
–
(10,790)
(2,532,044)
Net book value at December 31, 2015
528,435
1,004,832
2,116,334
24,765
456,132
77,068
4,207,566
89. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
13. Intangible assets, net
YEAR ENDED DECEMBER 31, 2016
Information
system
projects
Mining
assets
Exploration
and
evaluation
costs
Customer
relationships
and other
contractual
rights
Trademarks
Goodwill
Total
Values at the beginning of the year
COST
201,815
188,813
5,294
298,475
Accumulated depreciation
Net book value at January 1, 2016
(135,072)
66,743
(92,557)
96,256
–
(243,312)
73,665
(71,222)
662,307
1,430,369
–
(542,163)
5,294
55,163
2,443
662,307
888,206
Opening net book value
Translation differences
Additions
Disposals / Consumptions
Depreciation charge
Closing net book value
Values at the end of the year
COST
66,743
(1,216)
19,775
(69)
(33,774)
51,459
96,256
5,294
55,163
2,443
662,307
888,206
–
14,118
–
(13,867)
96,507
–
398
(3)
–
5,689
–
–
–
(29,611)
25,552
–
–
–
(1,400)
1,043
–
–
–
–
(1,216)
34,291
(72)
(78,652)
662,307
842,557
215,662
202,931
5,689
298,475
73,665
662,307
1,458,729
Accumulated depreciation
(164,203)
(106,424)
–
(272,923)
(72,622)
–
(616,172)
Net book value at December 31, 2016
51,459
96,507
5,689
25,552
1,043
662,307
842,557
YEAR ENDED DECEMBER 31, 2015
Information
system
projects
Mining
assets
Exploration
and
evaluation
costs
Customer
relationships
and other
contractual
rights
Trademarks
Goodwill
Total
Values at the beginning of the year
COST
Accumulated depreciation
Net book value at January 1, 2015
Opening net book value
Translation differences
Additions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
COST
Accumulated depreciation
Net book value at December 31, 2015
90. Ternium
203.557
(109.210)
94.347
94.347
(3.008)
14.043
–
(38.639)
66.743
142.658
(77.673)
64.985
38.439
298.475
73.665
662.307
1.419.101
–
(213.510)
(69.822)
–
(470.215)
38.439
84.965
3.843
662.307
948.886
64.985
38.439
84.965
3.843
662.307
948.886
–
11.182
34.973
(14.884)
96.256
–
1.828
(34.973)
–
–
–
–
–
–
–
(29.802)
5.294
55.163
(1.400)
2.443
–
–
–
–
(3.008)
27.053
–
(84.725)
662.307
888.206
201.815
(135.072)
66.743
188.813
(92.557)
96.256
5.294
298.475
73.665
662.307
1.430.369
–
(243.312)
(71.222)
–
(542.163)
5.294
55.163
2.443
662.307
888.206
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
14. Investments in non-consolidated companies
AS OF DECEMBER 31,
At the beginning of the year
Equity in earnings (losses) of non-consolidated companies
Other comprehensive income
Acquisition of additional shares (Note 3)
Dividends from non-consolidated companies
Contributions to non-consolidated companies
Impairment charge (Note 3)
At the end of the year
2016
250.412
14.624
39.077
114.449
(183)
–
–
418.379
2015
748.178
(80.874)
(234.556)
–
–
9.600
(191.936)
250.412
The principal investments in non-consolidated companies,
all of which are unlisted, except for Usiminas, are:
COMPANY
COUNTRY OF
INCORPORATION
MAIN ACTIVITY
VOTING RIGHTS
AT DECEMBER 31,
VALUE
AT DECEMBER 31,
Usinas Siderurgicas de Minas Gerais
S.A. - USIMINAS
Brazil
Manufacturing and selling
of steel products
34.39%
32.88%
411,134
239,960
Techgen S.A. de C.V.
Mexico
Provision of electric power
48.00%
48.00%
3,444
6,026
2016
2015
2016
2015
Other non-consolidated companies (1)
(1) It includes the investment held in Finma S.A.I.F., Arhsa S.A., Techinst S.A.,
Recrotek S.R.L. de C.V. and Gas Industrial de Monterrey S.A. de C.V.
3,801
4,426
418,379
250,412
91. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
A. Usinas Siderurgicas de Minas Gerais S.A. – USIMINAS
Usiminas is a Brazilian producer of high quality flat steel
products used in the energy, automotive and other industries.
As of December 31, 2016 and 2015, the value of the
investment in Usiminas is comprised as follows:
VALUE OF INVESTMENT
USIMINAS
AS OF DECEMBER 31,
At the beginning of the year
Share of results (1)
Other comprehensive income
Acquisition of additional shares (Note 3)
Impairment charge (Note 3)
At the end of the year
2016
239,960
16,832
39,893
114,449
–
411,134
(1) It includes the depreciation of the values associated to the purchase price allocation.
The investment in Usiminas is based in the following
calculation:
USIMINAS’ SHAREHOLDERS’ EQUITY
Percentage of interest of the Company over shareholders’ equity
INTEREST OF THE COMPANY OVER SHAREHOLDERS’ EQUITY
Purchase price allocation
Goodwill
Impairment
Total Investment in Usiminas
On February 16, 2017, Usiminas approved its annual
accounts as of and for the year ended December 31, 2016,
which state that revenues, net losses from continuing
operations and shareholders’ equity amounted to USD 2,443
million, USD 166 million and USD 4,153 million, respectively.
2015
742,335
(77,066)
(233,373)
–
(191,936)
239,960
4,153,214
20.47%
850,038
78,806
318,933
(836,643)
411,134
92. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Summarized balance sheet (in million USD)
AS OF DECEMBER 31,
ASSETS
Non-current
Current
Other current investments
Cash and cash equivalents
Total Assets
LIABILITIES
Non-current
Non-current borrowings
Current
Current borrowings
Total Liabilities
Non-controlling interest
Shareholders’ equity
Summarized income statement (in million USD)
AS OF DECEMBER 31,
Net sales
Cost of sales
Gross Profit
Selling, general and administrative expenses
Other operating income (loss), net
Operating income
Financial expenses, net
Equity in earnings of associated companies
Profit (Loss) before income tax
Income tax benefit
Net profit (loss) before non-controlling interest
Non-controlling interest in other subsidiaries
Net profit (loss) for the year
USIMINAS
2016
6,086
1,277
472
221
8,056
753
2,104
517
21
3,395
508
4,153
USIMINAS
2016
2.443
(2.292)
151
(180)
(61)
(90)
(17)
40
(67)
(99)
(166)
(28)
(194)
2015
5,343
1,247
314
205
7,109
592
1,526
661
490
3,269
406
3,434
2015
3.116
(3.045)
71
(212)
(906)
(1.047)
(377)
28
(1.396)
342
(1.054)
128
(926)
93. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
B. Techgen S.A. de C.V.
Techgen is a Mexican natural gas-fired combined cycle
electric power plant in the Pesquería area of the State of
Nuevo León, Mexico. The company started producing
energy on December 1st, 2016 and is fully operational.
As of February 2017, Ternium, Tenaris, and Tecpetrol
International S.A. (a wholly-owned subsidiary of San
Faustin S.A., the controlling shareholder of both Ternium
and Tenaris) completed their investments in Techgen.
Techgen is currently owned 48% by Ternium, 30% by
Tecpetrol and 22% by Tenaris. Ternium and Tenaris also
agreed to enter into power supply and transportation
agreements with Techgen, pursuant to which Ternium
and Tenaris will contract 78% and 22%, respectively, of
Techgen’s power capacity of 900 megawatts. During 2016,
Techgen’s shareholders made additional investments in
Techgen, in the form of subordinated loans, which in the
case of Ternium amounted to USD 92.5 million, which are
due in June 2020.
For commitments from Ternium in connection with
Techgen, see Note 24.
15. Receivables, net – Non-current and Current
AS OF DECEMBER 31,
Receivables with related parties (Notes 25 and 14 (B))
Employee advances and loans
Advances to suppliers for the purchase of property, plant and
equipment
Advances to suppliers for the purchase of property, plant and
equipment with related parties (Note 25)
Tax credits
Others
Receivables, net – Non-current
AS OF DECEMBER 31,
Value added tax
Tax credits
Employee advances and loans
Advances to suppliers
Advances to suppliers with related parties (Note 25)
Expenses paid in advance
Government tax refunds on exports
Receivables with related parties (Note 25)
Others
Receivables, net – Current
2016
103,525
3,888
7,077
283
17,371
436
132,580
2016
13,027
32,430
6,645
3,223
–
9,148
2,599
709
12,039
79,820
2015
10,419
3,637
9,767
247
10,901
1,176
36,147
2015
20,725
30,434
8,525
4,664
3,376
9,321
1,855
1,241
9,343
89,484
94. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2016
1,270
1,270
633,622
6,142
(6,019)
633,745
Total
343,338
297,696
641,034
(6,019)
635,015
Total
289,606
229,443
519,049
(7,585)
511,464
2015
–
–
512,627
6,422
(7,585)
511,464
Fully
performing
Past due
309,730
262,165
571,895
–
571,895
33,608
35,531
69,139
(6,019)
63,120
Fully
performing
Past due
261,902
174,286
436,188
–
436,188
27,704
55,157
82,861
(7,585)
75,276
16. Trade receivables, net - Non-current and Current
AS OF DECEMBER 31,
Trade receivables
Trade receivables, net – Non-current
Current accounts
Trade receivables with related parties (Note 25)
Allowance for doubtful accounts (Note 19)
Trade receivables, net – Current
AS OF DECEMBER 31, 2016
TRADE RECEIVABLES, NET
Guaranteed
Not guaranteed
Trade receivables
Allowance for doubtful accounts (Note 19)
Trade receivables, net
AS OF DECEMBER 31, 2015
TRADE RECEIVABLES, NET
Guaranteed
Not guaranteed
Trade receivables
Allowance for doubtful accounts (Note 19)
Trade receivables, net
95. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
17. Inventories, net
AS OF DECEMBER 31,
2016
2015
Raw materials, materials and spare parts
Goods in process
Finished goods
Goods in transit
Obsolescence allowance (Note 19)
Inventories, net
18. Cash, cash equivalents and other investments –
Non-current and Current
AS OF DECEMBER 31,
Investments in debt instruments
Other investments, net – Non-current
401,481
811,378
281,770
186,673
(33,433)
1,647,869
2016
5,998
5,998
364,367
761,086
258,528
227,584
(32,445)
1,579,120
2015
–
–
AS OF DECEMBER 31,
2016
2015
(I) OTHER INVESTMENTS
Other deposits with maturity of more than three months
Other investments – Current
(II) CASH AND CASH EQUIVALENTS
Cash and banks
Restricted cash
Short-term bank deposits
Other deposits with maturity of less than three months
Cash and cash equivalents
144,853
144,853
70,711
83
70,760
41,909
183,463
237,191
237,191
45,610
88
76,651
29,142
151,491
96. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
19. Allowances and Provisions – Non-current
and Current
PROVISIONS AND ALLOWANCES – NON-CURRENT
YEAR ENDED DECEMBER 31, 2016
Values at the beginning of the year
Translation differences
Additions
Reversals
Uses
At December 31, 2016
YEAR ENDED DECEMBER 31, 2015
Values at the beginning of the year
Translation differences
Additions
Reversals
Uses
At December 31, 2015
LIABILITIES
Legal
claims and
other matters
8,142
(1,290)
2,757
(1,079)
(1,580)
6,950
9,067
(3,396)
3,385
(205)
(709)
8,142
PROVISIONS AND ALLOWANCES – CURRENT
DEDUCTED FROM ASSETS
Allowance
for doubtful
accounts
Obsolescense
allowance
YEAR ENDED DECEMBER 31, 2016
Values at the beginning of the year
Translation differences
Additions
Reversals
Uses
At December 31, 2016
YEAR ENDED DECEMBER 31, 2015
Values at the beginning of the year
Translation differences
Additions
Reversals
Uses
At December 31, 2015
7,585
(656)
2,574
(2,286)
(1,198)
6,019
11,372
(1,666)
1,593
(2,417)
(1,297)
7,585
32,445
(900)
16,616
(12,016)
(2,712)
33,433
48,018
(2,366)
16,538
(21,354)
(8,391)
32,445
Asset
retirement
obligation
18,273
(3,102)
3,130
–
–
18,301
21,744
(3,207)
(264)
–
–
18,273
LIABILITIES
Assets
retirement
obligation
1,132
(276)
4,031
–
(625)
4,262
2,081
(363)
(586)
–
–
1,132
97. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
20. Deferred income tax
Deferred income taxes are calculated in full on temporary
differences under the liability method using the tax rate
of the applicable country.
