ANNUAL
REPORT
2017
CONTENTS
2. Ternium
01_
Company Profile and Strategy. page 4
Board of Directors and Senior Management /
Investor Information. page 6
02_
Chairman’s Letter. page 8
03_
Operating and Financial Highlights. page 10
04_
Management’s Report. page 14
05_
Environmental, Social and Governance. page 30
06_
Financial Statements. page 40
07_
Principal Risks and Uncertainties. page 134
3. Annual Report 2017
ANNUAL
REPORT
2017
COMPANY PROFILE AND
STRATEGY
4. Ternium
01 Ternium is Latin America’s leading flat steel
producer with an annual crude steel production
capacity of 12.4 million tons. We operate through
subsidiaries in Mexico, Brazil, Argentina,
Colombia, the southern United States and Central
America, which own regional manufacturing,
service center and distribution networks. In
addition, Ternium participates in the control
group of Usiminas, a leading steel company in the
Brazilian market.
Our customers range from small businesses to large
global companies in the automotive, home appliances,
construction, capital goods, container, food and
energy industries across the Americas. We aim to
build close relationships with our customers and
recognize that our success is closely linked with theirs.
Ternium supplies a broad range of high value-
added steel products and has advanced customer
integration systems that enable us to differentiate
ourselves from our competitors through the offering
of sophisticated products and services.
The company’s industrial system has varied
production technologies that provide a diversified
cost structure, based on different types of raw
material and energy sources, and a flexible
production configuration. The industrial system
includes proprietary iron ore mines, steelmaking
facilities, finishing facilities, service centers and
a broad distribution network to offer slabs, hot-
rolled products, cold-rolled products, galvanized
and electro-galvanized sheets, pre-painted sheets,
tinplate, welded pipes, bars and wire rods as well as
slit and cut-to-length products.
Ternium’s program for recently- graduated
professionals is in the core of a strategy
to recruit and retain talent. Current
management and technologist positions
are held mostly by employees recruited
through this program.
Internships and training activities help
identify talent and promote acquaintance
between the company and potential
candidates.
Its innovative culture, industrial expertise and
long-term view enable Ternium to continuously
achieve new breakthroughs in industrial excellence,
competitiveness and customer service. 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 IFRS and IFRIC
interpretations developed by the IFRS Interpretations Committee, as issued by
IASB and adopted by the European Union, and presented in US 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.
5. Annual Report 2017
Board of Directors and Senior Management
Board of Directors
Senior Management
Chairman
Paolo Rocca
Chief Executive Officer Máximo Vedoya
Vice-Chairman Daniel Novegil
Chief Financial Officer Pablo Brizzio
Directors
Ubaldo Aguirre (*)
Roberto Bonatti
Carlos Condorelli
Vincent Decalf (*)
Adrián Lajous (*)
Gianfelice Rocca
(*) Independent directors and
Audit Committee members
Ternium Mexico
President
Ternium Brasil
President
César Alejandro Jiménez
Marcelo Chara
Ternium Argentina
President
Martín Berardi
International Area
President
Héctor Obeso Zunzunegui
Planning and Global
Business Development
General Director
Oscar Montero
Engineering, Industrial Pablo Hernán Bassi
Coordination and EHS
Director
Quality and R&D
Director
Rubén Herrera
Chief Information Officer Roberto Demidchuk
Human Resources
Director
Rodrigo Piña
6. Ternium
Investor Information
Investor Relations Director
IR Inquiries
Sebastián Martí
smarti@ternium.com
Phone: +54 11 4018 8389
TERNIUM Investor Relations
ir@ternium.com
U.S. toll free: 866 890 0443
ADS Depositary Bank
BNY Mellon
Luxembourg Office
Proxy services: BNY Mellon Shareowner
29 Avenue de la Porte-Neuve
Services
L2227 - Luxembourg
P.O. Box 505000
Luxembourg
Louisville, KY 40233-5000
Phone: +352 2668 3153
Fax: +352 2659 8349
Toll free number for US calls:
+1 888 269 2377
Stock Information
International calls: +1 201 680 6825
New York Stock Exchange (TX)
CUSIP Number: 880890108
Internet
www.ternium.com
7. Annual Report 2017
02_CHAIRMAN’S LETTER
In 2017, Ternium laid the foundations for a new cycle of growth over the coming years. The acquisition of
thyssenkrupp’s advanced steel slab production facilities in Brazil and our expansion plans in Mexico and Colombia
will allow us to build on the solid platform we have established over the past decade and strengthen our position as
the leading flat steel producer in the Latin American region.
The integration of the modern slab facilities in Rio de Janeiro with our industrial center in Pesquería, Mexico, along
with our expansion projects will transform our industrial system and our product development capabilities, and act
as a catalyst to implement advanced manufacturing technologies throughout the company. Our agenda will be one
of industrial and technological excellence, customer service and competitive differentiation aimed at sustaining the
profitability of our operations for the long-term.
At its center will be the challenge of applying the connectivity and processing capabilities of new digital
technologies to create the smart factory of the future. This will be a factory where the use of automation, analytics
and real-time data processing systems produces a step change in safety, purchasing, quality, manufacturing and
logistics, integrating with customer operations and providing a more stimulating work environment.
With this demanding agenda in front of it, Ternium performed well in 2017. Sales and shipments were boosted
in the second part of the year following the incorporation of the new steel slab operations in Brazil in September.
EBITDA rose 25% to $1.9 billion, on higher shipments of 11.6 million tons and margins remained at an industry-
leading level.
In Mexico, shipments rose to a new record of 6.6 million tons as steel consumption continues to grow and we
strengthen our position serving the high value automotive and industrial sectors. We announced an investment
plan of $1.1 billion for the construction of a new hot rolling mill with an annual capacity of 4.1 million tons to
further strengthen our positioning and expand our product range by integrating the advanced steel capabilities
of our new Brazilian slab mill. Meanwhile, our investment in the Techgen power generation plant performed very
well in its first year of operation, with savings on our energy costs and positive margins on the sale to third parties
of our unused quota.
In Argentina, shipments rose 11% to 2.3 million tons, reflecting a gradual recovery in the economy led by the
agricultural, infrastructure and energy sectors, and our industrial facilities are operating at a good level of utilization.
Following the results of mid-term elections and an improvement in economic conditions in Brazil, we expect the
recovery to consolidate and extend to the automotive and private construction sectors in 2018.
In Colombia, we announced an investment plan of $90 million to build a new rebar rolling facility with an annual
production capacity of 520,000 tons, which we expect to start up in the second half of 2019. The Colombian
market for long steel products has grown significantly over the last few years and we see an opportunity to
leverage our distribution and finishing capabilities to displace imports and strengthen our position in the dynamic
construction sector.
In Brazil, the recovery in Usiminas continues. The market is improving and sales rose 27%. Margins are back at
normal levels and the financial position of the company is now stable. We have agreed with our partners at NSSMC
new corporate governance conditions, which should ensure renewed support for the company in the coming years.
As the Brazilian industrial sector strengthens, we expect our returns on this investment to continue to improve.
8. Ternium
As we advance with our investment programs and seek to develop integrated industrial value chains in the
countries where we operate, including our ProPymes program that provides technical and managerial support
for small and medium enterprises, we remain vigilant in our efforts to protect our markets from unfair trade
practices. This year, it has been encouraging to see a reduction in the overwhelming volume of unfairly traded
steel exports from China as the government takes steps to reduce excess capacity in its most polluting mills.
Nevertheless, unfair trade practices remain pervasive among government-sponsored companies in China and
other countries with excess capacity. In recent days, the US has proclaimed a 25% tariff under section 232 on
steel imports from all countries except Mexico and Canada. In the event that there were to be collateral effects
involving unfair trade as a result of these trade measures, we are confident the different trade authorities in the
region will take corresponding actions.
Actions to improve the sustainability of the company and our standing in the communities where we operate
are at the center of our agenda. We are active participants in the actions of worldsteel to bring transparency and
improve the industry’s record on sustainability issues. The extensive efforts we have made to improve our safety
management continue to bear results as our indicator for lost-time accidents fell a further 20% in 2017, bringing
it in line with the leading companies in our industry. We continue to invest to reduce emissions, improve air quality
and reduce water consumption at our less modern facilities as well as certifying all our operations in accordance
with OHSAS 18001 and ISO 14001 standards. The Roberto Rocca Technical School in Pesquería, now in its
second year, has 252 students and is an integral part of a vibrant and growing industrial community.
Net income for the year amounted to $886.2 million, or $4.51 per ADS, a 49% increase over the previous year.
After the acquisition of the new slab mill in Brazil and an increase in working capital, associated with a higher unit
cost of inventories and an increase in sales, our net financial debt increased to $2.7 billion, or 1.4 times EBITDA.
Considering the improvement in our financial results and a favorable outlook ahead for our sales, we are proposing
a further increase in the annual dividend payable to shareholders to $1.10 per ADS.
As Ternium embarks on a new cycle of growth, after an extraordinary decade since the company was first publicly
listed, it will now be led by Máximo Vedoya. Máximo has been at the helm of the company’s operations in Mexico
over the past six years and will bring management continuity and renewed energy for the transformation of the
company that lies ahead. I would like to thank Daniel Novegil for the remarkable job he has done in leading
Ternium over the past twelve years and we are very pleased to be able to continue to count on his wisdom and
experience as Vice-Chairman of the Board.
We have ahead of us a fascinating opportunity to strengthen our position as a leading industrial company in Latin
America, adopting new digital technologies to achieve new levels of industrial excellence and integration with
our suppliers and customers. I would like to thank our employees for their efforts and achievements during the
past year. I would also like to thank our customers, suppliers and shareholders for their continuing support and
confidence in our company.
Paolo Rocca
Chairman
March 21, 2018
9. Annual Report 2017
ANNUAL
REPORT
2017
OPERATING AND FINANCIAL
HIGHLIGHTS
10. Ternium
03 STEEL SHIPMENTS (THOUSAND TONS)
Mexico
Southern Region
Other Markets
Total
FINANCIAL INDICATORS ($ MILLION)
Net sales
Operating income
EBITDA (1)
Equity in earnings (losses) of non-consolidated companies (2)
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 (3)
BALANCE SHEET ($ MILLION)
Total assets
Total financial debt
Net financial debt (4)
Total liabilities
Capital and reserves attributable to the owners of the parent
Non-controlling interest
STOCK DATA ($ PER SHARE / ADS (5))
Basic earnings (losses) per share
Basic earnings (losses) per ADS
Proposed dividend per ADS
Weighted average number of shares outstanding (6)
(thousand shares)
(*)
2017
2016
2015
2014
2013
6,622.8
2,456.0
2,517.7
11,596.6
9,700.3
1,456.8
1,931.1
68.1
1,359.8
886.2
136.7
1,022.9
409.4
(25.5)
12,122.6
3,221.9
2,748.3
6,269.8
5,010.4
842.3
0.45
4.51
1.10
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
10,372.6
2,002.8
1,526.1
4,034.6
5,340.0
998.0
0.23
2.32
0.75
1,963,076.8
1,963,076.8
1,963,076.8
1,963,076.8
1,963,076.8
(1) EBITDA is operating income adjusted to exclude depreciation and amortization.
(2) Equity in earnings (losses) of non-consolidated companies includes in 2014 and 2015
impairment charges on the Usiminas investment of $739.8 million and $191.9 million,
respectively; no impairments were recorded in 2013, 2016 and 2017.
(3) Free cash flow equals net cash provided by operating activities less capital expenditures.
(4) Net financial debt equals total financial debt less cash and cash equivalents plus other
(5) Each ADS represents 10 shares.
(6) Shares outstanding were 1,963,076,776 as of December 31 of each year.
(*) In 2017, the financial statements of Ternium Brasil Ltda. (Ternium Brasil, formerly known
as CSA Siderúrgica do Atlântico Ltda.) were consolidated into Ternium’s, starting in
September. For more information, see note 3 to our consolidated financial statements
included in this annual report.
investments.
11. Annual Report 2017
RIO DE JANEIRO
STEEL MILL, BRAZIL
An acquisition that will transform our industrial system,
providing new opportunities for growth and integration.
5.0
MILLION TONS
ANNUAL
PRODUCTION
CAPACITY
490
MW
COMBINED
CYCLE POWER
PLANT
DEEP-WATER
HARBOR
IRON ORE
UNLOADING
TRAIN STATION
(JUST-IN-TIME
SUPPLY)
COMPACT,
EFFICIENT AND
ENVIRONMENTALLY
FRIENDLY FACILITY
12. Ternium
13. Annual Report 2017
ANNUAL
REPORT
2017
MANAGEMENT’S REPORT
14. Ternium
04 This review of Ternium’s financial condition and
results of operations is based on, and should be read
in conjunction with, the Company’s consolidated
financial statements as of December 31, 2017 and
2016 and for the years ended December 31, 2017,
2016 and 2015 (including the notes thereto), which
are included elsewhere in this annual report.
Summary Results
Steel shipments (tons)
Iron ore shipments (tons)
Net sales ($ million)
Operating income ($ million)
EBITDA ($ million)
EBITDA margin (% of net sales)
EBITDA per ton ($)
Income tax expense ($ million)
Profit for the year ($ million)
Profit for owners of the parent ($ million)
Basic earnings per ADS ($)
2017
2016
11,597,000
3,551,000
9,700.3
1,456.8
1,931.1
19.9%
166.5
(336.9)
1,022.9
886.2
4.51
9,764,000
3,310,000
7,224.0
1,141.7
1,548.6
21.4%
158.6
(411.5)
706.9
595.6
3.03
Dif.
19%
7%
34%
28%
25%
-7%
5%
-18%
45%
49%
49%
• EBITDA of $1.9 billion in 2017, a 25% year-over-
year increase reflecting higher shipments and
EBITDA per ton.
• Basic earnings per American Depositary Share
(ADS) of $4.51 in 2017, a year-over-year increase of
$1.48 per ADS.
• Capital expenditures of $409.4 million in 2017,
down from $435.5 million in 2016.
• Net cash use of $1.6 billion in connection with the
acquisition of Ternium Brasil and related transactions.
• Consolidation of Ternium Brasil’s financial
statements into Ternium’s, starting in September 2017.
For more information, see note 3 to our consolidated
financial statements included in this annual report.
• Net debt position of $2.7 billion at the end of
December 2017, up from $0.9 billion at the end of
December 2016 and equivalent to 1.4 times net debt
to EBITDA.
Operating income in 2017 was $1.5 billion, a
$315.1 million increase compared to operating
income in 2016, primarily attributable to higher
steel segment operating income, with an increase
in steel shipments partially offset by a decrease in
steel operating margin, and higher mining segment
operating income. Steel shipments were 1.8 million
tons higher compared to 2016, reflecting a 1.4
million-ton increase in Other Markets, mainly as
a result of the consolidation of Ternium Brasil’s
shipments, a 235,000-ton increase in the Southern
Region and a 218,000-ton increase in Mexico.
Steel revenue per ton increased year-over-year in
15. Annual Report 2017
Mexico and the Southern Region, and decreased in
Other Markets, mainly due to the consolidation of
Ternium Brasil slab sales. In addition, operating cost
per ton increased as a result of higher raw material
and purchased slab costs, partially offset by the
consolidation of Ternium Brasil.
Profit for 2017 amounted to $1.0 billion, compared
to a profit of $706.9 million for 2016. This $316.0
million increase in the year-over-year comparison
was mainly due to the above-mentioned higher
operating income, a lower effective tax rate and
higher results from the equity in earnings of
Usiminas (not consolidated), partially offset by
higher net financial expenses. The effective tax rate
was affected by the non-cash effect on deferred
taxes of the fluctuation of the Mexican peso against
the US dollar, which appreciated 5% in 2017 and
depreciated 17% in 2016. Higher net financial
expenses included an $85.8 million negative year-
over-year difference in net foreign exchange results
mainly related to the effect of the fluctuations of the
Mexican peso and the Argentine peso against the
US dollar on a net short local currency position in
Ternium’s Mexican subsidiaries and a net short US
dollar position in Ternium’s Argentine subsidiary.
Net Sales
Net sales in 2017 were $9.7 billion, 34% higher
than net sales in 2016. The following table outlines
Ternium’s consolidated net sales for 2017 and 2016.
NET SALES ($ MILLION)
SHIPMENTS (THOUSAND TONS)
REVENUE PER TON ($/TON)
2017
2016
Dif.
2017
2016
Dif.
2017
2016
Dif.
Mexico
Southern Region
Other Markets
Total steel products
Other products (7)
5,378.6
4,477.6
2,313.6
1,865.9
1,699.0
9,391.2
309.1
864.4
7,208.0
13.8
2,140%
20%
24%
97%
30%
6,622.8
6,405.2
2,456.0
2,517.7
11,596.6
2,220.8
1,138.1
9,764.0
3%
11%
121%
19%
812
942
675
810
699
840
760
738
16%
12%
-11%
10%
Steel reporting segment
9,700.3
7,221.8
34%
Mining reporting segment
271.5
204.9
32%
3,551.1
3,309.6
7%
76
62
23%
Intersegment eliminations
(271.4)
(202.7)
Net sales
9,700.3
7,224.0
34%
(7) The item “Other products” primarily includes Ternium Brasil’s and Ternium Mexico’s
electricity sales.
Steel reportable segment
Ternium produces flat and/or long steel products in
Mexico, Brazil, Argentina, the United States, Colombia
and Guatemala. We conduct our steel manufacturing
activities through subsidiaries, including Ternium
México S.A. de C.V. (Ternium Mexico), Ternium
Brasil, Ternium Argentina S.A. (Ternium Argentina,
formerly Siderar S.A.I.C., a company in which we have
a 61% equity interest), Ternium USA Inc. (Ternium
USA), Ternium Colombia S.A.S. (Ternium Colombia),
16. Ternium
Ternium Guatemala S.A. (Ternium Guatemala), and
Tenigal S.R.L. de C.V. (Tenigal, a Mexican corporation
in which we have a 51% equity interest, with Nippon
Steel & Sumitomo Metal Corporation having the
remaining 49% interest). We report steel shipments
under three operating segments: Mexico, Southern
Region (encompassing the steel markets of Argentina,
Bolivia, Chile, Paraguay and Uruguay), and Other
Markets.
Net sales of steel products in 2017 increased 30%
compared to net sales in 2016, reflecting a $72
increase in steel revenue per ton and a 1.8-million-
ton increase in shipments. Revenue per ton increased
10%, reflecting higher steel prices in Mexico and the
Southern Region, partially offset by lower average
steel prices in Other Markets. Average steel prices in
Other Markets decreased as a result of an increased
participation of slabs in the segment’s product
mix, due to the consolidation of Ternium Brasil’s
shipments as from September 2017. Ternium’s
shipments of steel products reached 11.6 million
tons in 2017, a 19% increase compared with the 9.8
million tons achieved in the previous year, reflecting
a 1.4-million-ton increase in Other Markets mainly
related to the consolidation of Ternium Brasil’s
shipments, a 235,000-ton increase in the Southern
Region and a 218,000-ton increase in Mexico.
Mexico operating segment
During 2017, shipments in the Mexican market reached
a new record of 6.6 million tons, representing 57% of
Ternium’s total steel shipments. Ternium is the leading
supplier of flat steel products in the country. The
Mexican steel market has been growing consistently,
becoming the largest steel market in Latin America,
with a consumption rate of more than 200 kilograms
per capita. Apparent steel demand reached a new
record of 26.4 million tons in 2017 driven mainly by
improved local manufacturing activity.