Changes in deferred income tax are as follows:
AT DECEMBER 31,
At the beginning of the year
Translation differences
Effect of changes in tax law (Note 11)
Withholding tax on dividend distributions (Note 11)
Credits (charges) directly to other comprehensive income
Deferred tax (charge) credit (Note 11)
At the end of the year
2016
(511,456)
3,351
2,028
(2,690)
2,379
(16,821)
(523,209)
2015
(554,897)
19,041
3,080
4,177
(2,320)
19,463
(511,456)
The changes in deferred tax assets and liabilities (prior to
offsetting the balances within the same tax jurisdiction)
during the year are as follows:
AT DECEMBER 31, 2016
DEFERRED TAX LIABILITIES
At the beginning of the year
Translation differences
Credits (charges) directly to other comprehensive income
Withholding tax on dividend distributions
Effect of changes in tax law
Income statement credit (charge)
At the end of the year
PP&E
Inventories
Intangible
assets
Other
Total
(599.522)
(52.723)
(38.652)
(10.387)
(701.284)
5.634
–
–
1.062
(33.137)
360
–
–
(103)
3.829
169
–
–
1.433
9.000
181
(192)
(2.690)
6
6.344
(192)
(2.690)
2.398
10.032
(10.276)
(625.963)
(48.637)
(28.050)
(3.050)
(705.700)
98. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
AT DECEMBER 31, 2016
DEFERRED TAX ASSETS
At the beginning of the year
Translation differences
Credits (Charges) directly to other comprehensive income
Effect of changes in tax law
Income statement credit (charge)
At the end of the year
(1) As of December 31, 2016, the recognized deferred tax assets on tax losses amount
to USD 56,297 and there are no net unrecognized deferred tax assets.
Provisions
Trade
receivables
Tax
losses
(1)
Other
Total
45,368
(2,399)
–
17
10,202
53,188
6,193
(289)
–
(3)
1,587
7,488
67,784
70,483
189,828
–
–
–
(11,487)
56,297
(305)
2,571
(384)
(6,847)
65,518
(2,993)
2,571
(370)
(6,545)
182,491
AT DECEMBER 31, 2015
DEFERRED TAX LIABILITIES
At the beginning of the year
Translation differences
Charges directly to other comprehensive income
Withholding tax on dividend distributions
Effect of changes in tax law
Income statement credit (charge)
At the end of the year
AT DECEMBER 31, 2015
DEFERRED TAX ASSETS
At the beginning of the year
Translation differences
Charges directly to other comprehensive income
Effect of changes in tax law
Income statement credit (charge)
At the end of the year
PP&E
Inventories
Intangible
assets
Other
Total
(589,862)
(80,217)
(46,855)
(53,037)
(769,971)
19,216
1,340
–
–
–
–
5,426
(487)
(34,302)
26,641
54
–
–
(2,481)
10,630
10,629
31,239
(8)
4,177
6
(8)
4,177
2,464
27,846
30,815
(599,522)
(52,723)
(38,652)
(10,387)
(701,284)
Provisions
Trade
receivables
Tax
losses
(2)
Other
Total
58,059
(11,638)
–
228
(1,281)
45,368
10,742
63,529
82,744
215,074
(674)
–
18
(3,893)
6,193
–
–
–
114
(12,198)
(2,312)
370
(2,312)
616
4,255
67,784
(10,433)
(11,352)
70,483
189,828
(2) As of December 31, 2015, the recognized deferred tax assets on tax losses amount
to USD 67,784 and the net unrecognized deferred tax assets amount to USD 4,154.
99. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Deferred tax assets and liabilities are offset when the entity
a) has a legally enforceable right to set off the recognized
amounts; and b) intends to settle the tax on a net basis or
to realize the asset and settle the liability simultaneously.
The amounts shown in the stertement of financial position
(prior to offseting the balances within the same tax
jurisdiction) include the following:
AS OF DECEMBER 31,
Deferred tax assets to be recovered after more than 12 months
Deferred tax assets to be recovered within 12 months
Deferred tax liabilities to be settled after more than 12 months
Deferred tax liabilities to be settled within 12 months
2016
131,407
51,084
(653,503)
(52,197)
(523,209)
2015
149,640
40,188
(637,658)
(63,626)
(511,456)
21. Other liabilities – Non-current and Current
AS OF DECEMBER 31,
2016
2015
(I) OTHER LIABILITIES - NON-CURRENT
Post-employment benefits
Other employee benefits
Asset retirement obligation (Note 19) (1)
Other
Other liabilities – Non-current
(1) The asset in connection with this liability is included in Property, plant and equipment.
Post-employment benefits
The amounts recognized in the consolidated statement of
financial position are determined as follows:
252,624
31,724
18,301
135
302,784
273,792
24,896
18,273
3,712
320,673
AS OF DECEMBER 31,
2016
2015
POST-EMPLOYMENT BENEFITS
Present value of unfunded obligations
Liability in the statement of financial position
252,624
252,624
273,792
273,792
100. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The amounts recognized in the consolidated income
statement are as follows:
AS OF DECEMBER 31,
2016
2015
POST-EMPLOYMENT BENEFITS
Current service cost
Interest cost
Amortization of prior service costs
Total included in labor costs
9,565
18,193
–
27,758
7,241
21,226
923
29,390
Changes in the liability recognized in the consolidated
statement of financial position are as follows:
AS OF DECEMBER 31,
2016
2015
POST-EMPLOYMENT BENEFITS
At the beginning of the year
Transfers, new participants and funding of the plan
Total expense
Remeasurements
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Translation differences
Contributions paid
At the end of the year
273,792
(231)
27,758
14,735
(2,600)
(1,360)
18,695
(41,783)
(21,647)
252,624
313,146
2,876
29,390
(4,922)
–
–
(4,922)
(42,099)
(24,599)
273,792
101. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The principal actuarial assumptions used were as follows:
YEAR ENDED DECEMBER 31,
2016
2015
MEXICO
Discount rate
Compensation growth rate
ARGENTINA
Discount rate
Compensation growth rate
8.00%
5.00%
7.00%
2.00%
7.75%
4.00%
7.00%
2.00%
The sensitivity of the defined benefit obligation to changes
in the weighted principal assumptions is as follows:
IMPACT ON DEFINED BENEFIT OBLIGATION
Discount rate
Compensation growth rate
Pension growth rate
Life expectancy
Change in
assumption
Increase in
assumption
Decrease in
assumption
1.00%
1.00%
1.00%
1 year
-9,5%
2,7%
-1,9%
3,9%
11,4%
-1,9%
2,1%
-4,0%
The estimated future payments for the next five years will
be between 16.0 and 19.0 million per year.
AS OF DECEMBER 31,
2016
2015
(II) OTHER LIABILITIES - CURRENT
Payroll and social security payable
VAT liabilities
Other tax liabilities
Termination benefits
Related Parties (Note 25)
Asset retirement obligation (Note 19)
Others
Other liabilities – Current
130,889
49,633
26,987
2,164
3,744
4,262
10,402
228,081
78,247
41,627
27,739
2,218
25
1,132
5,666
156,654
102. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
22. Derivative financial instruments
Net fair values of derivative financial instruments
The net fair values of derivative financial instruments at
December 31, 2016 and 2015 were as follows:
AS OF DECEMBER 31,
2016
2015
CONTRACTS WITH POSITIVE FAIR VALUE
Foreign exchange contracts
CONTRACTS WITH NEGATIVE FAIR VALUE
Interest rate swap contracts
Foreign exchange contracts
316
316
(257)
(30)
(287)
1,787
1,787
(1,164)
(19,471)
(20,635)
Derivative financial instruments breakdown is as follows:
A. Interest rate contracts
Fluctuations in market interest rates create a degree of
risk by affecting the amount of the Company’s interest
payments and the value of its floating-rate debt. As of
December 31, 2016, most of the Company’s long-term
borrowings were at variable rates.
During 2012 and 2013, Tenigal entered into several forward
starting interest rate swap agreements in order to fix the
interest rate to be paid over an aggregate amount of USD
100 million, at an average rate of 1.92%. These agreements
are effective from July 2014, will due on July 2022 and have
been accounted for as cash flow hedges. As of December
31, 2016, the after-tax cash flow hedge reserve related to
these agreements amounted to USD 0.1 million.
Charges in fair value of derivates instruments designated
as cash flow hedges for each if the years preaented are
included below:
At December 31, 2014
(Decrease) / Increase
Reclassification to income statement
At December 31, 2015
(Decrease) / Increase
Reclassification to income statement
At December 31, 2016
CASH FLOW HEDGES
Gross
amount
Income
tax
Total
(593)
(1.374)
1.401
(566)
(179)
820
75
178
412
(420)
170
54
(246)
(22)
(415)
(962)
981
(396)
(125)
574
53
103. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The gross amount of the pre-tax reserve recorded in other
comprehensive income at December 31, 2016 (amounting
to a gain of USD 0.1 million) is expected to be reclassified
to the income statements in accordance to the payments of
interests in connection with the borrowings hedged by these
derivative contracts, during 2017 and up to the end of the
life of the borrowing in 2022.
In addition, during the second half of 2015, Siderar
entered into future contracts and non-deliverable forward
agreements in the local market in order to cover its exposure
to trade payables in USD. As of December 31, 2016, there
are no outstanding notional amounts on future contracts or
non-deliverable forward agreements in the local market.
B. Foreign exchange contracts
From time to time, Ternium’s subsidiaries enter into
derivative agreements to manage their exposure to
currencies other than the USD, in accordance with the
Company’s policy for derivative instruments.
During 2016, 2015 and 2014, Prosid Investments entered
into several non-deliverable forward agreements in order to
manage the exchange rate exposure generated by Siderar’s
debt in ARS. As of December 31, 2016, the notional amount
on these agreements amounted to USD 235.4 million.
Furthermore, during 2016, 2015 and 2014, Ferrasa S.A.S.
has entered into non-deliverable forward agreements
to manage the exposure of certain trade receivables
denominated in its local currency. As of December 31,
2016, there are no outstanding notional amounts on these
agreements.
The net fair values of the exchange rate derivative
contracts as of December 31, 2016 and December 31, 2015
were as follows:
CURRENCIES
CONTRACT
ARS/USD
ND Forward - Buy ARS
ARS/USD
ND Forward - Buy USD
ARS/USD
Futures domestic contracts - Buy USD (1)
COP/USD
ND Forward - Sell COP
EUR/USD
ND Forward - Sell EUR
(1) Corresponds to contracts as of December 31, 2015, that were settled on a daily basis.
ARS: Argentine pesos; COP: Colombian pesos; EUR: Euros; USD: US dollars.
FAIR VALUE AT DECEMBER 31,
NOTIONAL
AMOUNT
2016
2015
4.0 billion ARS
316
(17.565)
37.9 million USD
31.0 million USD
33.7 billion COP
5.3 million EUR
–
–
–
(30)
286
494
–
(613)
–
(17.684)
104. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
23. Borrowings
AS OF DECEMBER 31,
2016
2015
(I) NON-CURRENT
Bank borrowings
Less: debt issue costs
(II) CURRENT
Bank borrowings
Less: debt issue costs
398,851
(2,109)
396,742
823,563
(1,670)
821,893
611,429
(4,192)
607,237
915,721
(1,935)
913,786
Total Borrowings
1,218,635
1,521,023
The maturity of borrowings is as follows:
EXPECTED MATURITY DATE
2017
2018
2019 and
thereafter
Fixed rate
Floating rate
Total
404,926
416,967
821,893
–
–
226,467
170,275
226,467
170,275
1,218,635
AT DECEMBER 31, (1)
2016
404,926
813,709
2015
462,038
1,058,985
1,521,023
(1) As most borrowings incorporate floating rates that approximate market rates
and the contractual repricing occurs mostly every 1 month, the fair value of the
borrowings approximates their carrying amount and it is not disclosed separately.
The weighted average interest rates - which incorporate
instruments denominated mainly in US dollars and
Argentine pesos and which do not include the effect of
derivative financial instruments nor the devaluation of these
local currencies - at year-end were as follows:
AT DECEMBER 31,
Bank borrowings
2016
6.92%
2015
3.37%
105. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The nominal average interest rates shown above were
calculated using the rates set for each instrument in
its corresponding currency and weighted using the
dollar-equivalent outstanding principal amount of said
instruments at December 31, 2016 and 2015, respectively.
Breakdown of borrowings by currency is as follows:
AT DECEMBER 31,
CURRENCIES
CONTRACT
2016
2015
USD
USD
ARS
COP
COP
GTQ
Total Borrowings
Floating
Fixed
Fixed
Floating
Fixed
Fixed
790,772
141,889
234,576
23,520
19,163
8,715
1,218,635
1,036,733
317,441
111,114
22,380
18,571
14,784
1,521,023
USD: US dollars; ARS: Argentine pesos; COP: Colombian pesos; GTQ: Guatemalan
quetzales.
Ternium’s most significant borrowings as of December
31, 2016, were those incurred under Ternium México’s
syndicated loan facilities, in order to improve its maturity
profile in 2013 and under Tenigal’s syndicated loan
facility, in order to finance the construction of its hot-
dipped galvanizing mill in Pesquería, Mexico:
In USD million
Date
Borrower
Type
Maturity
Original
principal
amount
Outstanding
principal
amount as
of December
31, 2016
November 2013
Ternium Mexico
Syndicated loan
Years 2012 and 2013
Tenigal
Syndicated loan
800
200
360
November 2018
150
July 2022
The main covenants on these loan agreements are
limitations on liens and encumbrances, limitations on
the sale of certain assets and compliance with financial
ratios (i.e. leverage ratio and interest coverage ratio).
As of December 31, 2016, Ternium was in compliance
with all of its covenants.
24. Contingencies, commitments and restrictions on
the distribution of profits
Ternium is involved in litigation arising from time to
time in the ordinary course of business. The Company
recorded a provision for those cases in which there is a
probable cash outflow and the outcome can be reliably
106. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
estimated. Based on management’s assessment and
the advice of legal counsel, it is not anticipated that
the ultimate resolution of existing litigation would be
material to Ternium’s consolidated financial position,
results of operations or liquidity.
I. Tax claims and other contingencies
A. Siderar. AFIP – Income tax claim for fiscal years 1995 to 1999
The Argentine tax authority (Administración Federal de
Ingresos Públicos, or “AFIP”) has challenged the deduction
from income of certain disbursements treated by Siderar
as expenses necessary to maintain industrial installations,
alleging that these expenses should have been treated as
investments or improvements subject to capitalization.
Accordingly, AFIP made income tax assessments against
Siderar with respect to fiscal years 1995 through 1999.
As of December 31, 2016, Siderar’s aggregate exposure
under these assessments (including principal, interest
and fines) amounts to approximately USD 1.3 million.
Siderar appealed each of these assessments before the
National Tax Court, which, in successive rulings, reduced
the amount of each of the assessments made by AFIP;
the National Tax Court decisions were, however, further
appealed by both Siderar and AFIP.
Based on recent National Tax Court decisions,
management believes that there could be an additional
potential cash outflow in connection with this assessment
and, as a result, Siderar recognized a provision which, as of
December 31, 2016, amounts to USD 0.4 million.
B. Companhia Siderúrgica Nacional (CSN) – Tender offer
litigation
In 2013, the Company was notified of a lawsuit filed in
Brazil by Companhia Siderúrgica Nacional (CSN) and
various entities affiliated with CSN against Ternium
Investments S.à r.l., its subsidiary Siderar, and Confab
Industrial S.A., a Brazilian subsidiary of Tenaris S.A.
The entities named in the CSN lawsuit had acquired a
participation in Usinas Siderúrgicas de Minas Gerais
S.A. – USIMINAS (Usiminas) in January 2012. The CSN
lawsuit alleges that, under applicable Brazilian laws and
rules, the acquirers were required to launch a tag-along
tender offer to all non-controlling holders of Usiminas
ordinary shares for a price per share equal to 80% of the
price per share paid in such acquisition, or BRL 28.8,
and seeks an order to compel the acquirers to launch an
offer at that price plus interest. If so ordered, the offer
would need to be made to 182,609,851 ordinary shares
of Usiminas not belonging to Usiminas’ control group;
Ternium Investments and Siderar’s respective shares in the
offer would be 60.6% and 21.5%.
On September 23, 2013, the first instance court issued
its decision finding in favor of the defendants and
dismissing the CSN lawsuit. The claimants appealed the
first instance court decision with the Sao Paulo court
of appeals. On February 8, 2017, the court of appeals
issued its decision on the merits and maintained the
understanding of the first instance court, holding that
the Company and the other defendants did not have the
obligation to launch a tender offer. The decision of the
court of appeals has not yet been published, and CSN may
still file a motion for clarification and/or appeal to the
Superior Court of Justice or the Federal Supreme Court.
Separately, on November 10, 2014, CSN filed a
complaint with Brazil’s securities regulator Comissão
de Valores Mobiliários (CVM) on the same grounds and
with the same purpose as the lawsuit referred to above.
In this complaint, CSN sought to reverse a February
2012 decision by the CVM, which had determined that
the above mentioned acquisition did not trigger any
tender offer requirement. On December 2, 2016, CVM
rendered its decision on this complaint, reaffirming its
previous decision from 2012 and rejecting all the new
allegations presented by CSN.
Finally, on December 11, 2014, CSN filed a claim with
Brazil’s antitrust regulator Conselho Administrativo de
Defesa Econômica (CADE). In its claim, CSN alleges
that the antitrust clearance request related to the January
2012 acquisition, which was approved by CADE without
restrictions in August 2012, contained a false and deceitful
description of the acquisition aimed at frustrating
the minority shareholders’ right to a tag-along tender
offer, and requests that CADE investigate and reopen
the antitrust review of the acquisition and suspend the
Company’s voting rights in Usiminas until the review is
107. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
completed. On May 6, 2015, CADE rejected CSN’s claim.
CSN did not appeal the decision and, on May 19, 2015
CADE formally closed the file.
Ternium continues to believe that all of CSN’s claims and
allegations are groundless and without merit, as confirmed
by several opinions of Brazilian legal counsel, the decisions
issued by CVM in February 2012 and December 2016,
and the first and second instance court decisions referred
to above. Accordingly, no provision was recorded in these
Consolidated Financial Statements.
C. Shareholder claims relating to the October 2014 acquisition
of Usiminas shares
On April 14, 2015, the staff of the Brazilian securities
regulator, the Comissão de Valores Mobiliários (CVM),
determined that Ternium’s acquisition of 51.4 million
ordinary shares of Usiminas, completed on October 30,
2014, triggered a requirement under applicable Brazilian
laws and regulations for Usiminas’ controlling shareholders
to launch a tender offer to all noncontrolling holders of
Usiminas ordinary shares. The CVM staff’s determination
was made further to a request by Nippon Steel & Sumitomo
Metal Corporation (NSSMC) and its affiliates, who alleged
that Ternium’s 2014 acquisition had exceeded a threshold
that triggers the tender offer requirement. In the CVM
staff’s view, the 2014 acquisition exceeded the applicable
threshold by 5.2 million shares. On April 29, 2015, Ternium
filed an appeal to be submitted to the CVM’s Board of
Commissioners. On May 5, 2015, the CVM staff confirmed
that the appeal would be submitted to the Board of
Commissioners and that the effects of the staff’s decision
would be stayed until such Board rules on the matter.
On June 15, 2015, upon an appeal filed by NSSMC, the
CVM staff changed its earlier decision and stated that the
obligation to launch a tender offer would fall exclusively
on Ternium. Ternium’s appeal has been submitted to the
CVM’s Board of Commissioners and it is currently expected
that such Board will rule on the appeal in early 2017. In the
event the appeal is not successful, under applicable CVM
rules Ternium may elect to sell to third parties the 5.2
million shares allegedly acquired in excess of the threshold,
in which case no tender offer would be required.