(8) Source: worldsteel.
(9) Source: Mexican Automotive Industry Association.
.
New production capabilities for AHSS for the
.
automotive industry (upgrade of Churubusco units’
capacity for trucks .
.
hot-rolling mill).
manufacturing facilities during the year. With 3.9 million
units produced in 2017, Mexico ranks as the world’s
seventh largest motor vehicle manufacturer. Ternium
has participated in the expansion of this sector through
investments in steel manufacturing capacity, mainly a new
industrial center in Pesquería in 2013, and the upgrade of
our hot-rolling mill in Churubusco in 2016. As a result,
industrial customers now represent approximately 53% of
our total shipments in the country.
Mexican industrial sectors proved to be very dynamic in
recent years. In particular, light vehicle production grew
13.5% in 2017, supported by the ramp up of new vehicle
Our new facilities in Pesquería enabled the development
of new value-added high-end products mainly for
17. Annual Report 2017
NEW INVESTMENT PROGRAM:
A LOGICAL NEXT STEP AFTER THE INTEGRATION
OF THE RIO DE JANEIRO FACILITY
TO TERNIUM’S INDUSTRIAL SYSTEM.
Pesquería unit’s
new hot-rolling mill
Pesquería unit’s new hot-dip galvanizing
and pre-painting lines
4.1
MILLION TONS
ANNUAL
PRODUCTION
CAPACITY
$1.1
BILLION
TOTAL
INVESTMENT
EXPECTED
START-UP 2020
350,000
120,000
TONS
HOT-DIP
GALVANIZED
ANNUAL
PRODUCTION
CAPACITY
TONS
PRE-PAINTED
ANNUAL
PRODUCTION
CAPACITY
$280
MILLION
TOTAL
INVESTMENT
EXPECTED
START-UP 2019
the automotive, home appliance and heating-
ventilation-air conditioning (HVAC) industries. In
addition, the installation of state-of-the-art cooling
technology in the Churubusco hot-strip mill opened
up the possibility of developing and processing new
advanced high-strength steel (AHSS) grades. With
those new capabilities, we are widening our high-end
product portfolio for customers in the automotive,
metal mechanic, home appliances, oil & gas and
electric motors industries.
automotive industry, as well as the home appliance,
machinery, energy and construction sectors. The new
hot-rolling mill will be fed with high-end slabs produced
in our recently acquired facility in Rio de Janeiro.
In addition, the recently announced new hot-dip
galvanizing and pre-painting facilities in Pesquería
will enable Ternium to produce new high-end value-
added products for the home appliance, HVAC and
automotive industries.
In September 2017, we announced the construction
of a new hot-rolling mill in Pesquería. This facility
will enable Ternium to expand its product range in
Mexico with a broader dimensional offering and the
most advanced steel grades, and reduce lead times in
the value chain targeting the demanding and innovative
We are also strengthening our product development
capabilities through the expansion of our research
infrastructure in Mexico and through a recent
association with World Auto Steel, a consortium of
steel companies that specializes in the design and
promotion of AHSS auto components.
18. Ternium
In the commercial steel market, we continued
introducing innovative products such as new wood-
resembling panels, new metal roof tiles and sides with
original designs and colors, and new antibacterial
products for cold chamber panels, among other
applications. Ternium’s strategy continues to gear
toward the offering of full range product catalogs,
a significant local presence, logistics management
and the introduction of new information technology
tools. Our commercial customers, mostly involved
in the construction sector, continued shifting toward
a fully digital commercial relationship. As a result,
more than 80% of our customers are interacting
with Ternium through Webservice, our digital
marketplace. Webservice’s multiple functionalities
enable the administration through B2B protocols and
mobile devices of product catalog, order placement
(end-to-end orders, sale from stock or bidding and
auction), production and inventory monitoring,
transportation tracking and payment, through a
direct connection with banks.
In 2017, steel prices in Mexico continued to follow
the US steel market trends. After the significant
price rebound experienced during 2016, the market
was strong throughout 2017. Service center steel
inventories in the US increased during 2017 in line
with apparent steel use, resulting in a relatively stable
month-of-supply inventory ratio. As in recent years,
in 2017 the US and Mexican governments remained
active against unfair trade practices, issuing several
new trade measures during the year. For a discussion
regarding recent developments concerning the U.S.
Department of Commerce Section 232 review, see
“07_ Principal Risks and Uncertainties” included in
this Annual Report.
Utilization rates in our integrated steelmaking
facilities in Mexico remained high during 2017,
achieving new record production levels in several
facilities. We continued to maximize the use of direct
reduced iron (DRI) 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
SMART Factory, a digital transformation. Social -
Mobile - Analytics - Robots – (Internet of) Things.
.
New metallic and textured coatings for exposed
surfaces. Increased light reflection and lower
cooling requirements.
.
efficient input vis-à-vis steel scrap. Our downstream
facilities, including our re-rolling facilities, showed
new year-over-year increases in production rates
in 2017, in line with a strong market demand for
Ternium’s steel products.
During the year, Ternium started implementing the
SMART factory concept, a digital transformation
process that will lead our facilities to a more
productive and efficient stage. This concept,
supported by Ternium’s information technology
platform, ensures a constant stream of knowledge
and information (data and events) that enables
actors to achieve a more efficient performance by
interacting from any location (offices, facilities
or elsewhere) through different kinds of devices.
Analytics and data correlation detect patterns
19. Annual Report 2017
hot-dip galvanizing and pre-painting facilities in
Pesquería.
Southern Region operating segment
Shipments in the Southern Region reached
2.5 million tons in 2017, or 21% of Ternium’s
consolidated shipments in the steel segment,
increasing 11% year-over-year. Most of Ternium’s
shipments in the region are destined for the
Argentine market, where Ternium Argentina is the
leading supplier of flat steel products.
Apparent steel demand in Argentina increased 17%
year-over-year in 2017 to approximately 4.9 million
tons. A markedly better business environment
fostered a gradual recovery of most steel consuming
sectors during the year. Of note in the rebound of
steel consumption was a significant recovery of the
construction sector (mainly public works) and the
agribusiness activity, and the startup of new natural
gas and oil investments in the Vaca Muerta shale
formation. In addition, the incipient recovery of the
Brazilian economy during 2017 is helping to raise
activity levels in some industrial sectors in Argentina,
which have started to show improvements.
Construction activity in Argentina increased 12.7%
in 2017, mainly driven by new public infrastructure
investments and increased availability of mortgage
and building loans. Motor vehicle production
stabilized after three consecutive years of
decreases, as higher production of utility vehicles,
mainly for the export markets, was offset by lower
production of sedan vehicles for both the Argentine
and export markets.
Ternium’s capital expenditures in the Southern
Region, mainly in Argentina, amounted to $95
million in 2017. During the year, we made progress
on several projects, including those for the upgrade
and expansion of the hot-rolling mill, the expansion
of connectivity and equipment automation (SMART
factory), and the improvement of environmental and
safety conditions in our facilities.
(10) Source: Argentine Statistics Institute.
(11) Source: Argentine Automotive Producers Association.
for various applications to increase safety and
efficiency, and reduce costs. Through video-feed
analysis (machine learning), applications include
real-time detection and reporting of unsafe
situations or behaviors in the facilities and, with
drones, the identification of potential damages in
tall structures and the assessment of bulk material
stockpiles. In addition, available technologies
enable the automatic handling of semi-finished and
finished steel products in the yards, speeding up
logistic operations and increasing safety.
Ternium’s capital expenditures in the steel segment
in Mexico amounted to $194 million in 2017,
compared with $197 million in 2016. The main
investments carried out during the period included
the upgrade and expansion of the hot strip mill at
the Churubusco unit, the expansion of connectivity
and equipment automation throughout Ternium
Mexico’s industrial system, and the improvement
of environmental and safety conditions at certain
facilities within the Guerrero, Churubusco and
Puebla units. Capital expenditures are expected to
increase in coming years, particularly in 2019 and
2020, as Ternium deploys its recently announced
investments in a new hot-rolling mill and new
20. Ternium
Colombia: a new reinforcing bar facility will enable the expansion
of our market share in the dynamic construction sector.
520,000
$90
TONS
ANNUAL
PRODUCTION
CAPACITY
MILLION
TOTAL
INVESTMENT
EXPECTED
START-UP 2019
In Argentina we focused our research and development
efforts on further strengthening our offering of steel
products and related services. Product development
initiatives are being carried on in collaboration with our
supply chain, targeting the automotive sector (specifically
the new light truck models and lighter and longer heavy
trucks), home appliance manufacturers (to increase
product portfolio with improved performance), the non-
conventional energy sector (for new wind and solar power
projects) and the construction of natural gas pipelines.
The development of these new products allows us to
participate in new steel market segments in the country.
Utilization rates in our crude steel production
facilities in Argentina remained relatively stable in
2017 compared to 2016. In our downstream facilities,
production rates were mixed year-over-year in 2017.
It is worth mentioning the recovery in utilization
rates in all of our downstream facilities during the
second half of 2017, compared to the first half of
the year and the second half of 2016.
In addition to higher shipments in Argentina,
Ternium’s shipments increased year-over-year in 2017
in Paraguay and Uruguay, and decreased in Chile
and Bolivia. Economic activity in these countries
continued growing at sustained rates during 2017.
Other Markets operating segment
Our major shipment destinations in the Other Markets
Region are the United States, Brazil, Colombia and
Central America. On September 7, 2017, Ternium
acquired Ternium Brasil’s slab-making facility in Rio de
Janeiro, Brazil, from thyssenkrupp AG. Following the
consolidation of Ternium Brasil’s financial statements
as from that date, shipments in the Other Markets
Region increased 121% year-over-year to 2.5 million tons,
representing 22% of Ternium’s total shipments in the
steel segment. The volume increase included 1.3 million
tons of slabs shipped to third parties in the United States
and Brazil from the Rio de Janeiro facility, between
September and December 2017.
The Rio de Janeiro facility 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. The transaction with thyssenkrupp included
the assignment of an agreement to supply slabs to
thyssenkrupp AG’s former re-rolling facility in Calvert,
Alabama, United States. Under that agreement, a total
of 3.5 million tons of slabs will be supplied between
January 2018 and December 2020.
In the United States, apparent demand for finished
steel rebounded in 2017, showing a 6.4% year-over-year
21. Annual Report 2017
R&D: SHARED EFFORTS
WITH RENOWNED UNIVERSITIES.
APPLIED RESEARCH
COLLABORATION BENEFITS ALL
Extract of a dialog with Eric
Palmiere, Professor of Metallurgy
and Thermomechanical Processing.
University of Sheffield, UK.
“At our university, we believe that
basic research needs to have a
direct application and a connection
with the industry. The relationship
between our university and Ternium
is of great value because we are
working on advanced steel that has a
direct application in the automotive
industry.”
Extract of a dialog with José
María Cabrebra, Professor of the
Materials Science and Metallurgical
Engineering Department.
Universidad Politécnica de Cataluña,
Spain.
“Closed laboratory doctorates
are senseless today. Companies
and universities need to be open
to ongoing collaboration, for the
universities to be able to transfer
back to society advanced training
and technology, and for companies
to be able to recruit the talent that
will help them remain competitive.”
UNDERSTANDING TECHNICAL
CHALLENGES
Extract of a dialog with Isacc
García. Professor of the Mechanical
Engineering and Materials Science
Department. University of Pittsburgh,
United States.
“This working relationship with
Ternium allows understanding the
technical challenges faced by steel
companies. Students in my research
group are very satisfied with the
opportunity to study and work in
fundamental and applied research for
the development of steels.”
22. Ternium
Peña Colorada’s new facilities raised
annual production capacity back
to 4.5 million tons of iron ore concentrate.
16.3
MILLION TONS
ANNUAL IRON ORE
PROCESSING
CAPACITY
COMMISSIONED
IN 2017
growth, on improved manufacturing activity and
healthier economic performance. Ternium’s shipments
of finished steel products in the country (excluding slab
shipments to the Calvert facility) increased in 2017,
with shipments focused on the aesthetically demanding
non-residential construction market, mainly for
commercial and industrial buildings. The company’s
finished steel production in the United States increased
slightly year-over-year in 2017, achieving new records.
In Colombia, Ternium is a leading supplier of finished
steel products. With apparent steel use of 3.7 million
tons, the country is the fourth largest steel market
in Latin America. After a decrease in steel demand
in 2016, Colombia’s steel market started to recover
in 2017 supported by a rebound in construction and
oil & gas activity, and continued expansion of the
manufacturing businesses. Although production rates
at our facilities were higher year-over-year, Ternium’s
shipments in the country decreased slightly in 2017 on
lower steel imports.
Ternium has recently announced the construction
of a new rebar hot-rolling mill, with an annual
production capacity of 520,000 tons, which will
enable us to expand market share in the construction
sector by substituting imports. With a total investment
of $90 million, the mill is expected to start operations
in the second half of 2019. The new mill will enable the
upstream integration of our operations by replacing
current purchases of reinforcing bars from third parties.
In Central America, Ternium’s steel shipments increased
year-over-year in 2017 as the region continued to grow
at healthy rates. Ternium’s finished steel production
in Guatemala grew 24% year-over-year on higher
production rates, achieving new records.
Our capital expenditures in the Other Markets Region
amounted to $53 million in 2017, mainly related
to maintenance activities and the improvement of
environmental and safety conditions in our facilities.
Mining reportable segment
Ternium produces iron ore pellets and magnetite
concentrate in Mexico. We conduct our mining activities
through Las Encinas S.A. de C.V. (Las Encinas), a
company in which we have a 100% equity interest, and
Consorcio Minero Benito Juárez Peña Colorada S.A. de
C.V. (Consorcio Peña Colorada, a company in which we
have a 50% interest with ArcelorMittal having the other
50%). ArcelorMittal and Ternium each receive 50% of
total iron ore production of Consorcio Peña Colorada. In
23. Annual Report 2017
2017, most of our iron ore production was consumed
internally at Ternium’s steelmaking facilities in Mexico.
At the end of 2017, Las Encinas was operating the
Aquila open pit mine, located in Michoacán, and
the Las Palomas open pit mine, located in Jalisco,
a small iron ore body where we started commercial
operations during 2017. The Las Encinas facilities
include two crushing plants located close to each of
the Aquila and El Encino mines, and a concentration
and pelletizing plant located in Alzada, Colima.
By the end of 2017, Consorcio Peña Colorada 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.
Cost of sales
Cost of sales was $7.4 billion in 2017, an increase of
$2.0 billion compared to 2016. This was principally due
to a $1.8 billion, or 47%, increase in raw material and
consumables used, mainly reflecting a 19% increase in
steel shipments volume and higher purchased slab, iron
ore, coking coal, scrap, zinc and energy costs; and to a
$204.6 million increase in other costs, mainly including
a $113.3 million increase in labor cost, a $33.8 million
increase in depreciation of property, plant and
equipment, a $33.3 million increase in services and fees,
and a $22.8 million increase in maintenance expenses.
The consolidation of Ternium Brasil in 2017 affected
all of the above-mentioned components of cost of
sales, as well as our selling, general and administrative
expenses. For more information, see note 3 to our
consolidated financial statements included in this
annual report.
IRON ORE RESERVES
(END OF 2017) (12)
Volume
(million tons)
Average
iron grade
(%)
Estimated
mine life
(years)
Las Encinas (13)
Peña Colorada (14)
22
230
40
21
8
15
Selling, general and administrative (SG&A) expenses
SG&A expenses in 2017 were $824.2 million, or 8.5% of
net sales, a year-over-year increase of $136.3 million, mainly
due to higher amortization of intangible assets, labor costs,
freight and transportation, services and fees expenses, and
taxes and contributions (other than income tax).
(12) Iron ore reserves, proven and probable, on a run-of-mine basis
(13) Includes exclusively the Las Encinas and Las Palomas mines
(14) Reported figures represent the total reserves at the Peña Colorada mine.
Ternium has a 50% interest in Consorcio Peña Colorada
Net sales of mining products in 2017 were 32% higher
than those in 2016, reflecting 23% higher revenue
per ton and 7% higher shipments. The increase in
shipments was mainly the result of Consorcio Peña
Colorada’s increased iron ore pellet production in 2017,
as the company ramped up its new iron ore crushing,
grinding and concentration facilities during the year.
Other net operating expense
Other net operating expense in 2017 was $16.2
million, compared to $9.9 million in 2016. Other net
operating expense in 2017 included a $15.9 million
donation related to the Roberto Rocca technical
school in Pesquería, Nuevo León, Mexico. For more
information, see 05_Environmental, Social and
Governance, and note 9 to our consolidated financial
statements included in this annual report.
Capital expenditures in the mining segment in 2017,
including Las Encinas and Ternium’s share in Peña
Colorada’s capital expenditures, amounted to $67
million, mainly related to preparation works at a
new iron ore body in the Peña Colorada mine and
maintenance activities.
Operating income
Operating income in 2017 was $1.5 billion, or 15.0%
of net sales, compared to operating income of $1.1
billion, or 15.8% of net sales, in 2016. The following
table shows Ternium’s operating income by segment
for 2017 and 2016.
24. Ternium
$ million
Net Sales
Cost of sales
SG&A expenses
Other operating (expenses)
income, net
STEEL SEGMENT
MINING SEGMENT
INTERSEGMENT ELIMINATIONS
TOTAL
2017
2016
2017
2016
2017
2016
2017
2016
9,700.3
7,221.8
271.5
(7,465.8)
(5,391.0)
(811.5)
(17.0)
(677.0)
(9.5)
(212.9)
(12.8)
0.8
204.9
(192.0)
(10.9)
(0.4)
(271.4)
(202.7)
9,700.3
198.7
(7,403.0)
–
–
(824.2)
(16.2)
7,224.0
(5,384.4)
(687.9)
(9.9)
275.6
–
–
4.1
4.1
Operating income (loss)
1,406.0
1,144.2
46.6
1.5
EBITDA
1,830.5
1,505.8
96.4
46.7
(4.0)
1,456.8
1,141.7
(4.0)
1,931.1
1,548.6
EBITDA
EBITDA in 2017 was $1.9 billion, or 19.9% of net
sales, compared with $1.5 billion, or 21.4% of net
sales, in 2016.
Net financial results
Net financial results were a $165.1 million loss in
2017, compared to a $37.9 million loss in 2016.
During 2017, Ternium’s net financial interest
results were a loss of $95.2 million, compared to a
$75.8 million loss in 2016.
Net foreign exchange results were a loss of
$65.5 million in 2017 compared to a gain
of $20.3 million in 2016. The year-over-year
difference in net foreign exchange results of
$85.8 million was mainly related to the effect
of the fluctuations of the Mexican peso against
the US dollar on a net short local currency
position in Ternium’s Mexican subsidiaries. In
2017, the Mexican peso appreciated 5% against
the US dollar, compared to a 17% depreciation
in 2016. Change in fair value of financial
instruments included in net financial results was
a $3.1 million gain in 2017 compared to a $19.3
million gain in 2016.
USIMINAS: BETTER PERFORMANCE
AND FINANCIAL POSITION IN 2017.
n Steel shipments up 10%
n Iron ore shipments up 14%
n Adjusted EBITDA of BRL 2.2 billion
(up 3.3 times)
n Net debt/EBITDA of 2.0x (down 70%)
Equity in results of non-consolidated companies
Equity in results of non-consolidated companies
was a gain of $68.1 million in 2017, compared
to a gain of $14.6 million in 2016, mainly due
to better results from Ternium’s investment in
Usiminas.