D. Potential Mexican income tax adjustment
In March 2015, the Mexican tax authorities, as part of a
tax audit to Ternium Mexico with respect to fiscal year
2008, challenged the deduction by Ternium Mexico’s
predecessor IMSA Acero of a tax loss arising from an
intercompany sale of shares in December 2008. Although
the tax authorities have not yet determined the amount
of their claim, they have indicated in a preliminary report
that they have observations that may result in an income
tax adjustment currently estimated at approximately
USD 52.2 million, including interest and fines.
Ternium Mexico requested an injunction from the
Mexican courts against the audit observations, and
also filed its defense and supporting documents with
the Mexican tax authorities. The Company, based
on the advice of counsel, believes that an unfavorable
outcome in connection with this matter is not probable
and, accordingly, no provision has been recorded in its
financial statements.
E. Tax claim on Argentine personal assets tax for 2008, 2009
and 2010
On June 28, 2016, Siderar was notified of a tax assessment
by the Argentine tax authorities (AFIP) for allegedly
omitted taxes in its capacity as substitute obligor for
the personal assets tax for 2008, 2009 and 2010 over
the investment held by its shareholder Ternium España
S.L.U. In its assessment, AFIP challenged the availability
of the benefits contemplated under the double taxation
treaty between Argentina and Spain then in effect and
ordered Siderar to pay taxes for approximately USD 4.9
million, plus interest for approximately USD 10.2 million.
On August 4, 2016, Siderar appealed AFIP’s assessment
before the National Tax Court. Siderar believes that it has
meritorious defenses and will not be required to pay any
amount while the appeal is pending.
The Company, based on the advice of counsel, believes
that it is not probable that the ultimate resolution of
this assessment will result in a material obligation
and, accordingly, no provision has been recorded in its
financial statements.
108. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
II. Commitments
The following are Ternium’s main off-balance sheet
commitments:
a. Siderar entered into a contract with Tenaris, a related
company of Ternium, for the supply of steam generated
at the power generation facility that Tenaris owns in the
compound of the Ramallo facility of Siderar. Under this
contract, Tenaris has to provide 250 tn/hour of steam,
and Siderar has the obligation to take or pay this volume.
The amount of this outsourcing agreement totals USD
25.1 million and is due to terminate in 2018.
The Company has also signed various contracts for the
provision of natural gas, assuming firm commitments
for a total of USD 22.3 million payable during the 2017
financial year.
b. Siderar, within the investment plan, has entered
into several commitments to acquire new production
equipment for a total consideration of USD 18.7 million.
c. Siderar is a party to a long-term contract with Air
Liquide Argentina S.A. for the supply of oxygen, nitrogen
and argon for an aggregate amount of USD 154.6 million
to satisfy the requirements through 2031. This agreement
includes the construction by Air Liquide Argentina S.A.
of a plant within San Nicolas’ facilities.
d. On December 20, 2000, Hylsa (Ternium Mexico’s
predecessor) entered into a 25-year contract with Iberdrola
Energia Monterrey, S.A. de C.V. (“Iberdrola”), a Mexican
subsidiary of Iberdrola Energía, S.A., for the supply to
four of Ternium Mexico’s plants of a contracted electrical
demand of 111.2 MW. Iberdrola currently supplies
approximately 25% of Ternium Mexico’s electricity
needs under this contract. Although the contract was to
be effective through 2027, on April 28, 2014, Ternium
Mexico and Iberdrola entered into a new supply contract
and terminated the previous one. In consideration of
the termination of the previous contract, Iberdrola has
granted Ternium Mexico a credit of USD 750 thousand
per MW of the 111.2 MW contracted capacity, resulting
over time in a total value of USD 83.4 million. In addition,
Iberdrola agreed to recognize to Ternium México USD
15.0 million through discounted rates. As a result of the
above mentioned credit and discount, the company expects
to incur in electricity rates comparable to those obtained
in the past under the previous contract’s terms for a period
that is estimated to be approximately 2 years. Following
such period, Ternium Mexico’s rates under the contract
will increase to market rates with a 2.5% discount;
however, Ternium Mexico will be entitled to terminate the
contract without penalty.
e. Several Ternium Mexico’s subsidiaries which have
facilities throughout the Mexican territory are parties
to a long term energy purchase agreement for purchased
capacity of electricity with Tractebel Energía de
Monterrey, S. de R.L. de C.V., distributed among each
plant defined as a capacity user. Each capacity user is
committed to pay Tractebel for the purchased capacity
and for the net energy delivered. Ternium Mexico is
required to provide its best estimate of its expected
nomination for capacity and energy under the specific
limits and timelines. The monthly payments are calculated
considering the capacity charges, energy charges, back-up
power charges, and transmission charges, less any steam
credits. The contracted amount is of USD 41.0 million
and the contract will terminate in 2018.
f. Following the maturity of a previously existing railroad
freight services agreement during 2013, in April 2014,
Ternium México and Ferrocarril Mexicano, S. A. de C. V.
(“Ferromex”) entered into a new railroad freight services
agreement pursuant to which Ferromex will transport
Ternium Mexico’s products through railroads operated
by Ferromex for a term of five years through 2019. Subject
to Ternium’s board approval, both Ternium Mexico and
Ferromex would be required to make (within a period of
36 months) certain investments to improve the loading and
unloading of gondolas. Ternium Mexico’s total investment
commitment would amount to approximately USD 11.0
million (out of which Ternium México has already invested
the 91% as of December 31, 2016), while Ferromex’s
already invested the committed amount of approximately
USD 3.9 million as of December 31, 2016. Under the
agreement, Ternium Mexico has guaranteed to Ferromex a
minimum average transport load of 200,000 metric tons per
month in any six-month period. In the event that the actual
109. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
per-month average transport loads in any six-month period
were lower than such guaranteed minimum, Ternium
Mexico would be required to compensate Ferromex for the
shortfall so that Ferromex receives a rate equivalent to a
total transport load of 1,200,000 metric tons for such six-
month period. However, any such compensation will not
be payable if the lower transport loads were due to adverse
market conditions, or to adverse operating conditions at
Ternium Mexico’s facilities.
g. Techgen is a party to gas transportation capacity
agreements with Kinder Morgan Gas Natural de Mexico,
S. de R.L. de C.V., Kinder Morgan Texas Pipeline LLC
and Kinder Morgan Tejas Pipeline LLC for the whole
transportation capacity starting on August 1, 2016
and ending during the second half of the year 2036.
As of December 31, 2016, the outstanding value of
this commitment was approximately USD 279 million.
Ternium’s exposure under the guarantee in connection
with these agreements amounts to USD 133.9 million,
corresponding to the 48% of the agreements’ outstanding
value as of December 31, 2016.
h. Ternium issued a Corporate Guarantee covering 48%
of the obligations of Techgen under a syndicated loan
agreement between Techgen and several banks led by
Citigroup Global Markets Inc., Credit Agricole Corporate
and Investment Bank, and Natixis, New York Branch
acting as joint bookrunners. The loan agreement
amounted to USD 800 million and the proceeds will
be used by Techgen in the construction of the facility.
As of December 31, 2016, disbursements under the loan
agreement amounted USD 800 million, as a result the
amount guaranteed by Ternium was approximately USD
384 million. The main covenants under the Corporate
Guarantee are limitations on the sale of certain assets
and compliance with financial ratios (e.g. leverage ratio).
As of December 31, 2016, Techgen was in compliance with
all of its covenants.
III. Restrictions on the distribution of profits
Under Luxembourg law, at least 5% of net income per
year calculated in accordance with Luxembourg law and
regulations must be allocated to a reserve until such reserve
has reached an amount equal to 10% of the share capital.
At December 31, 2016, this reserve reached the above-
mentioned threshold.
As of December 31, 2016, Ternium may pay dividends up
to USD 3.4 billion in accordance with Luxembourg law
and regulations.
Shareholders’ equity under Luxembourg law and
regulations comprises the following captions:
AT DECEMBER 31,
Share capital
Legal reserve
Non distributable reserves
Reserve for own shares
Accumulated profit at January 1, 2016
Loss for the year
Total shareholders’ equity under Luxembourg GAAP
2016
2,004,743
200,474
1,414,122
59,600
3,353,166
(20,990)
7,011,115
110. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
25. Related party transactions
As of December 31, 2016, Techint Holdings S.à r.l.
(“Techint”) owned 62.02% of the Company’s share capital
and Tenaris Investments S.à r.l. (“Tenaris”) held 11.46% of
the Company’s share capital. Each of Techint and Tenaris
were controlled by San Faustin S.A., a Luxembourg
company (“San Faustin”). Rocca & Partners Stichting
Administratiekantoor Aandelen San Faustin (“RP STAK”),
a Dutch private foundation (Stichting), held voting shares
in San Faustin sufficient in number to control San Faustin.
No person or group of persons controls RP STAK.
For commitments with Related parties, see Note 24.
The following transactions were carried out with related
parties:
I. Transactions
YEAR ENDED DECEMBER 31,
2016
2015
2014
A. SALES OF GOODS AND SERVICES
Sales of goods to non-consolidated parties
Sales of goods to other related parties
Sales of services and others to non-consolidated
parties
Sales of services and others to other related parties
B. PURCHASES OF GOODS AND SERVICES
Purchases of goods from non-consolidated parties
Purchases of goods from other related parties
Purchases of services and others from
non-consolidated parties
Purchases of services and others from other related
parties
C. FINANCIAL RESULTS
Income with non-consolidated parties
D. DIVIDENDS RECEIVED
Dividends from non-consolidated parties
E. OTHER INCOME AND EXPENSES
Income (expenses), net with non-consolidated parties
Income (expenses), net with other related parties
–
29,480
737
654
30,871
144,673
58,929
12,836
126,859
343,297
3,507
3,507
183
183
1,660
712
2,372
–
103,686
1,590
1,153
106,429
163,782
48,150
14,993
128,618
355,543
17
17
–
–
3,667
706
4,373
1,675
224,909
2,459
1,273
230,316
200,167
45,946
13,584
131,413
391,110
1,043
1,043
1,858
1,858
6,051
(640)
5,411
111. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
II. Year-end balances
AT DECEMBER 31,
2016
2015
A. ARISING FROM SALES/PURCHASES OF GOODS/SERVICES
AND OTHER TRANSACTIONS
Receivables from non-consolidated parties
Receivables from other related parties
Advances to suppliers with other related parties
Payables to non-consolidated parties
Payables to other related parties
103,333
7,043
283
(25,889)
(26,313)
58,457
11,392
6,690
3,623
(17,427)
(25,019)
(20,742)
III. Officers and Directors’ compensation
During the year ended December 31, 2016 the cash
compensation of Officers and Directors amounted to
USD 12,461 (USD 14,301 for the year ended December
31, 2015). In addition, Officers received 830.000 Units
for a total amount of USD 1,818 (USD 1,745 for the year
ended December 31, 2015) in connection with the incentive
retention program mentioned in in Note 4 (N)(3).
26. Other required disclosures
A. Statement of comprehensive income
At December 31, 2014
(Decrease)/ Increase
Reclassification to income statement
At December 31, 2015
(Decrease)/ Increase
Reclassification to income statement
At December 31, 2016
CASH FLOW HEDGES
CURRENCY
TRANSLATION
ADJUSTMENT
Gross
amount
(593)
(1.374)
1.401
(566)
(179)
820
75
Income
Tax
Total
178
412
(420)
170
54
(246)
(22)
(415)
(2.424.297)
(962)
981
(396)
(125)
574
(640.541)
–
(3.064.838)
(87.807)
–
53
(3.152.645)
112. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
B. Statement of cash flows
YEAR ENDED DECEMBER 31,
2016
2015
2014
I. CHANGES IN WORKING CAPITAL
(1)
Inventories
Receivables and others
Trade receivables
Other liabilities
Trade payables
II. INCOME TAX ACCRUAL LESS PAYMENTS
Tax accrued (Note 11)
Taxes paid
III. INTEREST ACCRUALS LESS PAYMENTS
Interest accrued (Note 10)
Interest paid
(1) Changes in working capital are shown net of the effect
of exchange rate changes.
(151,263)
488
(161,670)
89,032
61,040
(162,373)
411,528
(229,196)
182,332
89,971
(77,272)
12,699
349,662
(16,987)
142,670
(2,936)
36,735
509,144
207,320
(231,252)
(23,932)
89,489
(83,993)
5,496
(357,023)
4,760
(90,725)
30,640
(138,632)
(550,980)
339,105
(378,634)
(39,529)
117,866
(112,704)
5,162
27. Recently issued accounting pronouncements
The following amendments, standards and interpretations
have been applied on the year starting January 1, 2016:
• Annual Improvements to IFRS 2012-2014 cycle
• Amendments to IFRS 11 Accounting for Acquisitions of
Interests in Joint Operations
• Amendments to IAS 16 and IAS 38 - Clarification of
Acceptable Methods of Depreciation and Amortization
• Disclosure Initiative - Amendments to IAS 1
39. It includes requirements on the classification and
measurement of financial assets and liabilities, as well as
an expected credit losses model that replaces the current
incurred loss impairment model. IFRS 9 must be applied
on annual periods beginning on or after January 1,
2018. The Company’s management does not expect this
standard to have a significant impact on the classification
and measurement of its financial assets, liabilities and
hedge accounting.
These amendments did not impact significantly the
Company’s consolidated financial statements.
The following standards, amendments to standards and
interpretations are not mandatory for the financial year
beginning January 1, 2016 and have not been early adopted:
International Financial Reporting Standard 9, “Financial
instruments”
In July 2014, the IASB issued IFRS 9, “Financial
instruments”, which replaces the guidance in IAS
International Financial Reporting Standard 15, “Revenue from
contracts with customers”
In May 2014, the IASB issued IFRS 15, “Revenue from
contracts with customers”, which sets out the requirements
in accounting for revenue arising from contracts with
customers and which is based on the principle that
revenue is recognized when control of a good or service is
transferred to the customer. IFRS 15 must be applied on
annual periods beginning on or after January 1, 2018.
The Company’s management is currently assessing the
potential impact that the application of this standard
113. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
may have on the Company’s financial condition or results
of operations.
International Financial Reporting Standard 16, “Leases”
In January 2016, the IASB issued IFRS 16, “Leases”,
which will result in almost all leases being recognized on
the balance sheet, as the distinction between operating
and finance leases is removed. Under the new standard,
an asset (the right to use the leased item) and a financial
liability to pay rentals are recognized. IFRS 16 must be
applied on annual periods beginning on or after January
1, 2019. The Company’s management is currently
assessing the potential impact that the application of this
standard may have on the Company’s financial condition
or results of operations.
Other standards and interpretations non-significant for the
Company’s financial statements:
• Amendments to IAS 12 - Recognition of Deferred Tax
Assets for Unrealized Losses
• Amendments to IAS 7 – Disclosure initiative
• Amendment to IFRS 2 - Classification and
Measurement of Share-based Payment Transactions
• Annual Improvements to IFRS 2014-2016 cycle
• IFRIC 22 — Foreign Currency Transactions and
Advance Consideration
28. Financial risk management
1. Financial risk factors
Ternium’s activities expose the Company to a variety
of risks: market risk (including the effects of changes
in foreign currency exchange rates, interest rates and
commodities prices), credit risk and liquidity risk.
Ternium’s overall risk management program focuses
on the unpredictability of financial markets and seeks
to minimize potential adverse effects on the financial
performance. Ternium’s subsidiaries may use derivative
financial instruments to hedge certain risk exposures.
1.1. Market risk
I. Foreign exchange rate risk
Ternium operates and sells its products in different
countries, and as a result is exposed to foreign
exchange rate volatility. In addition, the Company
entered into several borrowings that contain covenants
providing for the compliance with certain financial
ratios, including ratios measured in currencies other
that the U.S. dollar. This situation exposes Ternium
to a risk of non-compliance derived from volatility in
foreign exchange rates. Ternium’s subsidiaries may use
derivative contracts in order to hedge their exposure
to exchange rate risk derived from their trade and
financial operations.
Ternium’s foreign exchange policy is to minimize the
negative impact of fluctuations in the value of other
currencies with respect to the U.S. dollar. Ternium’s
subsidiaries monitor their net cash flows in currencies
other than the U.S. dollar, and analyze potential
hedging according to market conditions. This hedging
can be carried out by netting positions or by financial
derivatives. However, regulatory or legal restrictions in
the countries in which Ternium’s subsidiaries operate,
could limit the possibility of the Company carrying out
its hedging policy.
Ternium has foreign operations, whose net assets are
exposed to foreign currency translation risk, some
of which may impact net income. The fact that some
subsidiaries have measurement currencies other than
the U.S. dollar may, at times, distort the results of the
hedging efforts as reported under IFRS.
The following table shows a breakdown of Ternium’s
assessed financial position exposure to currency risk as of
December 31, 2016. These balances include intercompany
positions where the intervening parties have different
functional currencies.
USD million
Exposure to
US dollar (USD)
EU euro (EUR)
Argentine peso (ARS)
Mexican peso (MXN)
Colombian peso (COP)
Other currencies
Functional Currency
USD
ARS
–
10
(0)
(526)
(11)
(0)
(61)
(4)
–
–
–
(4)
114. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The main relevant exposures correspond to:
on translation of the equity related to the Argentine peso
and the Brazilian real.
(a) Argentine peso vs. US dollar
The cumulative devaluation for the Argentine peso during
2016 was 17.9%. The devaluation generated a negative
effect of USD 140 million, included as currency translation
adjustment in Other comprehensive income in connection
with the valuation of Ternium’s Argentine subsidiaries’
equities (mainly Siderar S.A.I.C.), and a loss of USD 21
million, included as net foreign exchange results in the
Income Statement.
If the Argentine peso had weakened by 1% against the US
dollar, it would have generated a pre-tax loss of USD 0.7
million as of December 31, 2016, and a pre-tax loss of USD
0.5 million as of December 31, 2015.
(b) Mexican peso vs. US dollar
If the Mexican peso had weakened by 1% against the US
dollar, it would have generated a pre-tax gain of USD 5.5
million and USD 3.8 million as of December 31, 2016 and
2015, respectively.
(c) Colombian peso vs. US dollar
If the Colombian peso had weakened by 1% against the US
dollar, it would have generated a pre-tax gain of USD 0.1
million and no effects as of December 31, 2016 and 2015,
respectively.
We estimate that if the Argentine peso, Mexican peso
and Colombian peso had weakened simultaneously by
1% against the US dollar with all other variables held
constant, total pre-tax income for the year would have
been USD 4.9 million higher (USD 3.3 million higher as of
December 31, 2015), as a result of foreign exchange gains/
losses on translation of US dollar-denominated financial
position, mainly trade receivables, trade payables,
borrowings and other liabilities.
II. Interest rate risk
Ternium manages its exposure to interest rate volatility
through its financing alternatives and hedging instruments.
Borrowings issued at variable rates expose the Company
to the risk of increased interest expense in the event of a
raise in market interest rates, while borrowings issued at
fixed rates expose the Company to a variation in its fair
value. The Company’s interest-rate risk mainly arises from
long-term borrowings that bear variable-rate interest that
is partially fixed through different derivative transactions,
such as interest rate swaps.
Ternium’s nominal weighted average interest rate for its
debt instruments, which do not include neither the effect of
derivative financial instruments, nor the devaluation of the
local currencies, was 6.92% and 3.37% for 2016 and 2015,
respectively. These rates were calculated using the rates
set for each instrument in its corresponding currency and
weighted using the dollar-equivalent outstanding principal
amount of each instrument as of December 31, 2016 and
2015, respectively.
Ternium’s total variable interest rate debt amounted
to USD 814 million (66.8% of total borrowings) at
December 31, 2016 and USD 1,059 million (69.6% of total
borrowings) at December 31, 2015.
If interest rates on the aggregate average notional
of US dollar denominated borrowings held during
2016, excluding borrowings with derivatives contracts
mentioned in Note 22 (a), had been 100 basis points
higher with all other variables held constant, total pre-tax
income for the year ended December 31, 2016 would have
been USD 13.5 million lower (USD 17.7 million lower as
of December 31, 2015).
Considering the same variation of the currencies against
the US dollar of all net investments in foreign operations
amounting to USD 1.1 billion, the currency translation
adjustment included in total equity would have been
USD 10.4 million lower (USD 10.1 million lower as of
December 31, 2015), arising mainly from the adjustment
1.2. Credit risk
Credit risk arises from cash and cash equivalents, deposits
with banks and financial institutions, as well as credit
exposures to customers, including outstanding receivables
and committed transactions. Ternium’s subsidiaries have
credit guidelines in place to ensure that derivative and
115. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
treasury counterparties are limited to high credit quality
financial institutions.
The amount of the allowance for doubtful accounts was
USD 6.0 million as of December 31, 2016 (USD 7.6 million
as of December 31, 2015).
The carrying amounts of the Company’s trade and other
receivables as of December 31, 2016, are denominated in
the following currencies:
CURRENCY
USD million
US dollar (USD)
EU euro (EUR)
Argentine peso (ARS)
Mexican peso (MXN)
Colombian peso (COP)
Other currencies
636
22
12
119
57
2
848
1.3. Liquidity risk
Management maintains sufficient cash and marketable
securities and credit facilities to finance normal operations.
Management monitors rolling forecasts of the group’s
liquidity reserve on the basis of expected cash flow.
The table below analyses financial liabilities into relevant
maturity groups based on the remaining period at the date
of the statement of financial position to the contractual
maturity date. The amounts disclosed in the table are the
contractual undiscounted cash flows.
Ternium invests in financial assets with a minimum credit
rating of investment grade established by an international
qualification agency renowned in the financial market,
in line with corporate investment portfolio policies.