Income tax expense
Income tax expense in 2017 was $336.9 million, or
25% of income before income tax, compared to an
income tax expense of $411.5 million, or 37% of
income before income tax in 2016. Effective tax rate
in 2017 included a non-cash gain on deferred taxes
due to the 5% appreciation of the Mexican peso
25. Annual Report 2017
against the US dollar during the year. Effective tax
rate in 2016 included a non-cash charge on deferred
taxes due to the 17% depreciation of the Mexican
peso against the US dollar during that year.
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
In $ million
FOR THE YEAR ENDED DECEMBER 31,
2017
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Increase 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
383.9
(2,030.0)
1,802.3
156.2
(1.8)
183.5
337.8
requirements, as well as our acquisitions. We hold
money market investments, time deposits and variable-
rate or fixed-rate securities. We increased our financial
indebtedness to $3.2 billion at the end of 2017, from
$1.2 billion at the end of 2016, in order to finance the
acquisition of Ternium Brasil and related transactions and
as a result of increased working capital requirements.
The following table shows the changes in our cash
and cash equivalents for each of the periods indicated
below:
2016
.
1,099.6
(554.7)
(508.7)
36.2
(4.3)
.
.
151.5
183.5
Operating activities
Net cash provided by operating activities in 2017
was $383.9 million. Working capital increased by
$865.0 million in 2017 as a result of a $540.2 million
increase in inventories and an aggregate $411.4
million increase in trade and other receivables,
partially offset by an aggregate $86.6 million
increase in accounts payable and other liabilities.
The inventory value increase in 2017 was mainly due to
$258.1 million higher costs of slabs, goods in process
and finished goods principally as a result of the pass-
through of higher purchased slab, scrap, coal and iron
ore prices; $129.1 million higher steel volume, mainly
reflecting increased operating rates in all of Ternium’s
facilities; and $152.9 million higher price and volume
of raw materials, supplies and other items.
$ million
CHANGE IN INVENTORY DEC’17 / DEC’16
Finished steel goods
Steel goods to undergo processing
Total steel goods
Raw materials, supplies and other items
Total inventory
Price
44.8
213.4
258.1
Volume
30.0
99.1
129.1
Total
74.7
312.5
387.2
152.9
540.2
26. Ternium
The increase in trade and other receivables in 2017
reflected mostly higher prices and shipments in
Ternium’s main steel markets. In addition, Ternium
made income tax payments in excess of income tax
accruals for an aggregate $273.4 million in 2017, as
the payment of the balance of income tax for fiscal
year 2016 was very significant, reflecting a substantial
increase in net income in 2016 compared to 2015.
Investing activities
Net cash used in investing activities in 2017 was $2.0
billion, primarily attributable to a net cash use of
$1.6 billion in connection with the acquisition of
Ternium Brasil and related transactions, and capital
expenditures of $409.4 million.
Financing activities
Net cash provided by financing activities was
$1.8 billion in 2017, primarily attributable to net
proceeds from borrowings of $2.0 billion, partially
offset by total dividend payments of $226.9 million
($196.3 million to the Company’s shareholders and
$30.6 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 US 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 29
“Financial risk management” to our consolidated
financial statements included in this annual report.
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 we have sufficient resources to satisfy
our current working capital needs, service our debt
and pay dividends. Management also believes that
our liquidity and capital resources give us adequate
flexibility to manage our planned capital spending
programs and to address short-term changes in
business conditions.
Financial liabilities
Our financial liabilities consist of loans with
financial institutions and some pre-agreed overdraft
transactions. As of December 31, 2017, these facilities
were mainly denominated in US dollars, Argentine
pesos and Colombian pesos (88.5%, 10.3% and
0.9% of total financial liabilities, respectively).
Total financial debt (inclusive of principal and
interest accrued thereon) increased by $2.0 billion
in the year, from $1.2 billion as of December 31,
2016, to $3.2 billion as of December 31, 2017. As of
December 2017, current borrowings were 46.7% 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) increased
by $1.9 billion in 2017, from $0.9 billion as of
December 31, 2016, to $2.7 billion as of December
27. Annual Report 2017
31, 2017. Net financial debt as of December 31,
2017 equaled 1.4 times 2017 EBITDA.
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
2017 was 4.8%, a decrease compared to the
6.9% average interest rate in 2016. This rate was
calculated using the rates set for each instrument in
its corresponding currency and weighted using the
US dollar-equivalent outstanding principal amount
of each instrument as of December 31, 2017. The
year-over-year decrease in average interest rates
was due mainly to lower participation of Argentine
Most significant borrowings and financial commitments
Our most significant borrowings as of December
31, 2017 were those outstanding under Ternium
Mexico’s 2013 syndicated loan facility, Tenigal’s 2012
syndicated loan facility, and Ternium Investments
S.à.r.l.’s (Ternium Investments) 2017 syndicated loan
facility to finance the acquisition of Ternium Brasil
and related transactions.
$ million
DATE
BORROWER
TYPE
November 2013
Ternium Mexico
2012/2013
Tenigal
Syndicated loan
Syndicated loan
September 2017
Ternium Investments
Syndicated loan
Original
principal
amount
800
200
1,500
Outstanding principal
amount as of
December 31, 2017
Maturity
155
125
November 2018
July 2022
1,500
September 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, 2017, we were in compliance with all
covenants under our loan agreements.
Our most significant financial commitments as of
December 31, 2017, were the following:
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, 2017, Ternium’s guarantee amounted to
approximately $346 million, based on an outstanding
loan amount of $720 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,
2017, Techgen and Ternium, as guarantor, were 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 2036.
As of December 31, 2017, the outstanding value of
this commitment was approximately $265 million.
Our exposure under the guarantee in connection
with these agreements amounts to $127 million,
corresponding to 48% of the outstanding value of
the agreements as of December 31, 2017.
For further information on our financial
instruments, borrowings, commitments and
28. Ternium
Techgen. New 900-MW
power plant in Pesquería,
Mexico, built in
partnership with Tenaris
and Tecpetrol.
Annual dividend proposal
On February 20, 2018, the Company’s board of
directors proposed that an annual dividend of
$0.11 per share ($1.10 per ADS), or approximately
$215.9 million in the aggregate, be approved at the
Company’s annual general shareholders’ meeting,
which is scheduled to be held on May 2, 2018. If
the annual dividend is approved, it will be paid on
May 10, 2018. Ternium’s dividend payments have
been growing over the years, starting from 0.50
dollars per ADS in 2006, the year of the initial
public offering and listing.
financial risk management please see notes 22,
23, 24, 25 and 29 to our consolidated financial
statements included in this annual report.
Recent Developments
Agreement regarding governance of Usiminas
On February 8, 2018, the Company’s subsidiary
Ternium Investments S.à r.l. entered into a
binding and immediately effective agreement
(the “Agreement”) with Nippon Steel &
Sumitomo Metal Corporation (“NSSMC”),
establishing certain new governance rules
for Usiminas as well as certain undertakings
for the settlement of legal disputes. The
new governance rules for Usiminas include,
among others, an alternation mechanism for
the nomination of each of the CEO and the
Chairman of the Board of Directors, as well as
a new mechanism for the nomination of other
members of Usiminas’ Executive Board. In
addition, the Agreement incorporates an exit
mechanism.
29. Annual Report 2017
ANNUAL
REPORT
2017
ENVIRONMENTAL, SOCIAL
AND GOVERNANCE
30. Ternium
05 Ternium believes that the long-term prosperity of
the company and the communities surrounding its
operations are entwined. Environmental protection
and the individual’s health and safety are paramount
values for Ternium, and directors, officers and
employees have 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 aims to achieve the highest standards of
environment care, health and safety, incorporating
the principles of sustainable development
throughout its business. Health and safety, customer
satisfaction, environment protection and community
development are identified as integrated key drivers
of our business. The entire organization is oriented
towards achieving these goals.
Environment, health and safety (EHS)
Under Ternium’s environmental and health and
safety policies in place, environmental, health
and safety management and risk assessment are
integrated in all business processes. Management is
responsible and accountable for achieving excellence
in environmental, health and safety performance for
successful business results.
Ternium is committed to training all its employees in
the appropriate use of its EHS management systems,
strengthening its management through updating of
professional and managerial skills, fostering diversity,
emphasizing employee evaluation and motivation and
complying with the ethical principles established in its
code of conduct.
Ternium recognizes the importance of
implementing its environment and health and
safety policies throughout its management systems,
covering the entire supply chain from suppliers
to customers and the proper and efficient use
of its products in accordance with their agreed
specifications.
(15) Lost time injuries frequency rate refers to quantity of day-loss injuries per million
of hours worked.
(16) Injuries frequency rate refers to total quantity of injuries per million of hours worked.
(*) Ternium Brasil’s facilities, acquired during the year, are included starting September 2017.
Safety hour tour. Safety training programs target all employees
and contractors.
“ALL INJURIES AND WORK-RELATED
ILLNESSES CAN AND MUST
BE PREVENTED. WORKING SAFELY
IS A CONDITION OF EMPLOYMENT.”
Ternium’s Health and Safety Policy statement
31. Annual Report 2017
World Steel Association (worldsteel) forums
Ternium’s environment, health and safety policies
abide by worldsteel’s policy statement and its
principles for excellence in safety and occupational
health. worldsteel forums address various matters
of interest for the industry, including the Climate
Change Policy, Life Cycle Assessment, Carbon
Dioxide (CO2) Data Collection Program, Water
Management, Sustainability Reporting, and Safety
and Occupational Health Committee groups and
their working subgroups. These forums are focused
on sustainable development, environment, safety
and occupational health, and 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.
Environmental certifications
Ternium’s management of its environmental
footprint leans on a unified environmental
management system that integrates all of its
production units. The company periodically
certifies its procedures, which in turn help us
identify improvement opportunities and update our
environmental management processes. Ternium
INVESTING IN THE DEVELOPMENT
OF TALENT
Ternium funds postgraduate studies in
management and technology at renowned
universities for its staff.
Ternium engages under-graduate and
post-graduate students pursuing degrees
in engineering, materials science
and metallurgy to develop steel fundamental
knowledge.
also certifies each facility’s management system
under ISO 14001. This standard was created by the
International Organization for Standardization,
a 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 public and private
organizations.
Our recently acquired facility in Rio de Janeiro,
Brazil has become the main focus of our ISO 14001
certification project. We aim to obtain a ISO 14001
certificate for this facility by year-end 2018, which
would enable us to achieve a certification rate, as
reported to worldsteel, of approximately 99% of our
work force.
In addition, every year Ternium revalidates each
steel and in-use mining facility in Mexico with
Clean Industry certificates issued by Mexican
environmental authorities. The Clean Industry
standard is the result of an environmental
voluntary program developed by the Mexican
government in collaboration with ema, a network
of private companies and national chambers that
design technical standards and rate laboratories,
inspection bodies and certification bodies. The
standards set for Clean Industry certificates
are in line with the requirements of Mexican
environmental legislation.
Environmental investments
Ternium continuously invests in best-available
technologies to maximize the efficient use of
energy resources, the re-use of by-products and the
appropriate treatment and disposal of wastes, air
emissions and wastewater. These initiatives usually
require significant investments in new equipment,
such as de-dusting systems, scrap handling facilities
or briquetting facilities to clean and recycle material
recovered from air emissions; and hydrochloric acid
regeneration facilities and coke-oven gas treatment
facilities to capture re-usable by-products. Ternium’s
32. Ternium
Investments in best available technologies to reduce
our environmental footprint
CHURUBUSCO
UNIT, MEXICO
Technological
upgrade of two
pickling lines.
SAN NICOLÁS UNIT,
ARGENTINA
New de-dusting
system for a kish pit
station.
Capacity to clean
150,000 cubic
meters of air per
hour.
SAN NICOLÁS UNIT,
ARGENTINA
Runoff water
collection system
and sedimentation
treatment for the
sinter area and yards.
The recovered
material is recycled.
in the sinter plant.
APODACA UNIT,
MEXICO
New de-dusting
system for a scrap
preparation facility.
Capacity to clean
300,000 cubic
meters of air per
hour.
SAN NICOLÁS UNIT,
ARGENTINA
New close-water
circuit for blast
furnace No. 2.
Reduces water
usage by 900 cubic
meters per hour.
PUEBLA AND
GUERRERO UNITS,
MEXICO
CO2 recovery
equipment in the
DRI facilities.
Reduce CO2
emissions by up
to 210,000 tons
per year.
33. Annual Report 2017
Escuela Técnica Roberto
Rocca – ETRR (Roberto
Rocca Technical School).
A new technical school in
Pesquería, Mexico. The first
of its kind in the country,
offering specializations
in electro-mechanics
and mechatronics, and
scholarships for all students.
Pesquería, formerly a rural
area, has become a
fast-growing industrial
center. The industrial boom
has attracted many families
from nearby districts and
from elsewhere in the
country. The requirements
for infrastructure multiplied,
including a need for better
roads and new schools and
hospitals, among other
facilities.
energy efficiency program generates dozens of new
energy-saving projects every year. This program is a
continuous initiative encompassing all of Ternium’s
facilities to reduce greenhouse gas emissions and
operating costs.
Occupational, health and safety certification
Ternium’s programs to improve safety in its
production units are managed through a unified
health and safety management system. The company
periodically certifies its procedures, which helps
us find new opportunities to improve our safety
management systems and ensure their compliance
with our health and safety policy.
Ternium’s steelmaking and steel processing facilities
in Mexico, Argentina, Colombia and Guatemala are
certified under OHSAS 18001. 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.
We are currently working on the certification process
of our mining facilities in Mexico. In addition, we are
implementing our health and safety programs and
management system in our recently acquired facility in
Rio de Janeiro, Brazil.
Safety management improvements for critical production
processes
We performed a diagnosis and identification of
process hazards at critical processes in our mining,
steelmaking and steel processing facilities in Mexico,
Argentina and Colombia, and are now working
on sustainability. With the assistance of DuPont, a
renowned authority in industrial safety, we developed
new safety management tools for critical processes
and consolidated a safe administration of critical
processes.
34. Ternium
ETRR. In 2017, the second
cohort of students joined
the school.
252 students are currently
pursuing their degree
at ETRR. With capacity
for 384 students, the
school building houses 12
classrooms, 17 workshops,
two labs, a library, a gym,
an auditorium, a cafeteria
and other facilities.
Community relations
Ternium’s social programs focus on helping
strengthen our neighboring communities and forge
deepening ties with them. We work together with
local institutions to develop projects in the areas
of education, health and social integration. Lead
by the principle “help those who help themselves”,
the company promotes initiatives that improve
life quality and strengthen institutions that foster
education and welfare of our communities.
The program provides technical internships at
workshops and training at operating areas of
the company’s industrial centers, in addition
to technical training programs in schools. We
offer activities for developing teachers’ skills
and school management. Moreover, the program
funds the expansion and improvement of school
infrastructure, and makes cash contributions
for the purchase of new equipment or the
enhancement of existing equipment.
Ternium supports several state-run technical schools
near its facilities in the Ramallo and Ensenada
industrial areas in Argentina and the Monterrey
industrial area in Mexico. This endeavor has
contributed to a significant improvement of the
training level of their graduates. In addition to
Ternium, this program involves local governments and
the Hermanos Agustín y Enrique Rocca foundation, a
non-governmental organization linked to the Techint
Group committed to community development.
Ternium has programs aimed at improving basic
education in low-income communities near its
facilities. It provides support to elementary schools in
San Nicolás de los Garza and Pesquería, Mexico, and
in Ramallo, Argentina, and also organizes workshop
academies in Pihuamo, Aquila and Alzada in Mexico.
Together with the Hermanos Agustín y Enrique Rocca
foundation, Ternium funds scholarships for high-
school and university students from local communities
35. Annual Report 2017
Volunteering program.
Ternium’s employees and
their families volunteer to
improve school infrastructure.
Students’ relatives,
schoolteachers and neighbors
join us in the endeavor.
Ternium and the Hermanos
Agustín y Enrique Rocca
foundation, as well as other
companies operating in
our value chain, provide
organization and funding. So
far, 20 schools were revamped
in Mexico, Argentina,
Colombia and Guatemala.
in Mexico, Argentina, Colombia and Guatemala. It
also organizes health fairs, clinical examination, and
disease and addiction prevention campaigns aimed at
increasing the community’s awareness and gaining of a
basic understanding of how to prevent and take care of
various health issues.
In addition, the company supports and funds a basic
health care unit in Aquila, Mexico, and health care
infrastructure improvements in various locations.
As part of its health care initiative, the company
fosters sports through activities organized together
with local institutions, such as annual marathons
and sport leagues involving schools in its facilities’
neighboring communities.
Support to the industrial network
Ternium offers assistance and training to small and
medium enterprises (SMEs) to foster the industrial
value chain in Mexico and Argentina. With the
participation of approximately 1,500 companies, the
ProPymes program 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.
Training programs are performed in-house or
at universities or business schools. They cover
an expanding range of SMEs needs and are
continuously updated and broadened in order to
adapt to the requirements of managers, white-collar
and blue-collar employees.
Industrial assistance programs include a broad array
of issues from the use of automation technology
36. Ternium
and optimization of production facilities, to the
development of environment, health and safety
protocols and human resources management.
The institutional assistance program helps SMEs
develop strategies aimed at ensuring a level playing
field in the local market, 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 SMEs competitiveness. In addition, we help
SMEs set their own corporate social programs through
the implementation of a support program for technical
educational institutes.
Commercial support initiatives include the promotion
of commercial ties between SMEs and potential
customers in the automotive sector and other industries
in our value chain, and assistance in the development
process required to become a supplier of a large
company. In addition, we offer SMEs to leverage on the
Techint Group’s global network of commercial offices
in order to enhance their market reach.
The financial assistance program aims at fostering
investments to enhance productivity and increase
installed capacity, taking advantage of government-
sponsored low-cost financing instruments.
Corporate governance
Ternium S.A. is organized as a public limited
liability company (société anonyme), organized
under the laws of the Grand Duchy of Luxembourg.
The Company holds controlling stakes in steel
companies operating in Latin America and the
Southern United States. San Faustín S.A., the
holding company of the Techint Group, an
international group of companies, has a 62%
controlling interest in Ternium. San Faustín also has
controlling interests in Tenaris, a global supplier of
steel pipes and related services mainly for the energy
industry which holds an additional 11% interest
ProPymes has helped create an industrial network. Bringing
together government agencies, universities, industrial
associations, our customers and suppliers.
in Ternium; Tecpetrol, an oil and gas company;
Techint, an engineering and construction company;
Tenova, a supplier of equipment and technology for
iron mining and steel; and Humanitas, a network of
hospitals in Italy.
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,
2017, 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 ADSs are listed in the New York Stock
Exchange. 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
37. Annual Report 2017
10K Ternium. Thousands
of athletes participate every
year in local marathons
organized by Ternium
together with local
institutions.
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.
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
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.
The Company’s board of directors is currently
comprised of eight directors, of whom three are
independent under the articles of association and
SEC regulations applicable to foreign private issuers.