Approximately 65.7% of the Company’s liquid
financial assets correspond to investment grade rated
instruments as of December 31, 2016, in comparison with
approximately 60.7% as of December 31, 2015.
Ternium has no significant concentrations of credit
risk from customers. No single customer accounts for
more than five percent of Ternium’s sales. Ternium’s
subsidiaries have policies in place to ensure that sales are
made to customers with an appropriate credit history,
and that credit insurances, letters of credit or other
instruments are requested to reduce credit risk whenever
deemed necessary. The subsidiaries maintain allowances
for potential credit losses. The utilization of credit limits
is regularly monitored.
Trade and other receivables are carried at face value
less allowance for doubtful accounts, if applicable.
This amount does not differ significantly from fair
value. The other receivables do not contain significant
impaired assets.
As of December 31, 2016, trade receivables total USD 635.0
million (USD 511.5 million as of December 31, 2015).
These trade receivables are collateralized by guarantees
under letter of credit and other bank guarantees of USD
2.4 million (USD 2.4 million as of December 31, 2015),
credit insurance of USD 326.9 million (USD 285.0 million
as of December 31, 2015) and other guarantees of USD 7.6
million (USD 7.3 million as of December 31, 2015).
As of December 31, 2016, trade receivables of USD 571.9
million (USD 436.2 million as of December 31, 2015) were
fully performing.
As of December 31, 2016, trade receivables of USD 69.1
million (USD 82.9 million as of December 31, 2015) were
past due (mainly up to 180 days).
116. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2017
2018
2019
2020
Thereafter
822
30
588
1,440
226
8
6
240
36
4
7
47
36
3
1
40
98
4
13
115
USD million
Borrowings
Interests to be accrued
(1)
Trade payables and other liabilities
Total
(1) These amounts do not include the effect of derivative financial
instruments.
As of December 31, 2016, total borrowings less cash
and cash equivalents and other current and non-current
investments amounted to USD 884.3 million.
1.4. Capital risk
Ternium seeks to maintain an adequate debt/equity
ratio considering the industry and the markets where it
operates. The year-end ratio debt over debt plus equity
is 0.19 and 0.24 as of December 31, 2016 and 2015,
respectively. The Company does not have to comply with
regulatory capital adequacy requirements as known in
the financial services industry.
2. Financial instruments by category and fair value
hierarchy level
The accounting policies for financial instruments have been
applied to the line items below. According to the scope and
definitions set out in IFRS 7 and IAS 32, employers’ rights
and obligations under employee benefit plans, and non-
financial assets and liabilities such as advanced payments
and income tax payables, are not included.
In USD thousands
AT DECEMBER 31, 2016
I. Assets as per statement of financial position
Receivables
Derivative financial instruments
Trade receivables
Other investments
Cash and cash equivalents
Total
Loans and
receivables
Assets at fair
value through
profit and loss
Held to
maturity
Total
127,241
–
635,015
52,995
83,437
898,688
–
316
–
83,117
100,026
183,459
–
–
–
14,739
–
127,241
316
635,015
150,851
183,463
14,739
1,096,886
117. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Derivatives
Other financial
liabilities
Held to
maturity
Total
–
–
287
–
287
35.107
580.941
–
1.218.635
1.834.683
–
–
–
–
–
35.107
580.941
287
1.218.635
1.834.970
Loans and
receivables
Assets at fair
value through
profit and loss
Held to
maturity
Total
34,342
–
511,464
69,935
74,841
–
1,787
–
167,256
76,650
690,582
245,693
–
–
–
–
–
–
34,342
1,787
511,464
237,191
151,491
936,275
Derivatives
Other financial
liabilities
Held to
maturity
Total
–
–
20,635
23,298
555,621
–
–
1,521,023
20,635
2,099,942
–
–
–
–
–
23,298
555,621
20,635
1,521,023
2,120,577
In USD thousands
AT DECEMBER 31, 2016
II. Liabilities as per statement of financial position
Other liabilities
Trade payables
Derivative financial instruments
Borrowings
Total
In USD thousands
AT DECEMBER 31, 2015
I. Assets as per statement of financial position
Receivables
Derivative financial instruments
Trade receivables
Other investments
Cash and cash equivalents
Total
In USD thousands
AT DECEMBER 31, 2015
II. Liabilities as per statement of financial position
Other liabilities
Trade payables
Derivative financial instruments
Borrowings
Total
118. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Fair Value by Hierarchy
Following the requirements contained in IFRS 13,
Ternium categorizes each class of financial instrument
measured at fair value in the statement of financial
position into three levels, depending on the significance
of the judgment associated with the inputs used in
making the fair value measurements:
• Level 1 comprises financial assets and financial
liabilities whose fair values have been determined on the
basis of quoted prices (unadjusted) in active markets for
identical assets or liabilities.
• Level 2 includes financial assets and financial liabilities
for which fair values have been estimated using inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
• Level 3 comprises financial instruments for which inputs
to estimate fair value of the assets or liabilities are not
based on observable market data (unobservable inputs).
The following table presents the assets and liabilities that are
measured at fair value as of December 31, 2016 and 2015:
In USD thousands
DESCRIPTION
Financial assets at fair value through profit or loss
Cash and cash equivalents
Other investments
Derivative financial instruments
Total assets
Financial liabilities at fair value through profit or loss
Derivatives financial instruments
Total liabilities
In USD thousands
DESCRIPTION
Financial assets at fair value through profit or loss
Cash and cash equivalents
Other investments
Derivative financial instruments
Total assets
Financial liabilities at fair value through profit or loss
Derivatives financial instruments
Total liabilities
Fair value measurement at December 31, 2016
Total
Level 1
Level 2
100,026
100,026
83,117
78,105
316
–
183,459
178,131
287
287
–
–
–
5,012
316
5,328
287
287
Fair value measurement at December 31, 2015
Total
Level 1
Level 2
76,650
76,650
–
167,256
140,092
27,164
1,787
–
245,693
216,742
20,635
20,635
–
–
1,787
28,951
20,635
20,635
119. Annual Report 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
There were no significant transfers between Level 1 and
Level 2 of the fair value hierarchy and there were no
financial assets and liabilities considered as Level 3.
net” line item in the income statement. Ternium does not
hedge its net investments in foreign entities.
The fair value of financial instruments traded in active
markets is based on quoted market prices at the reporting
date. A market is regarded as active if quoted prices are
readily and regularly available from an exchange, dealer,
broker, industry group, pricing service, or regulatory
agency, and those prices represent actual and regularly
occurring market transactions on an arm’s length basis.
The quoted market price used for financial assets held by
Ternium is the current bid price. These instruments are
included in Level 1 and comprise primarily corporate and
sovereign debt securities.
The fair value of financial instruments that are not
traded in an active market (such as certain debt securities,
certificates of deposits with original maturity of more
than three months, forward and interest rate derivative
instruments) is determined by using valuation techniques
which maximize the use of observable market data when
available and rely as little as possible on entity specific
estimates. If all significant inputs required to value an
instrument are observable, the instrument is included in
Level 2. Ternium values its assets and liabilities included
in this level using bid prices, interest rate curves, broker
quotations, current exchange rates, forward rates and
implied volatilities obtained from market contributors as
of the valuation date.
If one or more of the significant inputs are not based on
observable market data, the instruments are included in
Level 3. Ternium values its assets and liabilities in this
level using observable market inputs and management
assumptions which reflect the Company’s best estimate on
how market participants would price the asset or liability
at measurement date.
3. Accounting for derivative financial instruments and
hedging activities
Derivative financial instruments are initially recognized
in the statement of financial position at cost and
subsequently measured at fair value. Changes in fair value
are disclosed under “Other financial income (expenses),
Ternium designates certain derivatives as hedges of a
particular risk associated with a recognized asset or
liability or a highly probable forecast transaction. These
transactions are classified as cash flow hedges (mainly
interest rate swaps). The effective portion of the fair value
of derivatives that are designated and qualify as cash
flow hedges is recognized within other comprehensive
income. Amounts accumulated in other comprehensive
income are recognized in the income statement in the
same period than any offsetting losses and gains on the
hedged item. The gain or loss relating to the ineffective
portion is recognized immediately in the income
statement. The fair value of Ternium derivative financial
instruments (asset or liability) continues to be reflected on
the statement of financial position.
For transactions designated and qualifying for hedge
accounting, Ternium documents at inception the
relationship between hedging instruments and hedged
items, as well as its risk management objectives and
strategy for undertaking various hedge transactions.
The Company also documents its assessment, both at
hedge inception and on an ongoing basis, of whether
the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values
or cash flows of hedged items. At December 31, 2016,
the effective portion of designated cash flow hedges
amounts to USD 0.1 million (net of taxes) and is included
as “Cash flow hedges” line item in the statement of
comprehensive income.
The fair values of various derivative instruments used for
hedging purposes are disclosed in Note 22. The full fair
value of a hedging derivative is classified as a non-current
asset or liability when the remaining maturity of the hedged
item is more than 12 months and as a current asset or
liability when the remaining maturity of the hedged item is
less than 12 months.
Changes in the fair value of any derivative instruments
that do not qualify for hedge accounting under IAS 39 are
recognized immediately in the income statement.
120. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
to thyssenkrupp’s former Calvert re-rolling facility in
Alabama, U.S.. The price of the transaction was set using
EUR1.5 billion as enterprise value and September 30,
2016, as a locked-box date, and is subject to agreed-upon
adjustments at closing. The transaction, which will require
antitrust clearance in several jurisdictions, including Brazil,
Germany and the U.S., and other conditions, is expected to
close on or before September 30, 2017.
Based on the agreed-upon valuation and adjustments as
of September 30, 2016, and considering CSA’s financial
debt with BNDES of EUR 0.3 billion, Ternium expects to
disburse EUR 1.26 billion for this transaction.
The assets to be acquired had in calendar year 2016
consolidated annual sales of EUR 1.6 billion, shipments
of 4.3 million tons and EBITDA of EUR256 million. CSA
is a steel slab producer with a steelmaking facility located
in the state of Rio de Janeiro, Brazil, and has an annual
production capacity of 5 million tons of high-end steel
slabs, a deep-water harbor and a 490 MW combined cycle
power plant.
Ternium anticipates that it will finance the acquisition
with bank debt, and that it will begin consolidating tkSI’s
balance sheet and results of operations as from the third
quarter of 2017.
Pablo Brizzio
Chief Financial Officer
4. Fair value estimation
The estimated fair value of a financial instrument is the
amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a
forced or liquidation sale.
For the purpose of estimating the fair value of financial
assets and liabilities with maturities of less than one year,
the Company uses the market value less any estimated
credit adjustments. For other investments, the Company
uses quoted market prices.
As most borrowings incorporate floating rates that
approximate market rates and the contractual repricing
occurs mostly every 1 month, the fair value of the
borrowings approximates their carrying amount and it is
not disclosed separately.