The board of directors has an audit committee
consisting of three independent members. The
charter of the audit committee sets forth, among
other things, the audit committee’s purpose and
responsibilities, which include the responsibility to
review material transactions with related parties
to determine whether their terms are consistent
with market conditions or are otherwise fair to the
Company and/or its subsidiaries. In addition, the
audit committee reports to the board of directors on
the adequacy of the systems of internal control over
financial reporting.
Ternium has adopted a Code of Conduct
incorporating guidelines and standards of integrity
and transparency that applies to all directors, officers
and employees. In addition, it has adopted a Code of
Ethics for Senior Financial Officers, a Transparency
Policy governing relationships with third parties, a
38. Ternium
Arts events and annual
festivals.
Large audiences enjoy
every year opera, ballet,
concerts and cinema
festivals organized by
Ternium together with
local institutions.
Policy on Business Conduct, a Code of Conduct for
Suppliers, an Antifraud Policy, a Policy on Securities
Trading and a Human Rights Policy.
and for designing norms aligned with national and
international laws against corruption and bribery.
Ternium purchases most of its supplies through
Exiros, a specialized procurement company whose
ownership we share with Tenaris. Ternium’s
suppliers undergo a rigorous process of selection
to ensure governance standards are in place, in
line with applicable laws and regulations and
in accordance with our Health and Safety and
Environmental policies and Code of Conduct.
Our Code of Conduct for Suppliers covers ethical
behavior, compliance with law, and health, safety
and environmental care.
Ternium has an internal audit area that reports to
the Chairman of the Board of Directors and, with
respect to internal control over financial reporting,
to the Audit Committee. The internal audit area
evaluates and reassures the effectiveness of control
processes, risk management and governance.
Ternium established and encourages the use of a
web-based anonymous compliance line to report
situations contrary to the Code of Conduct, which
operates according to the procedures designed by
the internal audit area.
Ternium has an Internal Control and Business
Conduct Compliance Officer reporting to the
CEO of the Company, who has responsibility for
identifying and mitigating corruption risks and
fostering a culture of ethical and transparent conduct,
39. Annual Report 2017
ANNUAL
REPORT
2017
FINANCIAL
STATEMENTS
TERNIUM S.A. CONSOLIDATED
FINANCIAL STATEMENTS
As of December 31, 2017
and 2016 and for the years
ended December 31,
2017, 2016 and 2015
40. Ternium
29 Avenue de la Porte-Neuve,
3rd floor
L – 2227
R.C.S. Luxembourg: B 98 668
06 Ternium S.A.
Index to The Consolidated
Financial Statements
42
45
46
47
48
51
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the years ended December 31, 2017, 2016,
and 2015
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Financial Position as of December 31, 2017 and 2016
Consolidated Statements of Changes in Equity for the years ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31,
2017, 2016 and 2015
52
Index to the Notes to the Consolidated Financial Statements
29 Avenue de la Porte-Neuve,
3rd floor
L – 2227
R.C.S. Luxembourg: B 98 668
41. Annual Report 2017
Audit Report
To the Shareholders of
Ternium S.A.
Report on the audit of the consolidated financial statements
Our opinion
In our opinion, the accompanying consolidated financial statements give a true and fair view
of the consolidated financial position of Ternium S.A. (the Company) and its subsidiaries
(the Group) as at 31 December 2017, and of its consolidated financial performance and its
consolidated cash flows for the year then ended in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
What we have audited
The Group’s consolidated financial statements comprise:
• the consolidated statement of financial position as at 31 December 2017;
• the consolidated income statement for the year then ended;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year then ended;
• the consolidated statement of cash flows for the year then ended; and
• the notes to the consolidated financial statements, which include a summary of
significant accounting policies.
Basis for opinion
We conducted our audit in accordance with the Law of 23 July 2016 on the audit profession (Law
of 23 July 2016) and with International Standards on Auditing (ISAs) as adopted for Luxembourg
by the “Commission de Surveillance du Secteur Financier” (CSSF). Our responsibilities under those
Law and standards are further described in the “Responsibilities of the “Réviseur d’entreprises
agréé” for the audit of the consolidated financial statements” section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
We are independent of the Group in accordance with the International Ethics Standards Board
for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) as adopted for
Luxembourg by the CSSF together with the ethical requirements that are relevant to our audit of
the consolidated financial statements. We have fulfilled our other ethical responsibilities under
those ethical requirements.
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
Other information
The Board of Directors is responsible for the other information. The other information comprises
the information stated in the consolidated Annual 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 identified above 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
that fact. We have nothing to report in this regard.
Responsibilities of the Board of Directors and those charged with governance for the
consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with IFRSs 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.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing
the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the Board of Directors either intends
to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Responsibilities of the “Réviseur d’entreprises agréé” for the audit of the annual accounts
The objectives of our audit are to obtain reasonable assurance about whether the consolidated
financial statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an audit report that includes our opinion. Reasonable assurance is a high level
of assurance, but is not a guarantee that an audit conducted in accordance with the Law of 23
July 2016 and with ISAs as adopted for Luxembourg by the CSSF will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with the Law of 23 July 2016 and with ISAs as adopted for
Luxembourg by the CSSF, we exercise professional judgment and maintain professional scepticism
throughout the audit. We also:
• Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
43. Annual Report 2017
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control;
• Obtain an understanding of internal control relevant to the audit 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 Group’s internal control;
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the Board of Directors;
• Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the Group’s ability to continue as a
going concern. If we conclude that a material uncertainty exists, we are required to draw attention
in our audit report to the related disclosures in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our audit report. However, future events or conditions may cause the
Group to cease to continue as a going concern;
• Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation;
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities
and business activities within the Group to express an opinion on the financial statements. We are
responsible for the direction, supervision and performance of the Group audit. We remain solely
responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our independence, and
where applicable, related safeguards.
Report on other legal and regulatory requirements
The consolidated Management report is consistent with the consolidated financial statements and
has been prepared in accordance with applicable legal requirements.
PricewaterhouseCoopers, Société coopérative
Represented by
Luxembourg, 21 March 2018
Marc Minet
44. Ternium
Consolidated Income Statements
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2017 and 2016 and for the years
ended December 31, 2017, 2016 and 2015
All amounts in USD thousands
YEAR ENDED DECEMBER 31,
NOTES
2017
2016
2015
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
9,700,296
(7,403,025)
2,297,271
(824,247)
(16,240)
1,456,784
(114,583)
19,408
(69,915)
68,115
1,359,809
(336,882)
1,022,927
886,219
136,708
1,022,927
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
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)
0,45
0.30
0.00
The accompanying notes are an integral part of these restated consolidated financial statements.
45. Annual Report 2017
Consolidated Statements
of Comprehensive Income
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2017 and 2016 and for the years
ended December 31, 2017, 2016 and 2015
All amounts in USD thousands
YEAR ENDED DECEMBER 31,
2017
2016
Profit (Loss) for the year
1,022,927
706,929
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
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
(95,462)
(8,931)
735
(107)
(96)
191
(15,068)
4,916
3,954
(141,665)
53,858
641
(192)
(1,542)
1,054
(14,735)
2,571
(15,817)
2015
59,779
(409,767)
(230,774)
1,277
(371)
–
973
5,277
(1,946)
(5,113)
Other comprehensive loss for the year, net of tax
(109,868)
(115,827)
(640,444)
Total comprehensive income (loss) for the year
913,059
591,102
(580,665)
Attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive income (loss) for the year
815,434
97,625
913,059
534,827
56,275
591,102
(457,750)
(122,915)
(580,665)
The accompanying notes are an integral part of these restated consolidated financial statements.
46. Ternium
Consolidated Statements
of Financial Position
All amounts in USD thousands
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2017 and 2016 and for the years
ended December 31, 2017, 2016 and 2015
BALANCES AS OF DECEMBER 31,
NOTES
2017
2016
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, net
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
Finance lease liabilities
Borrowings
CURRENT LIABILITIES
Current income tax liabilities
Other liabilities
Trade payables
Derivative financial instruments
Finance lease liabilities
Borrowings
Total Liabilities
12
13
14
18
20
15
16
15
22
17
16
18
18
19
20
21
23
24
21
22
23
24
5,349,753
1,092,579
478,348
3,380
121,092
677,299
4,135,977
842,557
418,379
5,998
85,795
132,580
4,832
7,727,283
1,270
5,622,556
362,173
2,304
2,550,930
1,006,598
132,736
79,820
316
1,647,869
633,745
144,853
337,779
4,392,520
183,463
2,690,066
2,763
4,395,283
12,122,566
5,010,424
842,347
5,852,771
10,248
2,700,314
8,322,870
4,391,298
775,295
5,166,593
768,517
513,357
373,046
2,259
69,005
6,950
609,004
302,784
9,305
–
1,716,337
3,442,521
396,742
1,324,785
52,940
357,001
897,732
6,001
8,030
178,112
228,081
603,119
287
-
1,505,570
2,827,274
821,893
1,831,492
6,269,795
3,156,277
Total Equity and Liabilities
12,122,566
8,322,870
The accompanying notes are an integral part of these restated consolidated financial statements.
47. Annual Report 2017
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1
(
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
Loans to non-consolidated companies
Decrease (Increase) in other investments
Acquisition of business
Purchase consideration
Cash acquired
Investment in non-consolidated companies
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
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
Finance Lease payments
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2017 and 2016 and for the years
ended December 31, 2017, 2016 and 2015
NOTES
2017
2016
2015
1,022,927
706,929
59,779
12 & 13
27 (B)
3 & 14
27 (B)
2 (B)
19
27 (B)
474,299
(273,443)
(68,115)
19,484
-
2.783
(864,970)
70,894
383,859
406,890
182,332
(14,624)
12,699
-
1,678
(162,373)
(33,936)
1,099,595
433,788
(23,932)
272,810
5,496
1,739
3,180
509,144
61,487
1,323,491
12 & 13
(409,402)
(435,460)
(466,643)
14
18
3
3
3 & 14
2 (B)
(23,904)
14,986
(1,890,989)
278,162
-
1,124
65
-
(92,496)
86,340
-
-
(114,449)
1,212
183
-
(10,416)
(85,946)
-
-
(9,600)
1,217
-
(673)
(2,029,958)
(554,670)
(572,061)
(196,308)
(30,573)
(4,157)
-
-
(176,677)
(50,829)
-
-
-
3,239,121
910,577
(176,677)
(32,743)
-
30,870
(74,000)
822,663
(1,205,827)
(1,191,770)
(1,379,747)
1,802.256
156.157
183.463
(1,841)
156,157
337,779
(508,699)
36,226
151,491
(4,254)
36,226
183,463
(809,634)
(58,204)
213,303
(3,608)
(58,204)
151,491
Contributions from non-controlling shareholders in consolidated subsidiaries
Acquisition of non-controlling interest
2 (B)
Proceeds from borrowings
Repayments of borrowings
Net cash provided by (used in) 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)
Non-cash transactions:
Acquisition of PP&E under lease contract agreeements
77,035
-
-
(1) The working capital is impacted by non-cash movement of USD (70.0) million as of
December 31, 2017 (USD (73.8) million and USD (210.6) million as of December 31,
2016 and 2015, respectively) due to the variations in the exchange rates used by
subsidiaries with functional currencies different from the US dollar.
2017, 2016 and 2015, respectively. In addition, the Company had other investments
with a maturity of more than three months for USD 135,864, USD 150,851 and USD
237,191 as of December 31, 2017, 2016 and 2015, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
(2) It includes restricted cash of USD 50, USD 83 and USD 88 as of December 31,
51. Annual Report 2017
Index to the Notes to the Consolidated
Financial Statements
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2017 and 2015 and for the years
ended December 31, 2017, 2016 and 2015
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
30
General information page 53
Basis of presentation page 53
Acquisition of business page 55
Accounting policies page 60
Segment information page 75
Cost of sales page 79
Selling, general and administrative expenses page 80
Labor costs (included in cost of sales and selling, general and administrative expenses) page 80
Other operating income (expenses), net page 81
Other financial income (expenses), net page 81
Income tax expense page 82
Property, plant and equipment, net page 83
Intangible assets, net page 85
Investments in non-consolidated companies page 87
Receivables, net - non-current and current page 90
Trade receivables, net – non-current and current page 91
Inventories, net page 92
Cash, cash equivalents and other investments page 92
Allowances and provisions – non-current and current page 93
Deferred income tax page 94
Other liabilities – non-current and current page 97
Derivative financial instruments page 99
Finance leases page 102
Borrowings page 103
Contingencies, commitments and restrictions on the distribution of profits page 105
Related party transactions page 110
Other required disclosures page 111
Recently issued accounting pronouncements page 113
Financial risk management page 114
Subsequent events - Agreement Regarding Governance Of Usiminas page 121
52. Ternium
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, 2017,
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, 2017 and 2016, this special tax reserve
amounted to USD 6.9 billion and USD 7.0 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 2018), 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.
53. Annual Report 2017
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, 2017, 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
20, 2018.
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)
Luxembourg
Luxembourg
Switzerland
Ternium Participaçoes S.A. (formerly
Brazil
Ternium Brasil S.A.) (1)
Holding
Holding
Services
Holding
Ternium Investments Switzerland AG (1)
Switzerland
Holding
Ternium Internacional España S.L.U. (1)
Ternium USA Inc. (1)
Spain
USA
Ternium Argentina S.A. (formerly Siderar
Argentina
S.A.I.C.) (2)
Impeco S.A. (3)
Prosid Investments S.A. (4)
Ternium Mexico S.A. de C.V. (5)
Hylsa S.A. de C.V. (6)
Las Encinas S.A. de C.V. (6)
Ferropak Comercial S.A. de C.V. (6)
Galvamet America Corp (6)
Transamerica E. & I. Trading Corp. (6)
Técnica Industrial S.A. de C.V. (6)
Acedor, S.A. de C.V. (6)
54. Ternium
Argentina
Uruguay
Mexico
Mexico
Mexico
Mexico
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
Manufacturing and selling of insulated
panel products
Scrap services company
Services
Holding
2017
2016
2015
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%
88.78%
88.78%
60.97%
60.94%
88.72%
88.72%
88.78%
88.78%
88.72%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.72%
88.72%
88.72%
88.72%
88.72%
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Galvacer America Inc (7)
Ternium Gas México S.A. de C.V. (8)
USA
Mexico
Distributing company
Energy services company
Ternium Internacional Guatemala S.A. (9)
Guatemala
Selling of steel products
Consorcio Minero Benito Juarez Peña
Colorada S.A.de C.V. (10)
Mexico
Exploration, exploitation and
pelletizing of iron ore
Peña Colorada Servicios S.A. de C.V. (10)
Mexico
Services
Exiros B.V. (10)
Netherlands
Procurement and trading services
Servicios Integrales Nova de Monterrey S.A.
de C.V. (11)
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
Ternium Colombia S.A.S. (formerly
Ferrasa S.A.S.) (12)
Ternium del Cauca S.A.S. (formerly
Perfilamos del Cauca S.A.S.) (12)
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
2017
2016
2015
–
88.78%
99.98%
44.39%
44.39%
50.00%
66.14%
88.78%
88.78%
99.98%
44.39%
44.39%
50.00%
66.14%
88.72%
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%
99.92%
99.91%
99.98%
99.98%
99.98%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Ternium Siderúrgica de Caldas S.A.S.
(formerly Siderúrgica de Caldas S.A.S.) (12)
Colombia
Manufacturing and selling of steel
products
100.00%
100.00%
100.00%
Tenigal S. de R.L. de C.V. (13)
Mexico
Ternium Internacional S.A. (14)
Uruguay
Manufacturing and selling of steel
products
Holding and marketing of steel
products
51.00%
51.00%
51.00%
100.00%
100.00%
100.00%
Ternium Treasury Services S.A. (14)
Uruguay
Financial services
Ternium International B.V. (15)
Netherlands
Marketing of steel products
Ternium International Inc. (15)
Ternium Procurement S.A. (16)
Panama
Uruguay
Marketing of steel products
Procurement services
Technology & Engineering Services S.A. (16)
Uruguay
Engineering and other services
Ternium International USA Corporation (17)
USA
Marketing of steel products
Ternium Internacional de Colombia S.A.S. (18)
Colombia
Marketing of steel products
Ternium Ingeniería y Servicios de México
S.A. de C.V.
Mexico
Engineering and other services
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%
Soluciones Integrales de Gestión S.A. (19)
Argentina
Other services
100.00%
100.00%
Procesadora de Materiales Industriales S.A. (20)
Colombia
Scrap services company
Ferropak Servicios S.A. de C.V. (21)
Corporativo Grupo Imsa S.A. de C.V. (21)
Mexico
Mexico
Services
Services
–
–
–
–
–
–
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
88.72%
88.72%
55. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Ternium International Ecuador S.A. (22)
Ecuador
Marketing of steel products
Ternium Staal B.V. (23)
Netherlands
Ternium Brasil Ltda. (23)
Brazil
Holding and marketing of steel
products
Manufacturing and selling of steel
products
Ecosteel Gestao de Efuentes Industriais S.A. (23)
Brazil
Ecosteel Gestao de Águas Industriais S.A. (23)
Brazil
Other services
Other services
Ternium del Atlántico S.A.S (24)
Colombia
Manufacturing and selling of steel
products
2017
2016
2015
–
100.00%
100.00%
100.00%
100.00%
100.00%
–
–
–
–
–
–
100.00%
–
–
–
–
–
(1) Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%.
(2) During the fourth quarter of 2017, Siderar S.A.I.C. changed its business name
to Ternium Argentina S.A. Indirectly through Ternium Internacional España S.L.U.
Total voting rights held: 60.94%.
(3) Since the fourth quarter of 2017, indirectly through Ternium Argentina S.A. and
Soluciones Integrales S.A. Total voting rights held 100.00%. Before that, indirectly
through Ternium Argentina S.A. and Ternium Internacional S.A.
(4) Since the fourth quarter of 2017, indirectly through Ternium Argentina S.A.
and Ternium Procurement S.A. Total voting rights held 100.00%. Before that,
indirectly through Ternium Argentina S.A. and Ternium Internacional S.A.
(5) Since the fourth quarter of 2017, indirectly through Ternium Argentina S.A.
and Ternium Internacional España S.L.U. Total voting rights held 100.00%.
Before that, indirectly through Ternium Argentina S.A., Ternium Internacional S.A.
and Ternium Internacional España S.L.U.
(6) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 100.00%.
(7) This company dissolved as of December 11, 2017.
(8) Indirectly through Ternium Mexico S.A. de C.V. and Tenigal S. de R.L. de C.V.
Total voting rights held: 100.00%.
(9) Indirectly through Ternium Internacional España S.L.U. Total voting rights held: 100%.
(10) Total voting rights held: 50.00%.
(11) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 74.50%.
(12) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held:
100.00%. See Note 2 (B).
(13) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held:
51.00%.
(14) Indirectly through Ternium Investments Switzerland AG. Total voting rights held:
100.00%.
(15) Since the third quarter of 2017, indirectly through Ternium Investments S.à r.l.
Total voting rights held: 100.00%. Before that, indirectly through Ternium
Investments Switzerland AG.
(16) Since the third quarter of 2017, indirectly through Ternium Internacional España
S.L.U. Total voting rights held: 100.00%. Before that, indirectly through Ternium
Investments Switzerland AG.
(17) Since the fourth quarter of 2017, indirectly through Ternium Investments S.à r.l.
Total voting rights held: 100.00%. Before that, indirectly through Ternium
Internacional S.A.