In assessing the fair value of derivatives and other financial
instruments, Ternium uses a variety of methods, including,
but not limited to, estimated discounted value of future
cash flows using assumptions based on market conditions
existing at each year end.
29. SUBSEQUENT EVENTS - Agreement for the acquisition
of CSA Siderúrgica do Atlântico Ltda.
On February 21, 2017, the company’s wholly-owned
Luxembourg subsidiary Ternium Investments S.à r.l.
entered into a definitive agreement with thyssenkrupp
AG (“tkAG”) to acquire a 100% ownership interest in
thyssenkrupp Slab International B.V. (“tkSI”) and its
wholly-owned subsidiary CSA Siderúrgica do Atlântico
Ltda. (“CSA”). In addition, tkAG will assign to Ternium
a 2.0 million tons per year agreement to supply slabs
121. Annual Report 2016
TERNIUM S.A.
SOCIÉTÉ ANONYME
AUDITED ANNUAL ACCOUNTS
AS AT DECEMBER 31, 2016
29, Avenue de la Porte-Neuve, 3rd floor
L-2227 Luxembourg
R.C.S. Luxembourg B-98-668
Index to the Annual Accounts
124
Audit Report
126
Balance sheet
127
Profit and loss account
128
Notes to the annual accounts
29, Avenue de la Porte-Neuve, 3rd floor
L-2227 Luxembourg
R.C.S. Luxembourg B-98-668
123. Annual Accounts 2016
Audit Report
To the Shareholders of
Ternium S.A.
We have audited the accompanying annual accounts of Ternium S.A., which comprise the
balance sheet as at 31 December 2016, the profit and loss account for the year then ended
and a summary of significant accounting policies and other explanatory information.
Board of Directors’ responsibility for the annual accounts
The Board of Directors is responsible for the preparation and fair presentation of these
annual accounts in accordance with Luxembourg legal and regulatory requirements
relating to the preparation of the annual accounts, and for such internal control as the
Board of Directors determines is necessary to enable the preparation of annual accounts
that are free from material misstatement, whether due to fraud or error.
Responsibility of the “Réviseur d’entreprises agréé”
Our responsibility is to express an opinion on these annual accounts based on our audit.
We conducted our audit in accordance with International Standards on Auditing as
adopted for Luxembourg by the “Commission de Surveillance du Secteur Financier”.
Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the annual accounts are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the annual accounts. The procedures selected depend on the judgment
of the “Réviseur d’entreprises agréé”, including the assessment of the risks of material
misstatement of the annual accounts, whether due to fraud or error. In making those
risk assessments, the “Réviseur d’entreprises agréé” considers internal control relevant
to the entity’s preparation and fair presentation of the annual accounts in order to
design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by the Board of Directors, as well as
evaluating the overall presentation of the annual accounts.
PricewaterhouseCoopers Société coopérative, 2 Rue Gerhard Mercator, B.P. 1443, L-1014 Luxembourg
T: +352 494848 1, F:+352 494848 2900, www.pwc.lu
Cabinet de révision agréé. Expert-comptable (autorisation gouvernementale n°10028256)
R.C.S. Luxembourg B 65 477 - TVA LU25482518
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the annual accounts give a true and fair view of the financial position of
Ternium S.A. as of 31 December 2016, and of the results of its operations for the year then
ended in accordance with Luxembourg legal and regulatory requirements relating to the
preparation of the annual accounts.
PricewaterhouseCoopers, Société coopérative
Represented by
Luxembourg, 21 February 2017
Marc Minet
Balance Sheet
as at December 31, 2016
Amounts expressed in USD
ASSETS
Fixed assets
Tangible assets
Other fixtures and fittings, tools and equipment
Financial assets
Shares in affiliated undertakings
Current assets
Debtors
Amounts owed by affiliated undertakings
a) becoming due and payable within one year
Other debtors
a) becoming due and payable within one year
Investments
Own shares
C
II
3
III
1
D
II
2
4
III
2
IV
Cash at bank and in hand
Total assets
A
I
II
IV
1
2
V
VI
B
1
C
6
CAPITAL, RESERVES AND LIABILITIES
Capital and reserves
Subscribed capital
Share premium account
Reserves
Legal reserve
Reserve for own shares or own corporate units
Profit or loss brought forward
Profit or loss for the financial year
Provisions
Provisions for pensions and similar obligations
Creditors
Amounts owed to affiliated undertakings
a) becoming due and payable within one year
b) becoming due and payable after more than one year
8
Other creditors
c) Other creditors
i) becoming due and payable within one year
Total capital, reserves and liabilities
The accompanying notes form an integral part of these annual accounts.
126. Ternium
3
2.5
4
2.6
2.7
5
6
2.8
2.9
4
4
NOTES
12.31.2016
12.31.2015
2.3
167,573
2.4 & 3
6,964,902,616
6,964,902,616
6,965,070,189
–
7,227,635,428
7,227,635,428
7,227,635,428
8,514,212
2,618,116
38,282
61,399
59,599,747
68,152,241
327,645
68,479,886
59,599,747
62,279,262
58,848
62,338,110
7,033,550,075
7,289,973,538
2,004,743,442
1,414,121,505
200,474,346
59,599,747
3,353,165,736
(20,989,981)
7,011,114,795
14,736,657
14,736,657
2,004,743,442
1,414,121,505
200,474,346
59,599,747
5,157,688,201
(1,627,845,555)
7,208,781,686
4,008,871
4,008,871
2,596,421
3,009,253
71,322,645
3,775,192
2,092,948
7,698,622
7,033,550,075
2,085,144
77,182,981
7,289,973,538
Profit and Loss Account
for the years ended December 31, 2016 and 2015
Amounts expressed in USD
7
Value adjustments
a) in respect of formation expenses and of tangible
and intangible fixed assets
8
11
13
Other operating expenses
Other interest receivable and similar income
a) derived from affiliated undertakings
b) other interest and similar income
Value adjustments in respect of financial assets and
of investments held as current assets
14
Interest payable and similar expenses
a) concerning affiliated undertakings
b) other interest and similar expenses
15
16
18
Tax on profit or loss
Profit or loss after taxation
Profit or loss for the financial year
The accompanying notes form an integral part of these annual accounts.
NOTES
12.31.2016
12.31.2015
7
(89.483)
–
(20.232.666)
(19.041.485)
3
8
11.583
24.531
–
(686.273)
(13.434)
(4.239)
(20.989.981)
(20.989.981)
1.708
12.677
(1.608.573.243)
(241.525)
–
(3.687)
(1.627.845.555)
(1.627.845.555)
127. Annual Accounts 2016
Notes to the Annual Accounts
1. General information
Ternium S.A. (hereafter the “Company” or “Ternium”),
was incorporated on December 22, 2003 to hold
investments in flat and long steel manufacturing and
distributing companies for an unlimited period.
The Company has an authorized share capital of a single
class of 3.5 billion shares having a nominal value of USD
1,00 per share. As of December 31, 2016, there were
2.004.743.442 shares issued. All issued shares are fully paid.
Following a corporate reorganization carried out
during fiscal year 2005, in January 2006 the Company
successfully completed its registration process with the
United States Securities and Exchange Commission
(“SEC”). Ternium’s ADSs began trading on the New
York Stock Exchange under the symbol “TX” on
February 1, 2006. The Company’s initial public offering
was settled on February 6, 2006.
The Company was initially established as a public limited
liability company (société anonyme) under Luxembourg’s
1929 holding company regime. Until termination of
such regime on December 31, 2010, holding companies
incorporated under the 1929 regime (including the
Company) were exempt from Luxembourg corporate and
withholding tax over dividends distributed to shareholders.
On January 1, 2011, the Company became an ordinary
public limited liability company (société anonyme)
and, effective as from that date, the Company is
subject to all applicable Luxembourg laws and taxes
(including, among others, corporate income tax on its
worldwide income) and its dividend distributions will
generally be subject to Luxembourg withholding tax.
However, dividends received by the Company from
subsidiaries in high income tax jurisdictions, as defined
under Luxembourg law, will continue to be exempt
from corporate income tax in Luxembourg under
Luxembourg’s participation exemption.
As part of the Company’s corporate reorganization
in connection with the termination of Luxembourg’s
1929 holding company regime, on December 6, 2010,
the Company contributed its equity holdings in all its
subsidiaries and all its financial assets to its Luxembourg
wholly-owned subsidiary Ternium Investments S.à r.l.,
or Ternium Investments, in exchange for newly issued
corporate units of Ternium Investments. As the assets
contributed were recorded at their historical carrying
amount in accordance with Luxembourg GAAP, the
Company’s December 2010 contribution of such assets
to Ternium Investments resulted in a non-taxable
revaluation of the accounting value of the Company’s
assets under Luxembourg GAAP. The amount of the
December 2010 revaluation was equal to the difference
between the historical carrying amounts of the assets
contributed and the value at which such assets were
contributed and amounted to USD 4,0 billion.
Following the completion of the corporate reorganization,
and upon its conversion into an ordinary Luxembourg
holding company, the Company voluntarily recorded
a special reserve exclusively for tax-basis purposes. As
of December 31, 2016 and 2015, this special tax reserve
amounted to USD 6,9 billion and USD 7,1 billion,
respectively. The Company expects that, as a result of its
corporate reorganization, its current overall tax burden
will not increase, as all or substantially all of its dividend
income will come from high income tax jurisdictions.
In addition, the Company expects that dividend distributions
for the foreseeable future will be imputed to the special
reserve and therefore should be exempt from Luxembourg
withholding tax under current Luxembourg law.
The financial year of the Company starts on January 1
and ends on December 31 of each year.
The Company also prepares consolidated financial
statements, which are published according to the
provisions of the Luxembourg Law.
2. Summary of significant accounting policies
2.1. Basis of presentation
These annual accounts have been prepared in accordance
with Luxembourg legal requirements and accounting
standards under the historical cost convention.
Accounting policies and valuation rules are, besides
the ones laid down by the law of December 19, 2002 as
amended on December 18, 2015, determined and applied
by the Board of Directors.
128. Ternium
TERNIUM S.A.
Notes to the accounts (contd.)
The preparation of annual accounts requires the Board
of Directors to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues
and expenses, and the related disclosure of contingent
assets and liabilities. Estimates and judgments are
continually evaluated and are based on historical
experience and other factors, including expectations of
future events that are believed to be reasonable under
the circumstances. Management makes estimates and
assumptions concerning the future. Actual results may
differ significantly from these estimates under different
assumptions or conditions.
Following the amendment of the Luxemburgish Law
of December 19, 2002, adopted on December 18, 2015,
some figures for the year ended December 31, 2015 have
been reclassified to ensure comparability with the figures
for the year ended December 31, 2016.
2.2. Foreign currency translation
The Company maintains its books and records in USD.