(18) Indirectly through Ternium Internacional S.A. Total voting rights held 100.00%.
(19) Since the third quarter of 2017, indirectly through Ternium Investments S.à r.l.
and Ternium Internacional España S.L.U. Total voting rights held 100.00%. Before
that, indirectly through Ternium Investments S.à r.l. and Technology and
Engineering Services S.A.
(20) This company was dissolved as of December 6, 2016.
(21) Merged with Hylsa S.A. de C.V. during the fourth quarter of 2016.
(22) This company was dissolved as of September 27, 2016.
(23) Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%.
(24) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held:
100.00%.
The most important non-controlling interest is related
to the investment in Ternium Argentina S.A., which is
a company listed in the Buenos Aires Stock Exchange.
Ternium Argentina stated in its annual accounts as
of and for the year ended December 31, 2017, that
revenues amounted to USD 2,301 million (2016: USD
1,892 million), net profit from continuing operations to
USD 337 million (2016: USD 251 million), total assets
to USD 2,820 million (2016: USD 2,415 million), total
liabilities to USD 874 million (2016: USD 607 million)
and shareholders’ equity to USD 1,945 million (2016:
USD 1,807 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 Ternium Colombia
S.A.S. (formerly Ferrasa S.A.S.)
On January 20, 2015, Ternium entered into an agreement
to acquire the remaining 46% interest in Ternium
Colombia for a total consideration of USD 74.0 million.
The Ternium Colombia 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 consolidated financial
statements.
56. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
3. Acquisition of business
A. CSA Siderúrgica do Atlântico Ltda. (now Ternium Brasil
Ltda.) and thyssenkrupp Slab International B.V. (now Ternium
Staal B.V.)
(a) The acquisition
On September 7, 2017, Ternium completed the acquisition
from thyssenkrupp AG (“tkAG”) of a 100% ownership
interest in thyssenkrupp Slab International B.V. (“tkSI”)
and its wholly-owned subsidiary CSA Siderúrgica do
Atlântico Ltda. (“CSA”), a steel slab producer with a
steelmaking facility located in the state of Rio de Janeiro,
Brazil, and having 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. The
acquisition is expected to substantially increase Ternium’s
steelmaking capacity and strengthen its business in
strategic industrial sectors across Latin America.
As part of the transaction, tkAG assigned to Ternium a
slab commitment agreement providing for an arrangement
relating to the purchase of CSA-manufactured carbon
steel slabs under the terms of a slab frame supply
agreement and related annual slab off-take agreements
between tkSI and the entity that acquired thyssenkrupp’s
former Calvert re-rolling facility in Alabama, United
States of America. Such slab commitment agreement
provided for a commitment by such entity to purchase
from tkSI approximately 2.0 million tons of CSA-
manufactured carbon steel slabs per year until September
30, 2019, at the price resulting from the pricing formula
set forth therein. This slab commitment agreement was
amended on December 20, 2017, spreading deliveries
of the remaining slab volumes committed under such
agreement through December 2020.
The purchase price paid by Ternium in the acquisition
totaled approximately USD 1,891 million.
Ternium began consolidating the balance sheets and
results of operations of tkSI and CSA as from September
7, 2017, and CSA changed its name to Ternium Brasil
Ltda. and tkSI was renamed Ternium Staal B.V.
Company for the period from September 7, 2017, to
December 31, 2017. Had the acquisition occurred on
January 1, 2017, pro-forma revenue and net loss for the
year ended December 31, 2017, would have been USD
2,398 million and USD 6 million, respectively. These
amounts have been calculated using Ternium Staal
B.V.’s consolidated results and adjusting them for the
additional depreciation and amortization that would
have been recovered assuming the fair value adjustments
to property, plant and equipment and intangible assets
had applied from January 1, 2017.
(b) Fair value of net assets acquired
The application of the purchase method requires
certain estimates and assumptions especially concerning
the determination of the fair values of the acquired
intangible assets and property, plant and equipment
as well as the liabilities assumed at the date of the
acquisition. The fair values determined at the acquisition
date are based mainly on discounted cash flows and other
valuation techniques.
The preliminary allocation of the fair values determined
for the assets and liabilities arising from the acquisition is
as follows:
FAIR VALUE OF ACQUIRED ASSETS AND LIABILITIES
USD
Property, plant and equipment and Intangible assets
1,573,946
Inventories
Cash and cash equivalents
Trade receivables
Other receivables
Deferred tax assets
Provisions
Trade payables
Other assets and liabilities, net
Net assets acquired
400,047
278,162
63,710
705,058
13,686
(799,938)
(219,604)
(124,078)
1,890,989
According to this preliminary purchase price allocation,
no goodwill was recorded.
The acquired business contributed revenues of USD
864 million and a net profit of USD 64 million to the
Ternium entered into several derivative contracts to
partially hedge the currency volatility risk associated
57. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
with the Euro-denominated transaction price. As of the
date of the closing of the acquisition, the fair value of
those contracts amounted to USD 75.9 million. Such
value was deducted from the purchase consideration.
may be either used to offset ICMS payment obligations
generated in connection with domestic sales of products
and services, or sold and transferred to third parties.
The preliminary purchase price allocation disclosed
above is currently under analysis with the assistance of
a third-party expert. Following IFRS 3, the Company
will continue reviewing the allocation and make any
necessary adjustments (mainly over Property, plant and
equipment, Intangible assets and Provisions) during the
twelve months following the acquisition date.
(c) Main contingencies associated with the acquired business
Contrary to the recognition principles in IAS 37
Provisions, Contingent Liabilities and Contingent Assets,
IFRS 3 Business Combinations requires an acquirer of a
business to recognize contingent liabilities assumed in a
business acquisition at the acquisition date even if it is
not probable that an outflow of resources will be required
to settle the obligation.
The main contingencies recognized in the Company’s
consolidated financial statements pursuant to IFRS
3 Business Combinations in connection with the
acquisition of tkSI and CSA include the following:
(i) Fishermen associations’ claims
Civil contingencies include lawsuits brought by a number
of fishermen associations on behalf of their associates,
alleging that the dredge of Ternium Brasil’s deep-water
port has had a negative impact on fish farming and
exploitation activities in the Sepetiba Bay area in Rio
de Janeiro and that, as a result, fishermen in that area
had suffered damages. A provision in the amount of
USD 24.5 million was recorded at the acquisition date
in connection with this matter (USD 23.4 million as of
December 31, 2017).
The Rio de Janeiro State Treasury Office is challenging
the use by Ternium Brasil of ICMS tax credits generated
in connection with purchases of refractory materials
in the period from December 2010 through December
2015, and intends to assess taxes and impose fines on
Ternium Brasil on the argument that such materials may
not be qualified as “raw materials” or “intermediary
products” but as “goods for consumption” and,
accordingly, ICMS tax credits generated in connection
with their purchase are not available and may not be
used to offset ICMS payment obligations generated
in connection with Ternium Brasil’s domestic sales of
carbon steel slabs. Ternium Brasil has appealed against
the Rio de Janeiro State Treasury Office tax assessments
and fines. A provision in the amount of USD 57.7
million was recorded as of the acquisition date in
connection with this matter (USD 54.9 million as of
December 31, 2017).
(iii) ICMS deferral tax benefit - Unconstitutionality
Through State Law No. 4,529, of March 31, 2005, the
State of Rio de Janeiro granted Ternium Brasil a tax
incentive consisting of a deferment of ICMS payable by
Ternium Brasil in connection with the construction and
operation of the company’s Rio de Janeiro steelmaking
complex. The incentive applies in respect of the
acquisition of fixed assets and certain raw materials
(i.e. iron ore, pellets, alloys, coke, coal and scrap) and
significantly reduces input ICMS credit accumulation
by Ternium Brasil. The tax incentive was granted for
a period of 20 years from the commencement of the
construction works for Ternium Brasil’s Rio de Janeiro
steel complex.
(ii) Tax assessments relating to the use of certain ICMS
tax credits
The Imposto Sobre Operações Relativas à Circulação de
Mercadorias e Serviços, or ICMS, is a Brazilian value-
added tax on the services (inter-states) and the transfer of
goods in Brazil. Payment of ICMS generates tax credits
that, subject to applicable law, rules and regulations,
In 2012, a Brazilian political party filed a direct action
of unconstitutionality against the above-mentioned
State Law before the Brazilian Federal Supreme
Court, predicated on the argument that, since the tax
incentive granted pursuant to such State Law had not
been approved by Brazil’s National Council of Fiscal
Policy (Conselho Nacional de Política Fazendária,
or CONFAZ), such State Law should be declared
58. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
unconstitutional. As of the date of these consolidated
financial statements, Brazil’s Federal Supreme Court has
not yet ruled on the matter.
taking into consideration the probability of negative
outcome for the Company, if any, on an estimated total
risk of USD 1,630 million (including estimated penalties
and interests).
In August 2017, the Brazilian Congress enacted
Supplementary Law No. 160/2017, instituting a
mechanism through which the States may confirm
any ICMS incentives they had granted in prior years
without CONFAZ approval and, in furtherance of
such Supplementary Law, in December 2017 the States
adopted ICMS Convention 190/2017, establishing the
applicable rules and deadlines for so confirming such
ICMS incentives. As per the terms of ICMS Convention
190/2017, all States are required to publish in their
official gazettes, on or before March 29, 2018, a list of
the ICMS incentives that are to be confirmed pursuant
to Supplementary Law No. 160, and then to file all
relevant documents concerning such incentives with
CONFAZ on or before June 29, 2018. The States may
request the postponement of such deadlines, subject to
CONFAZ’s approval.
As part of such confirmation process, in December
2017 the Rio de Janeiro State tax authorities requested
Ternium Brasil to satisfy certain document and
information requirements pertaining to its ICMS
incentive and, in January 2018, Ternium Brasil filed all
documents and information so requested. As of the date
of these consolidated financial statements, the Rio de
Janeiro State has not concluded its confirmation process
and is therefore yet to publish the list of ICMS incentives
that are to be confirmed pursuant to Supplementary Law
No. 160.
The tax benefits accumulated under Ternium Brasil’s
ICMS incentive as of the acquisition date amounted to
approximately USD 1,089 million. In accordance with
the guidance in IFRS 3, the Company recorded as of
the acquisition date a provision of USD 651.8 million
(including estimated penalties and interest) in connection
with this matter, together with an asset of USD 325.9
million arising from its right to recover part of the
contingency amount from Thyssenkrup Veerhaven B.V.
(USD 620.1 million and USD 310.0 million, respectively,
as of December 31, 2017). The calculation of this
contingency is provisional and has been determined
(d) Acquisition financing
The acquisition was mainly financed through an unsecured
5-year syndicated facility in the principal amount of USD
1.5 billion granted to the Company’s subsidiary, Ternium
Investments S.àr.l., by a syndicate of banks.
The facility will be repaid in eight consecutive and
equal semi-annual installments, commencing on March
5, 2019, and has been guaranteed by the Company’s
subsidiary, Ternium México, S.A. de C.V. The borrower
and the guarantor are subject to certain covenants
customary for transactions of this type, including
limitations on liens and encumbrances, transactions with
affiliates, consolidations and mergers and restrictions
on investments. The guarantor is additionally subject to
limitations on the sale of certain assets and compliance
with a leverage ratio. There are no limitations to the
payment of dividends applicable to the borrower or the
guarantor, except, with respect to the borrower, upon an
event of default under the facility. As of December 31,
2017, the borrower and the guarantor were in compliance
with all of its covenants.
B. Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS (2016)
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
Metal Corporation Group (“NSSMC”, formerly Nippon
Group), with 46.1% of the voting rights within the
59. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
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%.
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.
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
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, Ternium Argentina 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, Ternium Argentina 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 and has a participation in
Usiminas’ results of 20.5%.
As of December 31, 2017, the closing price of the
Usiminas ordinary and preferred shares, as quoted on
the BM&F Bovespa Stock Exchange, was BRL 10,83
(approximately USD 3,27; 2016: BRL 8,26 – USD
2,53) per ordinary share and BRL 9,10 (approximately
USD 2,75; 2016: BRL 4,10 – USD 1,26) per preferred
share, respectively. Accordingly, as of December 31,
2017, Ternium’s ownership stake had a market value
of approximately USD 817.6 million (2016: USD 625.5
million) and a carrying value of USD 466.3 million (2016:
USD 411.1 million).
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.
Usiminas financial restructuring process (that started in
April 2016 with the capital increase) was completed by
the end of August 2017. The completion of this process
together with the increase in the share price since June
2016 and the improvement in business conditions may
lead to an increase in the value of the investment in
Usiminas in future periods.
4. Accounting policies
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, 2016.
60. 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.
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.
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 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.
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
acquisition-date fair value of any previous equity interest
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
61. Annual Report 2017
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 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.
62. 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, 2017 and 2016, there are USD
6.1 million and USD 14.7 million 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, 2017 and 2016, 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
63. Annual Report 2017
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. Spare parts are included in
property, plant and equipment.
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
3-20 years
Derivative financial instruments
Information about accounting for derivative financial
instruments and hedging activities is included in Note 29
"Financial Risk management" and Note 4 (Y).
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.
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.
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 2017, 2016 and 2015.
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.
64. 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 (U)).
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, 2017, 2016 and 2015, is
approximately 7%, 7% 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.
65. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
As of December 31, 2017 and 2016, 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, 2017, 2016 and 2015 totaled USD
9.8 million, USD 9.2 million and USD 6.2 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 Ternium Colombia S.A.S. (formerly
Ferrasa S.A.S.). These customer relationships were
amortized using the straight-line method over a useful life
of approximately 10 years. As of December 31, 2017, these
assets are fully amortized.
In accordance with IFRS 3 and IAS 38, Ternium has
recognized the value of customer relationships in
connection with the acquisition of Ternium Staal B.V.
The value of the slab commitment agreement by which
Ternium Investments S.à r.l. is entitled to invoice, under
certain conditions, the price difference between slabs and
hot rolled coils will be amortized using the units of slabs
sold method.
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 Ternium Colombia S.A.S. (formerly Ferrasa
S.A.S.). As of December 31, 2017, these assets are fully
amortized.
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.
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.
66. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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, 2017 the discount rate used to test
goodwill allocated to the Steel and Mining Mexico CGUs
for impairment was 11.49% (as of December 31, 2016,
10.82%).
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.
Except for the impairment in connection with the
investment in Usiminas in 2015 and 2014, during the
years 2017, 2016 and 2015, no impairment provisions
were recorded in connection with assets that have an
indefinite useful life (including goodwill).
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.
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.
H. Inventories
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 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.
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 (BB) (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.
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.
67. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
K. Non current assets (disposal groups) classified as held
for sale
Non-current assets (disposal groups) are classified as
assets held for sale, complying with the recognition criteria
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.
The carrying value of non-current assets classified as
held for sale, at December 31, 2017 and 2016 totals USD
2.8 million and USD 10.2 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. Finance leases
Leases of property, plant and equipment where the
Company, as lessee, has substantially all the risks and
rewards of ownership are classified as finance leases.
Finance leases are capitalized at the lease’s inception at the
fair value of the leased property or, if lower, the present
value of the minimum lease payments. The corresponding
rental obligations, net of finance charges, are included
in other short-term and long-term payables. Each lease
payment is allocated between the liability and finance cost.
The finance cost is charged to the profit or loss over the
lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each
period. The property, plant and equipment acquired under
finance leases is depreciated over the asset’s useful life or
over the shorter of the asset’s useful life and the lease term
if there is no reasonable certainty that the Company will
obtain ownership at the end of the lease term.
N. 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 tax assets are recognized to the extent it is
probable that future taxable income will be available to
offset temporary differences.
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
68. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
is probable that the temporary difference will not reverse
in the foreseeable future.
difference between the defined benefit obligations less plan
assets.
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.
O. Employee liabilities
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.
1. Post-employment obligations
Mexico
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
charged or credited to equity in other comprehensive
income in the period in which they arise.
Ternium Mexico has defined benefit and defined
contribution plans.
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 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
Ternium Argentina implemented an unfunded defined
benefit employee retirement plan for certain senior officers.
The plan is designed to provide certain benefits to those
69. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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
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.
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.
As of December 31, 2017 and 2016, the outstanding
liability corresponding to the Program amounts to USD
30.8 million and USD 23.4 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, 2017 and 2016, is USD 30.3
million and USD 24.1 million, respectively.
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,
Ternium Argentina 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.
P. 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.
Q. Trade payables
Trade payables are recognized initially at fair value and
subsequently measured at amortized cost using the
effective interest method.
R. Revenue recognition and other income
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 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.
70. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Interest income is recognized on a effective yield basis.
S. 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, 2017, 2016
and 2015, the capitalized borrowing costs are not material.
T. 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.
Commissions, freight and other selling expenses, including
shipping and handling costs, are recorded in Selling,
general and administrative expenses in the Consolidated
Income Statement.
U. Stripping costs
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”).
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.
V. 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.
W. 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.
X. 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.
Y. Derivative financial instruments and hedging activities
Ternium designates certain derivatives as hedges of a
particular risk associated with a recognized asset or
71. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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, 2017 and
2016, the effective portion of designated cash flow hedges
(net of taxes) amounted to USD 0.7 million and USD 0.1
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 27 (A)).
More information about accounting for derivative
financial instruments and hedging activities is included in
Note 29 "Financial risk management".
Z. 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.
AA. 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:
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.
BB. 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
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, 2017 was 11.49% and no impairment charge
resulted from the impairment test performed. See Notes
4(F) and 4(E)(4).
72. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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. The loss contingencies provision amounts to
USD 768.5 million and USD 7.0 million as of December
31, 2017 and 2016, respectively.
4. Allowance for obsolescence of supplies and spare parts
and slow-moving inventory
considering their selling prices or whether they are
damaged or have become wholly or partly obsolete.
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, 2017 and 2016, the Company
recorded no allowance for net realizable value and
USD 36.2 million and USD 33.4 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
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
When assessing whether an impairment indicator may
73. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
exist, the Company evaluates both internal and external
sources of information, such as the following:
customer payment terms when evaluating the adequacy
of the allowance for doubtful accounts.
• 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, 2017 and 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
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
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, 2017 and 2016,
allowance for doubtful accounts totals USD 16.5 million
and USD 6.0 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
74. Ternium
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.
9. Business combinations
The recognition of business combinations requires the
excess of the purchase price of acquisitions over the
net book value of assets acquired to be allocated to the
assets and liabilities of the acquired entity. The Company
makes judgments and estimates in relation to the fair
value allocation of the purchase price. If any unallocated
portion is positive, it is recognized as goodwill, and if
negative, it is recognized in the income statement. See
further information in Note 3 (A).
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. It also includes the
sales of energy.
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
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Southern region operating segment manages the businesses
in Argentina, Paraguay, Chile, Bolivia and Uruguay. The
Other markets operating segment includes businesses
mainly in Brazil, United States, Colombia, Guatemala,
Costa Rica, Honduras, El Salvador and Nicaragua.
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.
Ternium’s Chief Operating Decision Maker (CEO) holds
monthly meetings with senior management, in which
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.
Most information on segment assets is not disclosed as it is
not reviewed by the CODM.
75. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
YEAR ENDED DECEMBER 31, 2017
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
9,700,260
271,477
(271,441)
9,700,296
(7,465,751)
(212,860)
275,586
(7,403,025)
2,234,509
58,617
4,145
2,297,271
(811,487)
(12,760)
(17,011)
771
–
–
(824,247)
(16,240)
1,406,011
46,628
4,145
1,456,784
9,700,260
287,152
(287,116)
9,700,296
1,065,605
66,694
(1,291)
1,131,008
325,776
1,456,784
(165,090)
68,115
1,359,809
Depreciation and amortization - IFRS
(424,529)
(49,770)
–
(474,299)
76. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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)
1,830,713
12,856
(3,984)
1,839,585
(677,007)
(10,935)
(9,543)
1,144,163
(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)
77. Annual Report 2017
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)
Geographical information
The Company has revenues attributable to the Company’s
country of incorporation (Luxembourg) related to a
contract acquired as a part of the business combination
disclosed in Note 3 (A).
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, 2017
Net sales
Non-current assets (1)
YEAR ENDED DECEMBER 31, 2016
Net sales
Non-current assets (1)
YEAR ENDED DECEMBER 31, 2015
Net sales
Non-current assets (1)
Mexico
Southern
region
Other
(2)
markets
Total
5,629,267
2,316,444
1,754,585
9,700,296
4,042,914
643,411
1,756,007
6,442,332
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
4,166,148
682,705
909,453
246,919
7,877,449
5,095,772
(1) Includes Property, plant and equipment and Intangible assets.
(2) Includes the assets related to the business acquisition disclosed in Note 3 (A).
78. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Revenues by product
YEAR ENDED DECEMBER 31,
2017
2016
2015
Semi-finished (1)
Slabs
Hot rolled (2)
Cold rolled
Coated (3)
Roll-formed and tubular (4)
Other products (5)
123,752
715,513
3,366,697
1,321,663
3,391,328
472,253
309,090
19,878
–
2,763,403
1,110,671
2,900,009
413,991
16,023
88,264
–
3,049,433
1,176,019
3,004,700
509,034
49,999
Total Sales
9,700,296
7,223,975
7,877,449
(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 sales of energy and pig iron.
6. Cost of sales
YEAR ENDED DECEMBER 31,
2017
2016
2015
INVENTORIES AT THE BEGINNING OF THE YEAR
1,647,869
1,579,120
Acquisition of business (Note 3)
Translation differences
PLUS: CHARGES FOR THE YEAR
400,047
(97,148)
–
82,515)
2,134,034
–
(204,512)
Raw materials and consumables used and other movements
6,337,283
4,060,783
4,548,219
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
110,949
673,821
348,415
35,275
480,496
7,350
7,968
(4,028)
(25,973)
31,631
(2,550,930)
7,403,025
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
79. Annual Report 2017
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
2017
86,990
229,529
12,345
78,264
5,038
98,786
35,922
259,898
685
16,790
824,247
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2016
65,965
193,118
13,589
38,427
3,092
90,166
36,223
234,801
288
12,273
687,942
2015
69,434
214,352
13,761
36,283
4,957
130,061
40,487
246,762
(824)
15,019
770,292
(1) For the year ended December 31, 2017, it includes fees accrued for professional
services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to
USD 3,501, including USD 2,863 for audit services, USD 91 for audit-related
services, USD 229 for tax services and USD 318 for all other services.
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.
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
2017
849,354
25,783
28,213
903,350
2016
698,825
27,048
27,758
753,631
2015
754,063
30,888
29,390
814,341
As of December 31, 2017, 2016 and 2015, the quantity of
employees was 21,335, 16,725 and 16,739, respectively.
80. Ternium
9. Other operating income (expenses), net
YEAR ENDED DECEMBER 31,
Results of sundry assets
Other operating income
Other operating income
Provision for legal claims and other matters (Note 19 and 25 (II))
Other operating income
Other operating expense
Other operating (expenses) income, net
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
2017
1,190
-
1,190
(2,783)
(14,647)
(17,430)
(16,240)
2017
(114,583)
(114,583)
19,408
19,408
(65,479)
(1,057)
4,132
(7,511)
(69,915)
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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
2015
2,009
10,625
12,634
(3,180)
–
(3,180)
9,454
2015
(89,489)
(89,489)
7,981
7,981
(5,181)
(8,143)
(2,058)
(2,540)
(17,922)
81. Annual Report 2017
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,
2017
2016
2015
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)
Income tax expense
(450,384)
(394,045)
(234,040)
106,047
7,455
–
(336,882)
(16,821)
2,028
(2,690)
(411,528)
19,463
3,080
4,177
(207,320)
(1) For 2017, it includes mainly the effects of the Argentine tax reform, which became
effective starting January 1, 2018, including a reduction in the corporate income
tax rate from 35% to 30% during the first two years (i.e., fiscal years starting on or
after January 1, 2018 until December 31, 2019, inclusive) and to 25% going
forward. Also, a one-time tax on an asset revaluation for tax purposes was approved.
As of the date of these consolidated financial statements, the law has not yet
been regulated and the tax authorities have not issued the regulations that establish
the operative aspects that will allow the payment of the special tax. The Company
is evaluating the exercise of the option, which could be exercised only when the law
is regulated.
It also includes the effects of the US tax reform, which among other provisions,
reduced the US corporate tax rate from 35% to 21%, effective January 1, 2018.
This required a revaluation of the deferred tax assets and liabilities and certain
current tax payables to the newly enacted tax rates at the date of enactment.
Consequently, the Company has recorded a net adjustment to deferred income tax
benefit of USD 5.2 million for the year ended December 31, 2017.
For 2016, it includes mainly the effects of the Colombian tax rate reform which
introduced an increase from 39% to 40% in 2016, 42% in 2017 and 43% in 2018
and of the Mexican mining tax. For 2015, it includes mainly the effects of the
Mexican mining tax.
(2) It includes the 10% withholding tax on dividend distributions made by Argentine
companies to foreign beneficiaries since 2013.
Income tax expense for the years ended December 31,
2017, 2016 and 2015 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,
2017
2016
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
Effect of changes in tax law
Income tax expense
1,359,809
(387,666)
16,232
(24,070)
51,167
–
7,455
(336,882)
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)
(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.
82. Ternium
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, 2017
Land
Buildings and
improvements
Production
equipment
Vehicles,
furniture
and fixtures
Work in
progress
Spare
parts
Total
Values at the beginning of the year
Cost
528,991
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 January 1, 2017
528,991
1,051,515
2,091,327
43,678
337,814
82,652
4,135,977
Opening net book value
Translation differences
Acquisition of business (Note 3)
Additions
Capitalized borrowing costs
Disposals / Consumptions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
Cost
528,991
1,051,515
2,091,327
(677)
(45,808)
(42,248)
32,187
2,778
–
505,339
602,654
9,385
84,035
(1,139)
(14,776)
–
–
(167)
43,678
(1,188)
4,102
2,307
–
(922)
337,814
(13,982)
80,878
341,575
563
(612)
82,652
4,135,977
(3,697)
(107,600)
31,878
1,257,038
16,274
456,354
–
563
(14,063)
(31,679)
(98)
–
101,661
174,321
13,501
(290,215)
690
(140)
(73,880)
(269,272)
(13,898)
–
(3,710)
(360,760)
562,042
1,533,436
2,640,650
47,580
456,021
110,024
5,349,753
562,042
2,096,959
4,927,478
151,883
456,021
113,188
8,307,571
Accumulated depreciation
-
(563,523)
(2,286,828)
(104,303)
–
(3,164)
(2,957,818)
Net book value at December 31, 2017
562,042
1,533,436
2,640,650
47,580
456,021
110,024
5,349,753
83. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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
611
–
(1,217)
2,591
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)
–
(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
84. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
13. Intangible assets, net
YEAR ENDED DECEMBER 31, 2017
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
215,662
202,931
5,689
298,475
Accumulated depreciation
(164,203)
(106,424)
–
(272,923)
73,665
(72,622)
662,307
1,458,729
–
(616,172)
Net book value at January 1, 2017
51,459
96,507
5,689
25,552
1,043
662,307
842,557
Opening net book value
Translation differences
Acquisition of business (Note 3)
Additions
Disposals / Consumptions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
Cost
51,459
(1,730)
2,731
35,867
(32)
(512)
(26,874)
60,909
96,507
5,689
25,552
1,043
662,307
842,557
–
–
8,076
–
5,185
(15,431)
94,337
–
–
9,829
–
(5,185)
–
–
314,177
–
–
(4,845)
(70,191)
–
–
–
–
–
(1,043)
–
–
–
–
–
–
(1,730)
316,908
53,772
(32)
(5,357)
(113,539)
10,333
264,693
–
662,307
1,092,579
249,379
216,196
10,333
604,931
73,935
662,307
1,817,081
Accumulated depreciation
(188,470)
(121,859)
–
(340,238)
(73,935)
–
(724,502)
Net book value at December 31, 2017
60,909
94,337
10,333
264,693
–
662,307
1,092,579
85. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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
86. Ternium
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
At the end of the year
2017
418,379
68,115
(4,786)
-
(3,360)
478,348
2016
250,412
14,624
39,077
114,449
(183)
418,379
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%
34.39%
466,299
411,134
Techgen S.A. de C.V.
Mexico
Provision of electric power
48.00%
48.00%
6,862
3,444
2017
2016
2017
2016
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.
5,187
3,801
478,348
418,379
87. Annual Report 2017
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, 2017 and 2016, 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
Dividends
Acquisition of additional shares (Note 3)
At the end of the year
2017
411,134
63,030
(4,570)
(3,295)
–
466,299
(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 8, 2018, Usiminas approved its annual accounts
as of and for the year ended December 31, 2017, which state
that revenues, net profit from continuing operations and
shareholders’ equity amounted to USD 3,368 million, USD
100 million and USD 4,164 million, respectively.
2016
239,960
16,832
39,893
–
114,449
411,134
4,164,086
20.47%
852,263
78,688
314,218
(778,870)
466,299
88. 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)
YEAR ENDED 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
2017
5,662
1,494
164
535
7,855
637
1,707
622
299
3,265
426
4,164
USIMINAS
2017
3,368
(2,854)
514
(206)
(78)
230
(145)
49
134
(34)
100
(26)
74
2016
6,086
1,277
472
221
8,056
753
2,104
517
21
3,395
508
4,153
2016
2.443
(2.292)
151
(180)
(61)
(90)
(17)
40
(67)
(99)
(166)
(28)
(194)
89. Annual Report 2017
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
2017 and 2016, Techgen’s shareholders made additional
investments in Techgen, in the form of subordinated
loans, which in the case of Ternium amounted to USD
23.9 million and USD 92.5 million, respectively, which are
due in June 2020 .
For commitments from Ternium in connection with
Techgen, see Note 25.
15. Receivables, net – Non-current and Current
AS OF DECEMBER 31,
Receivables with related parties (Notes 26 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 26)
Tax credits (1)
Others (1)
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 26)
Expenses paid in advance
Government tax refunds on exports
Receivables with related parties (Note 26)
Others
Receivables, net – Current
2017
126,859
4,171
27,734
3,252
202,853
312,430
677,299
2017
149,021
77,887
6,429
44,239
3
13,244
32,522
29,190
9,638
362,173
(1) The increase in tax credits and other receivables corresponds mainly to the business
acquisition included in Note 3 (A).
90. Ternium
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
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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 26)
Allowance for doubtful accounts (Note 19)
Trade receivables, net – Current
2017
4,832
4,832
926,310
96,831
(16,543)
1,006,598
2016
1,270
1,270
633,622
6,142
(6,019)
633,745
AS OF DECEMBER 31, 2017
TRADE RECEIVABLES, NET
Guaranteed
Not guaranteed
Trade receivables
Allowance for doubtful accounts (Note 19)
Trade receivables, net
AS OF DECEMBER 31, 2016
TRADE RECEIVABLES, NET
Guaranteed
Not guaranteed
Trade receivables
Allowance for doubtful accounts (Note 19)
Trade receivables, net
Total
Fully
performing
Past due
412,036
615,937
1,027,973
(16,543)
1,011,430
Total
343,338
297,696
641,034
(6,019)
635,015
366,902
543,791
45,134
72,146
910,693
117,280
-
(16,543)
910,693
100,737
Fully
performing
Past due
309,730
262,165
571,895
-
571,895
33,608
35,531
69,139
(6,019)
63,120
91. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
17. Inventories, net
AS OF DECEMBER 31,
2017
2016
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 companies under cost method
Investments in debt instruments
Other investments, net – Non-current
616,870
1,251,779
423,372
295,106
(36,197)
2,550,930
2017
252
3,128
3,380
401,481
811,378
281,770
186,673
(33,433)
1,647,869
2016
–
5,998
5,998
AS OF DECEMBER 31,
2017
2016
(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
132,736
132,736
100,739
50
229,239
7,751
337,779
144,853
144,853
70,711
83
70,760
41,909
183,463
92. Ternium
19. Allowances and Provisions – Non-current
and Current
PROVISIONS AND ALLOWANCES – NON-CURRENT
YEAR ENDED DECEMBER 31, 2017
Values at the beginning of the year
Translation differences
Acquisition of business (Note 3)
Additions
Reversals
Uses
At December 31, 2017
YEAR ENDED DECEMBER 31, 2016
Values at the beginning of the year
Translation differences
Additions
Reversals
Uses
At December 31, 2016
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
LIABILITIES
Legal
claims and
other matters
6,950
(39,757)
799,938
3,112
(329)
(1,397)
768,517
8,142
(1,290)
2,757
(1,079)
(1,580)
6,950
Asset
retirement
obligation
18,301
853
–
8,675
–
–
27,829
18,273
(3,102)
3,130
–
–
18,301
93. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
PROVISIONS AND ALLOWANCES – CURRENT
DEDUCTED FROM ASSETS
Allowance
for doubtful
accounts
Obsolescense
allowance
YEAR ENDED DECEMBER 31, 2017
Values at the beginning of the year
Translation differences
Acquisition of business (note 3)
Additions
Reversals
Uses
At December 31, 2017
YEAR ENDED DECEMBER 31, 2016
Values at the beginning of the year
Translation differences
Additions
Reversals
Uses
At December 31, 2016
6,019
(504)
10,822
1,365
(680)
(479)
16,543
7,585
(656)
2,574
(2,286)
(1,198)
6,019
33,433
(860)
12,385
9,959
(13,987)
(4,733)
36,197
32,445
(900)
16,616
(12,016)
(2,712)
33,433
LIABILITIES
Assets
retirement
obligation
4,262
246
–
443
–
(2,292)
2,659
1,132
(276)
4,031
–
(625)
4,262
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,
2017
2016
At the beginning of the year
Acquisition of business (Note 3)
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
(523,209)
(511,456)
13,686
(1,052)
7,455
–
4,808
106,047
(392,265)
–
3,351
2,028
(2,690)
2,379
(16,821)
(523,209)
94. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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, 2017
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
(625,963)
(48,637)
(28,050)
(3,050)
(705,700)
6,907
–
–
17,293
61,924
(215)
–
–
185
(8,339)
67
–
–
352
8,939
(29)
(108)
–
11
1,120
6,730
(108)
–
17,841
63,644
(539,839)
(57,006)
(18,692)
(2,056)
(617,593)
AT DECEMBER 31, 2017
DEFERRED TAX ASSETS
At the beginning of the year
Translation differences
Acquisition of business (Note 3)
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, 2017, the recognized deferred tax assets on tax losses amount
to USD 43,355 and there are net unrecognized deferred tax assets of USD 1.2 billion
and unrecognized tax losses amounting to USD 1.9 billion. These two last effects are
connected to the acquisition of Ternium Brasil (see Note 3 (A)).
Provisions
Trade
receivables
Tax
losses
(1)
Other
Total
53,188
(501)
–
–
(2,692)
11,106
61,101
7,488
(273)
–
–
(238)
1,223
8,200
56,297
65,518
182,491
–
–
–
–
(12,942)
(7,008)
13,686
4,916
(7,456)
43,016
(7,782)
13,686
4,916
(10,386)
42,403
43,355
112,672
225,328
95. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
AT DECEMBER 31, 2016
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
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)
AT DECEMBER 31, 2016
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
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
(2) 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.
96. Ternium
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 statement of financial position
(prior to offsetting 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
2017
155,350
69,978
(558,890)
(58,703)
(392,265)
2016
131,407
51,084
(653,503)
(52,197)
(523,209)
21. Other liabilities – Non-current and Current
AS OF DECEMBER 31,
2017
2016
(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:
275,950
31,312
27,829
37,955
373,046
252,624
31,724
18,301
135
302,784
AS OF DECEMBER 31,
2017
2016
POST-EMPLOYMENT BENEFITS
Present value of unfunded obligations
Liability in the statement of financial position
275,950
275,950
252,624
252,624
97. Annual Report 2017
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,
2017
2016
POST-EMPLOYMENT BENEFITS
Current service cost
Interest cost
Total included in labor costs
6,555
21,658
28,213
9,565
18,193
27,758
Changes in the liability recognized in the consolidated
statement of financial position are as follows:
AS OF DECEMBER 31,
2017
2016
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
252,624
840
28,213
15,068
(4,950)
14,110
5,908
10,527
(31,322)
275,950
273,792
(231)
27,758
14,735
(2,600)
(1,360)
18,695
(41,783)
(21,647)
252,624
98. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The principal actuarial assumptions used were as follows:
YEAR ENDED DECEMBER 31,
2017
2016
MEXICO
Discount rate
Compensation growth rate
ARGENTINA
Discount rate
Compensation growth rate
7.75%
5.00%
6.00% - 7.00%
2.00% - 3.00%
8.00%
5.00%
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%
1.6%
-2.9%
2.6%
10.5%
-3.5%
0.7%
-4.4%
The estimated future payments for the next five years will
be between 19.0 and 23.0 million per year.
AS OF DECEMBER 31,
2017
2016
(II) OTHER LIABILITIES - CURRENT
Payroll and social security payable
VAT liabilities
Other tax liabilities
Termination benefits
Related Parties (Note 26)
Asset retirement obligation (Note 19)
Others
Other liabilities – Current
183,249
79,085
30,927
1,816
6,215
2,659
53,050
357,001
130,889
49,633
26,987
2,164
3,744
4,262
10,402
228,081
99. Annual Report 2017
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, 2017 and 2016 were as follows:
AS OF DECEMBER 31,
2017
2016
CONTRACTS WITH POSITIVE FAIR VALUE
Interest rate swap contracts
Foreign exchange contracts
CONTRACTS WITH NEGATIVE FAIR VALUE
Interest rate swap contracts
Foreign exchange contracts
302
2,002
2,304
–
(6,001)
(6,001)
–
316
316
(257)
(30)
(287)
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, 2017, most of the Company’s long-term
borrowings were at variable rates.
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, 2017, the after-tax cash flow hedge
reserve related to these agreements amounted to USD 0.6
million.
During 2012 and 2013, Tenigal entered into several
forward starting interest rate swap agreements in order to
Changes in fair value of derivative instruments
designated as cash flow hedges for each of the years
presented are included below:
CASH FLOW HEDGES
Gross
amount
Income
tax
Total
(566)
(179)
820
75
363
372
810
170
54
(246)
(22)
3
(110)
(129)
(396)
(125)
574
53
366
262
681
At December 31, 2015
(Decrease) / Increase
Reclassification to income statement
At December 31, 2016
(Decrease) / Increase
Reclassification to income statement
At December 31, 2017
100. Ternium
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, 2017 (amounting
to a gain of USD 0.7 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 2018 and up to the end of the
life of the borrowing in 2022.