Transactions expressed in currencies other than USD
are translated into USD at the exchange rate effective
at the time of the transaction. Formation expenses and
long-term assets expressed in currencies other than USD
are translated into USD at the exchange rate effective at
the time of the transaction. At the balance sheet date,
these assets remain translated at historical exchange
rates. Cash at bank is translated at the exchange rate
effective at the balance sheet date. Exchange losses
and gains are recorded in the profit and loss account
of the year. Other assets and liabilities are translated
separately respectively at the lower or at the higher of
the value converted at the historical exchange rate or
the value determined on the basis of the exchange rates
effective at the balance sheet date. Solely the unrealised
exchange losses are recorded in the profit and loss account.
The exchange gains are recorded in the profit and loss
account at the moment of their realisation. Where there is
an economic link between an asset and liability, these are
valued in total according to the method described above
and the net unrealised losses are recorded in the profit and
loss account whereas the net unrealised exchange gains are
not recognised.
2.3. Tangible assets
Tangible assets are recognized at purchase price or
construction cost less accumulated depreciation;
purchase price includes expenditure that is directly
attributable to the acquisition of the items.
Depreciation is calculated for each asset over its
estimated useful life, which is, in average, 10 years for
buildings and 5 years for other fixtures and fittings,
tools and equipment.
Where the Company considers that a tangible fixed asset
has suffered a durable depreciation in value, an additional
write-down is recorded to reflect this loss. These value
adjustments are not continued if the reasons for which the
value adjustments were made have ceased to apply.
2.4. Financial assets
Shares in affiliated undertakings are valued at purchase
price including the expenses incidental thereto. Loans to
affiliated undertakings are stated at nominal value.
Whenever necessary the Company conducts impairment
test on its fixed assets in accordance with Luxembourg
regulations.
In the case of durable depreciation in value according to
the opinion of the Board of Directors, value adjustments
are made in respect of financial fixed assets, so that they
are valued at the lower figure to be attributed to them at
the balance sheet date. These value adjustments are not
continued if the reasons for which the value adjustments
were made have ceased to apply.
2.5. Debtors
Amounts owed by affiliated undertakings and other
debtors are valued at nominal value. They are subject to
value adjustments when their recovery is compromised.
These value adjustments are not continued if the reasons
for which the value adjustments were made have ceased
to apply.
Debtors are mainly composed of amounts owed by
affiliated undertakings becoming due and payable within
one year.
129. Annual Accounts 2016
TERNIUM S.A.
Notes to the accounts (contd.)
2.6. Investments
Investments are valued at the lower of purchase price,
including expenses incidental thereto and calculated on
the basis of weighted average prices or market value,
expressed in the currency in which the annual accounts
are prepared. A value adjustment is recorded where the
market value is lower than the purchase price. These value
adjustments are not continued if the reasons for which the
value adjustments were made have ceased to apply.
The figures for the year that has ended on December 31,
2015 relating to the caption “Own shares” have been
reclassified to ensure comparability with the figures for
the year ended on 31 December 2016.
2.7. Cash at bank and in hand
Cash at bank and in hand also comprise cash
equivalents, liquidity funds and short-term investments
with a maturity of less than three months at the date of
purchase. Assets recorded in cash and cash equivalents
are carried at fair market value or at historical cost which
approximates fair market value.
2.8. Provisions for pensions and similar obligations
During 2007, Ternium launched an incentive retention
program (the “Program”) applicable to certain senior
officers and employees of the Company, who will be
granted a number of Units throughout the duration of
the Program. The value of each of these Units is based on
Ternium’s shareholders’ equity (excluding non-controlling
interest). Also, the beneficiaries of the Program are entitled
to receive cash amounts based on (i) the amount of
dividend payments made by Ternium to its shareholders,
and (ii) the number of Units held by each beneficiary to
the Program. Units vest ratably over a period of four years
and will be redeemed by the Company ten years after grant
date, with the option of an early redemption at seven years
after grant date. As the cash payment of the benefit is tied
to the book value of the shares, and not to their market
value, Ternium valued this long-term incentive program as
a long term benefit plan as classified in IAS 19. Actuarial
gains and losses are charged or credited in the profit or loss
in the period in which they arise.
As of December 31, 2016 the outstanding liability
corresponding to the Program amounts to USD 14,7
million.
2.9. Creditors
Creditors are recorded at their reimbursement value.
When the amount repayable on account is greater than
the amount received, the difference is shown as an asset
and is written off over the period of the debt based on a
linear method.
3. Financial Assets
On June 30, 2016, as result of the master credit
agreement entered between Ternium Investments S.à
r.l. (“Ternium Investments”) and Ternium S.A. where
Ternium Investments pursuant to which, upon request
from Ternium, Ternium Investments may, but shall not
be required to, from time to time make loans to Ternium.
Any loan under the master credit agreement may be
repaid or prepaid from time to time through a reduction
of the capital of Ternium Investments by an amount
equivalent to the amount of the loan then outstanding
(including accrued interest). As a result of the
cancellation of loans granted to Ternium, the reductions
in the capital of Ternium Investments made on June 30,
2016 amounted to USD 262.732.812.
As a result of the transactions detailed above, the financial
assets of the Company as at December 31, 2016, consist of:
COMPANY
COUNTRY
% of
beneficial
ownership
Book value at
12.31.2015
USD
Net (Decreases)
/ Additions
USD
Book value at
12.31.2016
USD
Equity at
12.31.2016
USD
Ternium Investments S.à r.l.
Luxembourg
100.00%
7,227,635,428
-262,732,812
6,964,902,616
6,978,308,424
Shares in affiliated undertakings
7,227,635,428
-262,732,812
6,964,902,616
6,978,308,424
130. Ternium
4. Balances with affiliated undertakings
Amounts expressed in USD
ASSETS
Debtors
Ternium Solutions A.G.
Ternium Investments S.à r.l.
LIABILITIES
Creditors
Exiros México, S.A. de C.V.
Siderar S.A.I.C.
Soluciones Integrales de Gestión S.A. (SIGSA)
Techint Inc.
BORROWINGS
Ternium Investments S.à.r.l.
TERNIUM S.A.
Notes to the accounts (contd.)
12.31.2016
12.31.2015
8,178,345
335,867
8,514,212
3,009,253
250,374
744,757
414
4,004,798
1,600,876
1,600,876
1,091,633
1,526,483
2,618,116
3,775,192
229,365
1,045,850
–
5,050,407
70,047,430
70,047,430
5. Capital and reserves
Amounts expressed in USD
Subscribed
Capital
Share
Premium
Legal
Reserve
Profit or
loss brought
forward
Result for
the financial
year
Total capital
and reserves
Reserve for
own shares
or own
corporate
(2)
units
Balance at December 31, 2015
Allocation of previous year results
(1)
Payment of dividends
(1)
Loss for the year
2,004,743,442
1,414,121,505
200,474,346
59,599,747
5.157.688.201
(1.627.845.555)
7.208.781.686
–
–
–
–
–
–
–
–
–
–
–
–
(1.627.845.555)
1.627.845.555
–
(176.676.910)
–
(176.676.910)
–
(20.989.981)
(20.989.981)
Balance at December 31, 2016
2,004,743,442
1,414,121,505
200,474,346
59,599,747
3.353.165.736
(20.989.981)
7.011.114.795
(1) As approved by the Annual General Meeting of Shareholders held on May 4, 2016.
(2) As of December 31, 2016, the Company held 41.666.666 shares as treasury shares.
6. Legal reserve
In accordance with Luxembourg law, the Company is
required to set aside a minimum of 5% of its annual
net profit for each financial period to a legal reserve.
This requirement ceases to be necessary once the balance
of the legal reserve has reached 10% of the Company’s
issued share capital. At December 31, 2016, this reserve
reached the above-mentioned threshold, the legal reserve
is not available for distribution to shareholders.
131. Annual Accounts 2016
TERNIUM S.A.
Notes to the accounts (contd.)
7. Other operating expenses
11. Subsequent events – Agreement for the acquisition of
Amounts expressed in USD
AT DECEMBER 31,
2016
2015
Services and fees
18,770,053
17,323,417
Board of director’s accrued fees
1,031,642
1,376,817
Other expenses
Total
430,971
341,251
20,232,665
19,041,485
Services and fees are mainly composed of professional,
audit and legal services.
8. Taxes
For the year ended December 31, 2016, the Company did
not realize any profits subject to tax in Luxembourg and
will therefore be only subject to the minimum income
tax applicable to a Soparfi (société de participations
financières). The Company is also liable to the minimum
net wealth tax.
9. Income from financial fixed assets derived from affiliated
undertakings
During the period, the Company did not receive any
dividends.
10. Parent Company
As of December 31, 2016, Techint Holdings S.à r.l.
(“Techint”) owned 62.02% of the Company’s share capital
and Tenaris Investments S.à r.l. (“Tenaris”) held 11.46% of
the Company’s share capital. Each of Techint and Tenaris
were controlled by San Faustin S.A., a Luxembourg
company (“San Faustin”). Rocca & Partners Stichting
Administratiekantoor Aandelen San Faustin (“RP STAK”),
a Dutch private foundation (Stichting), held voting shares
in San Faustin sufficient in number to control San Faustin.
No person or group of persons controls RP STAK.
CSA Siderúrgica do Atlântico Ltda.
On February 21, 2017, the company’s wholly-owned
Luxembourg subsidiary Ternium Investments S.à r.l.
entered into a definitive agreement with thyssenkrupp
AG (“tkAG”) to acquire a 100% ownership interest in
thyssenkrupp Slab International B.V. (“tkSI”) and its
wholly-owned subsidiary CSA Siderúrgica do Atlântico
Ltda. (“CSA”). In addition, tkAG will assign to Ternium
a 2.0 million tons per year agreement to supply slabs
to thyssenkrupp’s former Calvert re-rolling facility in
Alabama, U.S.. The price of the transaction was set using
EUR1.5 billion as enterprise value and September 30,
2016, as a locked-box date, and is subject to agreed-upon
adjustments at closing. The transaction, which will require
antitrust clearance in several jurisdictions, including Brazil,
Germany and the U.S., and other conditions, is expected to
close on or before September 30, 2017.
Based on the agreed-upon valuation and adjustments as
of September 30, 2016, and considering CSA’s financial
debt with BNDES of EUR0.3 billion, Ternium expects to
disburse EUR1.26 billion for this transaction.
The assets to be acquired had in calendar year 2016
consolidated annual sales of EUR1.6 billion, shipments
of 4.3 million tons and EBITDA of EUR256 million.
CSA is a steel slab producer with a steelmaking facility
located in the state of Rio de Janeiro, Brazil, and has an
annual production capacity of 5 million tons of high-end
steel slabs, a deep-water harbor and a 490 MW combined
cycle power plant.
Ternium anticipates that it will finance the acquisition
with bank debt, and that it will begin consolidating tkSI’s
balance sheet and results of operations as from the third
quarter of 2017.
Pablo Brizzio
Chief Financial Officer
132. Ternium
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49. Annual Report 2016
www.ternium.com
122. Ternium