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 2017, 2016 and 2015, Prosid Investments entered
into several non-deliverable forward agreements in order to
manage the exchange rate exposure generated by Ternium
Argentina’s debt in ARS. As of December 31, 2017, the
notional amount on these agreements amounted to USD
324.7 million.
Furthermore, during 2017, 2016 and 2015, Ternium
Colombia S.A.S. (formerly 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, 2017, the notional amount on these
agreements amounted to USD 22.0 million.
As part of the acquisition of the subsidiary in Brazil, the
Company maintained several non-deliverable forward
agreements which were entered into to manage the
exchange rate exposure generated by financial debt in
BRL. As of December 31, 2017, the outstanding notional
amounts in USD are offset on these agreements.
During December 2017, Ternium Mexico entered into a
forward agreement in order to manage the exchange rate
exposure generated by future payables in EUR related to
the investment plan. As of December 31, 2017, the notional
amount on this agreement amounted to USD 46.7 million.
The net fair values of the exchange rate derivative
contracts as of December 31, 2017 and December 31, 2016
were as follows:
CURRENCIES
CONTRACT
ARS/USD
ND Forward - Buy ARS
ARS/USD
ND Forward - Sell ARS
COP/USD
ND Forward - Sell COP
EUR/USD
ND Forward - Buy EUR
BRL/USD
ND Forward - Buy BRL
BRL/USD
ND Forward - Sell BRL
EUR/USD
ND Forward - Sell EUR
ARS: Argentine pesos; COP: Colombian pesos; EUR: Euros; USD: US dollars; BRL:
Brazilian real.
FAIR VALUE AT DECEMBER 31,
NOTIONAL
AMOUNT
2017
2016
6.4 billion ARS
(6,534)
187.0 million ARS
65.7 billion COP
39.0 million EUR
533
17
224
67.2 million BRL
1,514
61.1 million BRL
53.3 million BRL
247
–
(3,999)
316
–
–
–
–
–
(30)
286
101. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
23. Finance leases
As of December 31, 2017, the Company is part to a contract
that qualifies as financial lease agreement with Air Liquide
Argentina S.A., being the object of the lease a plant for the
provision of industrial gas located in the Company’s plant
in San Nicolas, Argentina. This contract does not consider a
purchase option of the related asset on its expiry date. The
total commitment generated a current finance lease liability
of USD 8.0 million and a non-current finance lease liability
of USD 69.0 million. The total finance lease liability to be
paid on expiry of the lease contract amounts to USD 77.0
million.
The reconciliation of the minimum future payments and the
present value of the contract are as follows:
AS OF DECEMBER 31,
COMMITMENTS IN RELATION TO FINANCE LEASES ARE PAYABLE AS FOLLOWS:
Within one year
Later than one year but not later than five years
Later than five years
Minimum lease payments
Future finance charges
Total Financial lease liabilities
THE PRESENT VALUE OF FINANCE LEASE LIABILITIES IS AS FOLLOWS:
Within one year
Later than one year but not later than five years
Later than five years
Total minimum lease payments
2017
8,328
33,312
79,810
121,450
(44,415)
77,035
8,030
27,208
41,797
77,035
Property, plant and equipment include a net book value of
USD 61.4 million in connection with assets leased to the
Company under this finance lease. The lease term is 15
years and the amortization period of the related asset is 15
years as well.
102. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
24. Borrowings
AS OF DECEMBER 31,
2017
2016
(I) NON-CURRENT
Bank borrowings
Less: debt issue costs
(II) CURRENT
Bank borrowings
Less: debt issue costs
1,724,454
(8,117)
1,716,337
1,510,820
(5,250)
1,505,570
398,851
(2,109)
396,742
823,563
(1,670)
821,893
Total Borrowings
3,221,907
1,218,635
The maturity of borrowings is as follows:
AT DECEMBER 31, (1)
EXPECTED MATURITY DATE
2018
2019
2020 and
thereafter
2017
2016
Fixed rate
Floating rate
Total
1.112,760
13,929
19,942
1,146,631
392,810
409,015
1,273,451
2,075,276
1,505.570
422,944
1,293,393
3,221,907
404,926
813,709
1,218,635
(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
2017
4.76%
2016
6.92%
103. Annual Report 2017
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, 2017 and 2016, respectively.
Breakdown of borrowings by currency is as follows:
AT DECEMBER 31,
CURRENCIES
CONTRACT
2017
2016
USD
USD
ARS
ARS
COP
COP
GTQ
Floating
Fixed
Floating
Fixed
Floating
Fixed
Fixed
2,061,106
791,158
2,377
328,060
11,793
18,500
8,913
790,772
141,889
–
234,576
23,520
19,163
8,715
Total Borrowings
3,221,907
1,218,635
USD: US dollars; ARS: Argentine pesos; COP: Colombian pesos; GTQ: Guatemalan
quetzales.
Ternium’s most significant borrowings as of December
31, 2017, were those incurred under Ternium México’s
syndicated loan facilities, in order to improve its maturity
profile in 2013, under Tenigal’s syndicated loan facility,
in order to finance the construction of its hot-dipped
galvanizing mill in Pesquería, Mexico, and under
Ternium Investments S.à r.l., in order to finance the
acquisition of Ternium Brasil:
In USD million
Date
Borrower
Type
Maturity
Original
principal
amount
Outstanding
principal
amount as
of December
31, 2017
November 2013
Ternium Mexico
Syndicated loan
Years 2012 and 2013
Tenigal
Syndicated loan
September 2017
Ternium Investments S.à r.l.
Syndicated loan
800
200
1,500
155
125
November 2018
July 2022
1,500
September 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, 2017, Ternium was in compliance with
all of its covenants.
104. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
25. 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
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. For the contingencies
related to Ternium Brasil, please refer to Note 3 (A).
I. Tax claims and other contingencies
A. 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 dismissed
the CSN lawsuit, and on February 8, 2017, the court of
appeals of São Paulo maintained the understanding of the
first instance court. On March 6, 2017, CSN filed a motion
for clarification against the decision of the court of appeals,
which was rejected on July 19, 2017. On August 18, 2017,
CSN filed with the court of appeals an appeal seeking the
review and reversal by the Superior Court of Justice of the
decision issued by the court of appeals. The Superior Court
of Justice is restricted to the analysis of alleged violations
to federal laws and cannot assess matters of fact. The
court of appeals must decide whether CSN’s appeal meets
the requirements for submission to the Superior Court
of Justice. If declared admissible, the Superior Court of
Justice will also review admissibility, and, if also declared
admissible, will then render a decision on the merits.
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,
two decisions issued by the Brazilian securities regulator
(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.
B. Shareholder claims relating to the October 2014 acquisition
of Usiminas shares
On April 14, 2015, the staff of the CVM determined that
an acquisition of additional ordinary shares of Usiminas
by Ternium Investments made in October 2014, triggered a
requirement under applicable Brazilian laws and regulations
for Usiminas’ controlling shareholders to launch a tender
offer to all non-controlling 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 2018. 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
105. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
excess of the threshold, in which case no tender offer would
be required.
II. Commitments
The following are Ternium’s main off-balance sheet
commitments:
C. 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 58.4 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.
D. Tax claim on Argentine personal assets tax for 2008, 2009
and 2010
On June 28, 2016, Ternium Argentina 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 required
Ternium Argentina to pay taxes and related interest for
approximately USD 15.9 million as of such date. On
August 4, 2016, Ternium Argentina appealed AFIP’s
assessment before the National Tax Court.
In March 2017, Ternium decided to include this tax
assessment in an official fiscal plan, which condoned
part of the related interest and the whole amount
in connection with fines. The total payment, which
also included the principal and interest for the fiscal
periods 2011 and 2012, amounted to USD 12.8 million,
extinguishing all the liabilities related to this tax claim.
A. Ternium Argentina signed agreements to cover 80%
of its required iron ore, pellets and iron ore fines volumes
until December 31, 2021, for an estimated total amount
of US USD 844.0 million. Although they do not set a
minimum amount or a minimum commitment to purchase
a fixed volume, under certain circumstances a penalty is
established for the party that fails of:
- 7% in case the annual operated volume is between
70% and 75% of the total volume of purchases of the
Company; such percentage is applied over the difference
between the actual purchased volume and the 80% of the
total volume of purchases.
- 15% in case the annual operated volume is lower than
70% of the total volume of purchases of the Company;
such percentage is applied over the difference between the
actual purchased volume and the 80% of the total volume
of purchases.
B. Ternium Argentina 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 Ternium
Argentina. Under this contract, Tenaris has to provide
250 tn/hour of steam, and Ternium Argentina has the
obligation to take or pay this volume. The amount of this
outsourcing agreement totals USD 11.4 million and is due
to terminate in 2018.
C. Ternium Argentina also signed various contracts for
the provision of natural gas, assuming firm commitments
for a total of USD 18.6 million payable during the 2018
financial year.
D. Ternium Argentina signed an agreement with Air
Liquide Argentina S.A. for the supply of oxygen, nitrogen
and argon until 2021, for an aggregate amount of USD
30.9 million, which is due to terminate in 2032.
E. On April 24, 2017, Ternium Mexico entered into a
25-year contract (effective as of December 1, 2016, through
December 1, 2041) with Techgen, S.A. de C.V. for the
106. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
supply of 699 MW (which represents 78% of Techgen’s
capacity) and covers most of Ternium Mexico’s facilities
electricity needs. Monthly payments are determined on
the basis of capacity charges, operation costs, back-up
power charges, and transmission charges. As of the seventh
contract year (as long as Techgen’s existing or replacing
bank facility has been repaid in full), Ternium Mexico
has the right to suspend or early terminate the contract
if the rate payable under the agreement is higher than the
rate charged by Comisión Federal de Electricidad (“CFE”)
or its successors. Ternium Mexico may instruct Techgen
to sell to any affiliate of Ternium Mexico, to CFE, or to
any other third party all or any part of unused contracted
energy under the agreement and Ternium Mexico will
benefit from the proceeds of such sale.
F. 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 of
energy to four of Ternium Mexico’s plants. On March 31,
2008, two of those plants were terminated by Iberdrola.
The contracted electrical demand as of December 31, 2017,
is 51.7 MW. Iberdrola currently supplies approximately
8.5% 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
originally 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 1 year. 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.
G. 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., and is committed to pay
Tractebel for the contracted capacity and for the consumed
energy. The monthly payments are calculated considering
the capacity charges, operation costs, back-up power
charges, and transmission charges, less any steam credits.
The contracted amount is of USD 8.8 million and the
contract will terminate in April 2018.
H. 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.
The total investment commitment of Ternium México
and Ferromex was already invested as of December
31, 2017. 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 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.
I. Ternium México issued a guarantee letter covering up to
approximately USD 40.4 million of the obligations of Gas
Industrial de Monterrey, S.A. de C.V. (“GIMSA”), under
the natural gas trading agreement between GIMSA and
Pemex Transformación Industrial (“Pemex”). The credit
line granted by Pemex in connection with this natural
gas trading agreement amounted to approximately USD
40.4 million. As of December 31, 2017, the outstanding
107. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
amount under the natural gas trading agreement was USD
12.8 million, which is below the amount included in the
guarantee letter issued by Ternium México.
J. 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 2036. As of December
31, 2017, the outstanding value of this commitment was
approximately USD 265 million. Ternium’s exposure under
the guarantee in connection with these agreements amounts
to USD 127 million, corresponding to the 48% of the
agreements’ outstanding value as of December 31, 2017.
K. 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 were
used by Techgen in the construction of the facility. As
of December 31, 2017, the outstanding amount under
the loan agreement was USD 720 million, as a result the
amount guaranteed by Ternium was approximately USD
346 million. The main covenants under the Corporate
Guarantee are limitations to the sale of certain assets and
compliance with financial ratios (e.g. leverage ratio). As of
December 31, 2017, Techgen and Ternium, as guarantor,
were in compliance with all of their covenants.
L. During 2006, CSA, the predecessor of Ternium
Brasil, has entered into a 15-year contract denominated
“Contrato de comercialização de energia elétrica no
ambiente regulado – CCEAR por disponibilidade” to
provide electric energy to 24 distributors starting on 2011.
Under this contract, Ternium Brasil has to provide 200
MW average per year and the price is adjusted by the
Brazilian inflation index. The penalty for not delivering the
volume of energy of the contract is the difference between
the spot price and the unit variable cost (calculated and
published by the Agéncia Nacional de Energía Elétrica),
calculated per hour.
M. Ternium Brasil signed an exclusivity agreement with
Vale S.A. for the purchase of iron ore (pellets, sinter feed
and lump ore), which is due to terminate in 2029. The
total purchased volume, in accordance with the actual
production capacity, is of approximately 8.0 million tons
per year. Ternium Brasil has not the obligation to take or
pay the mentioned volume and only should pay logistic
costs in case of not purchasing the contracted volume.
N. Ternium Brasil, for its activity of energy generation
through gas and steam turbines, signed on March 2017
a contract with GE Global Parts and Products GMBH,
General Electric International Inc. and Alstom Energia
Térmica e Indústria Ltda. for the maintenance services
of such turbines (including the supply of spare parts) for
a period of 20 years. The amount of the entire contract
totals USD 190.7 million.
O. Ternium Brasil also signed on November 2007 a
contract with Primetals Technologies Brazil Ltda.
for the provision of maintenance services at a central
workshop for the entire steel mill complex, including
caster maintenance for the steel plant. The amount of the
mentioned services totals approximately USD 53.0 million
per year and is due to terminate on November 2024.
Ternium Brasil is currently using more hours than the
minimum quantity of contracted hours.
P. Ternium Brasil is a party to a long-term contract with
the Consortium formed by Air Liquide Brasil Ltda.,
AirSteel Ltda., White Martins Gases Industriais Ltda.,
White Martins Steel Ltda. and ThyssenKrupp MinEnergy
GmbH for the supply of air, oxygen, nitrogen and argon
for an aggregate amount of USD 55.0 million per year to
satisfy the requirements up to January 2029. The contract
has minimum daily-required volumes.
Q. Ternium Brasil signed on January 2015 a contract with
Companhia Distribuidora de Gás do Rio de Janeiro for the
supply of natural gas. This agreement is due to terminate
on December 2019 and it totals an aggregate amount of
USD 33.9 million per year or 61.3 million m3 per year.
Ternium Brasil is currently purchasing more than the
minimum volume required by the contract, which is 85%
of the volume mentioned before.
108. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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, 2017, this reserve reached the above-
mentioned threshold.
As of December 31, 2017, Ternium may pay dividends up
to USD 3.1 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, 2017
Loss for the year
Total shareholders’ equity under Luxembourg GAAP
2017
2,004,743
200,474
1,414,122
59,600
3,135,868
(32,012)
6,782,795
109. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
26. Related party transactions
As of December 31, 2017, 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 25.
I. Transactions
YEAR ENDED DECEMBER 31,
2017
2016
2015
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
453,551
164,694
177
660
619,082
404,891
57,941
13,126
111,439
587,397
7,611
7,611
3,360
3,360
2,723
247
2,970
–
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
110. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
II. Year-end balances
AT DECEMBER 31,
2017
2016
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
223,847
29,033
3,255
(24,570)
(21,547)
210,018
103,333
7,043
283
(25,889)
(26,313)
58,457
III. Officers and Directors’ compensation
During the year ended December 31, 2017 the cash
compensation of Officers and Directors amounted to
USD 23.031 (USD 12,461 for the year ended December
31, 2016). In addition, Officers received 828.000 Units
for a total amount of USD 2,069 (USD 1,818 for the year
ended December 31, 2016) in connection with the incentive
retention program mentioned in Note 4 (O)(3).
27. Other required disclosures
A. Statement of comprehensive income
At December 31, 2015
(Decrease)/ Increase
Reclassification to income statement
At December 31, 2016
(Decrease)/ Increase
Reclassification to income statement
At December 31, 2017
CASH FLOW HEDGES
CURRENCY
TRANSLATION
ADJUSTMENT
Gross
amount
Income
Tax
Total
(566)
(179)
820
75
363
372
810
170
54
(246)
(22)
3
(110)
(129)
(396)
(3.064.838)
(125)
(87.807)
574
53
366
262
681
–
(3.152.645)
(104.393)
–
(3.257.038)
111. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
B. Statement of cash flows
YEAR ENDED DECEMBER 31,
2017
2016
2015
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.
C. Financial debt reconciliation
(540,162)
(108,257)
(303,114)
40,230
46,333
(864,970)
336,882
(610,325)
(273,443)
114,583
(95,099)
19,484
(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
FINANCIAL DEBT
Finance lease
liabilities
Short term
borrowings
Long term
borrowings
Total
–
–
–
–
–
–
364
–
(76,879)
(14,949)
14,429
(913,786)
(607,237)
(1,521,023)
302,648
(34,154)
268,494
(246,182)
246,182
–
(17,245)
52,672
(1,591)
(18,836)
58
52,730
(821,893)
(396,742)
(1,218,635)
(540,918)
(1,511,860)
(2,052,414)
(192,547)
192,547
–
–
(32,574)
82,362
–
(371)
89
(76,879)
(47,894)
96,880
(77,035)
(1,505,570)
(1,716,337)
(3,298,942)
As of December 31, 2015
Cash flows
Reclassifications
Foreign exchange adjustments
Other non cash movements
As of December 31, 2016
Cash flows
Reclassifications
Acquisitions - finance leases
Foreign exchange adjustments
Other non cash movements
As of December 31, 2017
112. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
28. Recently issued accounting pronouncements
The following amendments, standards and interpretations
have been applied on the year starting January 1, 2017:
• Recognition of Deferred Tax Assets for Unrealized Losses
– Amendments to IAS 12.
• Disclosure initiative – amendments to IAS 7.
• Annual Improvements to IFRS Standards 2014-2016 Cycle.
to date, the Company does not expect a material impact in
the loss allowance for trade receivables.
The new standard also introduces expanded disclosure
requirements and changes in presentation. These are
expected to change the nature and extent of the Company’s
disclosures about its financial instruments particularly in
the year of the adoption of the new standard.
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, 2017 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 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.
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 has assessed the effects of
applying the new standard on the Company’s financial
statements and has not identified any material impact in
the application of the new standard.
The Company’s management has reviewed its financial
assets and liabilities and is not expecting a material impact
from the adoption of the new standard on January 1, 2018.
The new hedge accounting rules will align the accounting
for hedging instruments more closely with the Company’s
risk management practices. As a general rule, it is probable
that some hedge relationships might be eligible for hedge
accounting, as the standard introduces a more principles-
based approach. The Company has confirmed that its
current hedge relationships will qualify as continuing
hedges upon the adoption of IFRS 9.
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.
The new impairment model requires the recognition of
impairment provisions based on expected credit losses
(ECL) rather than only incurred credit losses as is the
case under IAS 39. It applies to financial assets classified
at amortized cost, debt instruments measured at FVOCI,
trade receivables, loan commitments and certain financial
guarantee contracts. Based on the assessments undertaken
Other standards and interpretations non-significant for the
Company’s financial statements:
• Amendments to IAS 12 - Recognition of Deferred Tax
Assets for Unrealized Losses
• Amendment to IFRS 2 - Classification and
Measurement of Share-based Payment Transactions
• Transfers of Investment Property – Amendments to IAS 40
113. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
29. 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.
The following table shows a breakdown of Ternium’s
assessed financial position exposure to currency risk
as of December 31, 2017. 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)
Brazilian real (BRL)
Colombian peso (COP)
Other currencies
Functional Currency
USD
ARS
–
14
(0)
(434)
(194)
21
(2)
(102)
(5)
–
–
(3)
–
–
The main relevant exposures correspond to:
(a) Argentine peso vs. US dollar
The cumulative devaluation for the Argentine peso
during 2017 was 14.8%. The devaluation generated a
negative effect of USD 97 million, included as currency
translation adjustment in Other comprehensive
income in connection with the valuation of Ternium's
Argentine subsidiaries’ equities (mainly Ternium
Argentina S.A.), and a loss of USD 47 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 1.1
million as of December 31, 2017, and a pre-tax loss of USD
0.7 million as of December 31, 2016.
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.
(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 4.3
million and USD 5.5 million as of December 31, 2017 and
2016, respectively.
114. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
(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 loss of USD
0.2 million and a pre-tax gain of USD 0.1 million as of
December 31, 2017 and 2016, respectively.
(d) Brazilian real vs. US dollar
If the Brazilian real had weakened by 1% against the US
dollar, it would have generated a pre-tax gain of USD 1.9
million as of December 31, 2017.
We estimate that if the Argentine peso, Mexican peso,
Colombian peso and Brazilian real 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 4.9
million higher as of December 31, 2016), 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.
Considering the same variation of the currencies against
the US dollar of all net investments in foreign operations
amounting to USD 1.2 billion, the currency translation
adjustment included in total equity would have been
USD 11.9 million lower (USD 10.4 million lower as of
December 31, 2016), arising mainly from the adjustment
on translation of the equity related to the Argentine peso
and the Brazilian real.
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 4.76% and 6.92% for 2017 and 2016,
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, 2017 and
2016, respectively.
Ternium’s total variable interest rate debt amounted
to USD 2,075 million (64.4% of total borrowings) at
December 31, 2017 and USD 814 million (66.8% of total
borrowings) at December 31, 2016.
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, 2017 would
have been USD 20.5 million lower (USD 13.5 million
lower as of December 31, 2016).
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
treasury counterparties are limited to high credit quality
financial institutions.
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 75.7% of the Company’s liquid
financial assets correspond to investment grade rated
instruments as of December 31, 2017, in comparison with
approximately 65.7% as of December 31, 2016.
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,
115. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
CURRENCY
US dollar (USD)
EU euro (EUR)
Argentine peso (ARS)
Mexican peso (MXN)
Brazilian real (BRL)
Colombian peso (COP)
Other currencies
USD million
971
27
53
163
760
76
1
2,051
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.
As of December 31, 2017, trade receivables total USD
1,011.4 million (USD 635.0 million as of December
31, 2016). These trade receivables are collateralized by
guarantees under letter of credit and other bank guarantees
of USD 2.6 million (USD 2.4 million as of December 31,
2016), credit insurance of USD 380.0 million (USD 326.9
million as of December 31, 2016) and other guarantees of
USD 15.0 million (USD 7.6 million as of December 31, 2016).
As of December 31, 2017, trade receivables of USD 910.7
million (USD 571.9 million as of December 31, 2016) were
fully performing.
As of December 31, 2017, trade receivables of USD 117.3
million (USD 69.1 million as of December 31, 2016) were
past due (mainly up to 180 days).
The amount of the allowance for doubtful accounts was
USD 16.5 million as of December 31, 2017 (USD 6.0
million as of December 31, 2016).
The carrying amounts of the Company’s trade and other
receivables as of December 31, 2017, are denominated in
the following currencies:
116. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2018
2019
2020
2021
Thereafter
1,506
76
909
2,491
423
45
22
490
430
32
15
477
411
20
14
445
452
10
16
478
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, 2017, total borrowings less cash
and cash equivalents and other current and non-current
investments amounted to USD 2,748.3 million.
2. Financial instruments by category and fair value
hierarchy level
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 0.36 and 0.19 as of December 31, 2017 and 2016,
respectively. The Company does not have to comply with
regulatory capital adequacy requirements as known in the
financial services industry.
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
AS OF DECEMBER 31, 2017
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
488,718
–
1,011,430
30,231
101,444
1,631,823
–
2,304
–
99,505
236,335
338,144
–
–
–
6,129
–
488,718
2,304
1,011,430
135,865
337,779
6,129
1,976,096
117. Annual Report 2017
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Derivatives
–
–
6,001
–
–
Other
financial
liabilities
116,549
860,767
-
77,035
3,221,907
6,001
4,276,258
Held to
maturity
Total
–
–
–
–
–
–
116,549
860,767
6,001
77,035
3,221,907
4,282,259
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
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
In USD thousands
AS OF DECEMBER 31, 2017
II. Liabilities as per statement of financial position
Other liabilities
Trade payables
Derivative financial instruments
Finance lease liabilities
Borrowings
Total
In USD thousands
AS OF DECEMBER 31, 2016
I. Assets as per statement of financial position
Receivables
Derivative financial instruments
Trade receivables
Other investments
Cash and cash equivalents
Total
In USD thousands
AS OF DECEMBER 31, 2016
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, 2017 and 2016:
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, 2017
Total
Level 1
Level 2
236,335
236,335
99,505
2,304
99,505
-
338,144
335,840
6,001
6,001
-
-
–
–
2,304
2,304
6,001
6,001
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
119. Annual Report 2017
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.
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 mid 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 mid prices, interest
rate curves, broker quotations, current exchange rates and
forward rates 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),
net” line item in the income statement. Ternium does not
hedge its net investments in foreign entities.
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, 2017,
the effective portion of designated cash flow hedges
amounts to USD 0.7 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.
4. Fair value estimation
The estimated fair value of a financial instrument is the
amount at which the instrument could be exchanged in a
120. Ternium
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.
30. SUBSEQUENT EVENTS - Agreement for the acquisition
of CSA Siderúrgica do Atlântico Ltda.
On February 8, 2018, the Company announced that
its subsidiary Ternium Investments S.à r.l. had entered
into a binding and immediately effective agreement
(the “Agreement”) with Nippon Steel & Sumitomo
Metal Corporation (“NSSMC”), establishing certain
new governance rules for Usiminas as well as certain
undertakings for the settlement of legal disputes. The
new governance rules for Usiminas include, among others,
an alternation mechanism for the nomination of each
of the CEO and the Chairman of the Usiminas board of
directors, as well as a new mechanism for the nomination
of other members of Usiminas’ executive board. In
addition, the Agreement incorporates an exit mechanism.
Under the Agreement, the right to nominate the CEO
and the Chairman will alternate between Ternium and
NSSMC at a 4-year interval, comprising two consecutive
2-year terms. For the initial four years, Ternium will be
entitled to nominate the CEO and NSSMC will be entitled
to nominate the Chairman. Initially, Ternium and NSSMC
intend to nominate Sergio Leite as Usiminas’ CEO and
Ruy Hirschheimer as Usiminas’ Chairman of the Board,
respectively. The executive board will be composed of six
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
members, including the CEO and five Vice-Presidents, with
Ternium and NSSMC nominating three members each.
The Agreement includes an exit mechanism consisting of
a buy-and-sell procedure, exercisable at any time during
the term of the existing Usiminas shareholders' agreement
after the fourth-and-a-half-year anniversary from the
coming election of Usiminas’ executive board in May 2018.
Such buy-and-sell procedure would allow either Ternium
or NSSMC to purchase all or a majority of the Usiminas
shares held by the other party.
Ternium Investments S.à r.l. and its subsidiaries Siderar
S.A.I.C. and Prosid Investments, togehter with Confab
Industrial S.A., a Brazilian subsidiary of Tenaris S.A.,
are parties to the T/T Group within the Usiminas
controlling group. Pursuant to the Agreement, the T/T
Group members will use their reasonable best efforts to
negotiate and execute an amended and restated Usiminas’
shareholders’ agreement together with the other minority
shareholders of the control group, Previdência Usiminas,
Metal One Corporation and Mitsubishi Corporation
do Brasil S.A., having the same termination date as the
existing Usiminas shareholders’ agreement. If any non-
affiliated controlling group shareholder for any reason
does not enter into the new shareholders agreement on
or before April 10, 2018, the T/T Group members will
enter into a separate Usiminas’ shareholders’ agreement
only among themselves and their affiliates that are
shareholders of Usiminas, which will operate as an upper-
level agreement in respect of the existing shareholders
agreement and will more fully reflect and implement the
new governance rules as between them and their affiliates.
Pablo Brizzio
Chief Financial Officer
121. Annual Report 2017
TERNIUM S.A.
SOCIÉTÉ ANONYME
AUDITED ANNUAL ACCOUNTS
AS AT DECEMBER 31, 2017
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
127
Balance sheet
128
Profit and loss account
129
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 2017
Audit Report
To the Shareholders of
Ternium S.A.
Opinion
In our opinion, the accompanying annual accounts give a true and fair view of the
financial position of Ternium S.A. (the Company) as at 31 December 2017, and of the
results of its operations for the year then ended in accordance with Luxembourg legal
and regulatory requirements relating to the preparation and presentation of the annual
accounts.
What we have audited
The Company’s annual accounts comprise:
• the balance sheet as at 31 December 2017;
• the profit and loss account for the year then ended; and
• the notes to the annual accounts, which include a summary of significant accounting
policies.
Basis for opinion
We conducted our audit in accordance with the Law of 23 July 2016 on the audit
profession (Law of 23 July 2016) and with International Standards on Auditing (ISAs)
as adopted for Luxembourg by the “Commission de Surveillance du Secteur Financier”
(CSSF). Our responsibilities under those Law and standards are further described in
the “Responsibilities of the “Réviseur d’entreprises agréé” for the audit of the annual
accounts” section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
We are independent of the Company in accordance with the International Ethics
Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA
Code) as adopted for Luxembourg by the CSSF together with the ethical requirements
that are relevant to our audit of the annual accounts. We have fulfilled our other ethical
responsibilities under those ethical requirements.
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
Responsibilities of the Board of Directors and those charged with governance for the
annual accounts
The Board of Directors is responsible for the preparation and fair presentation of the
annual accounts in accordance with Luxembourg legal and regulatory requirements
relating to the preparation and presentation of the annual accounts, and for such internal
control as the Board of Directors determines is necessary to enable the preparation of the
annual accounts that are free from material misstatement, whether due to fraud or error.
In preparing the annual accounts, the Board of Directors is responsible for assessing
the Company’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless the Board
of Directors either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial
reporting process.
Responsibilities of the “Réviseur d’entreprises agréé” for the audit of the annual
accounts
The objectives of our audit are to obtain reasonable assurance about whether the annual
accounts as a whole are free from material misstatement, whether due to fraud or error,
and to issue an audit report that includes our opinion. Reasonable assurance is a high level
of assurance, but is not a guarantee that an audit conducted in accordance with the Law of
23 July 2016 and with ISAs as adopted for Luxembourg by the CSSF will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these annual accounts.
As part of an audit in accordance with the Law of 23 July 2016 and with ISAs as
adopted for Luxembourg by the CSSF, we exercise professional judgment and maintain
professional scepticism throughout the audit.
We also:
• Identify and assess the risks of material misstatement of the annual accounts, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control;
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control;
• Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the Board of Directors;
• Conclude on the appropriateness of the Board of Directors’ use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on
the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our audit report to the related
disclosures in the annual accounts or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our
audit report. However, future events or conditions may cause the Company to cease to
continue as a going concern;
• Evaluate the overall presentation, structure and content of the annual accounts,
including the disclosures, and whether the annual accounts represent the underlying
transactions and events in a manner that achieves fair presentation;
We communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
PricewaterhouseCoopers, Société coopérative
Represented by
Luxembourg, 20 February 2018
Marc Minet
126. Ternium
Balance Sheet
as at December 31, 2017
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
C
II
3
III
1
D
II
2
4
Other debtors
a) becoming due and payable within one year
III
2
Investments
Own shares
IV
Cash at bank and in hand
Total assets
CAPITAL, RESERVES AND LIABILITIES
A
I
II
Capital and reserves
Subscribed capital
Share premium account
IV
Reserves
1
2
V
Legal reserve
Reserve for own shares or own corporate units
Profit or loss brought forward
VI
Profit or loss for the financial year
B
1
C
6
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.
NOTES
12,31,2017
12.31.2016
2.3
2.4 & 3
3
137,804
167,573
6,750,343,423
6,750,481,227
6,964,902,616
6,965,070,189
2.5
4
2.6
2.7
5
6
2.8
2.9
4
4
518,471
21,043
59,599,747
60,139,261
96,510
60,235,771
8,514,212
38,282
59,599,747
68,152,241
327,645
68,479,886
6,810,716,998
7,033,550,075
2,004,743,442
1,414,121,505
200,474,346
59,599,747
3,135,868,077
(32,012,057)
6,782,795,060
16,223,341
16,223,341
879,680
6,562,864
4,256,053
11,698,597
6,810,716,998
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
2,596,421
3,009,253
2,092,948
7,698,622
7,033,550,075
127. Annual Accounts 2017
Profit and Loss Account
for the year ended December 31, 2017
Amounts expressed in USD
NOTES
12.31.2017
12,31,2016
7
Value adjustments
a) in respect of formation expenses and of tangible
and intangible fixed assets
(29.769)
(89,483)
Other operating expenses
7
(31.504.964)
(20,232,666)
38.604
62.272
(571.159)
652
(32.004.364)
(7.693)
(32.012.057)
11,583
24,531
(686,273)
(13,434)
(20,985,742)
(4,239)
(20,989,981)
8
11
Other interest receivable and similar income
a) derived from affiliated undertakings
b) other interest and similar income
14
Interest payable and similar expenses
a) concerning affiliated undertakings
b) other interest and similar expenses
Profit or loss after taxation
Other taxes not shown under items 1 to 16
8
Profit or loss for the financial year
16
17
18
The accompanying notes form an integral part of these annual accounts.
128. Ternium
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, 2017, 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, 2017 and 2016, this special tax reserve
amounted to USD 6,9 billion and USD 7,0 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
129. Annual Accounts 2017
TERNIUM S.A.
Notes to the accounts (contd.)
amended on December 18, 2015, determined and applied
by the Board of Directors.
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.
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 annual accounts.
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 unrealized 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 realization. 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 unrealized losses
are recorded in the profit and loss account whereas the net
unrealized exchange gains are not recognized.
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.
2.6. Investments
Investments are valued at the lower of purchase price,
including expenses incidental thereto and calculated on
130. Ternium
TERNIUM S.A.
Notes to the accounts (contd.)
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.
losses are charged or credited in the profit or loss in the
period in which they arise.
As of December 31, 2017, the outstanding liability
corresponding to the Program amounts to USD 16,2
million.
2.7. Cash at bank and in hand
2.9. Creditors
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.
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.
2.8. Provisions for pensions and similar obligations
3. Financial Assets
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
On June 29, 2017, 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 29,
2017 amounted to USD 214.559.192.
As a result of the transactions detailed above, the
financial assets of the Company as at December 31, 2017,
consist of:
COMPANY
COUNTRY
% of
beneficial
ownership
Book value at
12.31.2016
USD
Net (Decreases)
/ Additions
USD
Book value at
12.31.2017
USD
Equity at
12.31.2017
USD
Ternium Investments S.à r.l.
Luxembourg
100.00%
6,964,902,616
-214,559,192
6,750,343,424
6,824,947,495
Shares in affiliated undertakings
6,964,902,616
-214,559,192
6,750,343,424
6,824,947,495
131. Annual Accounts 2017
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.
Ternium Investments S.À.r.l. - Zug Branch
BORROWINGS
Ternium Investments S.à.r.l.
TERNIUM S.A.
Notes to the accounts (contd.)
12,31,2017
12.31.2016
–
518,471
518,471
2,554,629
193,157
679,290
605
3,041
3,430,721
4,011,823
4,011,823
8,178,345
335,867
8,514,212
3,009,253
250,374
744,757
414
(0)
4,004,798
1,600,876
1,600,876
5. Capital and reserves
Amounts expressed in USD
Subscribed
Capital
Share
Premium
Legal
Reserve
Profit or
loss brought
forward
Reserve for
own shares
or own
corporate
(2)
units
Result for the
financial year
Total capital
and reserves
Balance at December 31, 2016
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
3,353,165,736
(20.989.981)
7.011.114.795
–
–
–
–
–
–
–
–
–
–
–
–
(20,989,981)
20.989.981
–
(196,307,678)
–
(196.307.678)
–
(32.012.057)
(32.012.057)
Balance at December 31, 2017
2,004,743,442
1,414,121,505
200,474,346
59,599,747
3,135,868,077
(32.012.057)
6.782.795.060
(1) As approved by the Annual General Meeting of Shareholders held on May 3, 2017.
(2) As of December 31, 2017, the Company held 41.666.666 shares as treasury shares.
132. Ternium
TERNIUM S.A.
Notes to the accounts (contd.)
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, 2017, this reserve
reached the above-mentioned threshold, the legal reserve
is not available for distribution to shareholders.
7. Other operating expenses
Amounts expressed in USD
AT DECEMBER 31,
2017
2016
Services and fees
29,710,733
18,770,053
Board of director’s accrued fees
1,235,000
1,031,642
Other expenses
Total
559,231
430,971
31,504,964
20,232,665
8. Taxes
For the year ended December 31, 2017, the Company did
not realize any profits subject to tax in Luxembourg and
will therefore be only subject to the minimum net wealth
tax.
in San Faustin sufficient in number to control San Faustin.
No person or group of persons controls RP STAK.
11. Commitments
Techgen S.A. de C.V is a Mexican natural gas-fired
combined cycle electric power plant owned by Ternium
(48%), Tenaris S.A. (22%) and Tecpetrol International
S.A. (30%) (a wholly-owned subsidiary of San Faustin
S.A., the controlling shareholder of both Ternium and
Tenaris).
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 were
used by Techgen in the construction of the facility. As
of December 31, 2017, the outstanding amount under
the loan agreement was USD 720 million, as a result the
amount guaranteed by Ternium was approximately USD
346 million. The main covenants under the Corporate
Guarantee are limitations to the sale of certain assets and
compliance with financial ratios (e.g. leverage ratio). As of
December 31, 2017, Techgen and Ternium, as guarantor,
were in compliance with all of their covenants.
9. Income from financial fixed assets derived from affiliated
undertakings
During the period, the Company did not receive any
dividends.
Pablo Brizzio
Chief Financial Officer
10. Parent Company
As of December 31, 2017, 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
133. Annual Accounts 2017
ANNUAL
REPORT
2017
PRINCIPAL RISKS AND
UNCERTAINTIES
134. Ternium
07 Ternium’s business, financial condition, results
of operations, reputation or prospects could be
materially and adversely affected by one or more
of the risks and uncertainties described below.
A more extensive description of the risks and
uncertainties associated with Ternium’s business,
financial condition, results of operations, reputation
or prospects will be included in the annual report
on form 20-F that will be filed with the SEC on or
before April 30, 2018, and will be available at
https://www.sec.gov.
Ternium’s results of operations are exposed to
fluctuations in steel demand, caused by changes in
global or regional economic activity, and fluctuations
in profitability, caused by protracted falls in steel
prices, excess steel production capacity coupled with
unfair steel trade practices, fluctuations in industry
inventories, intense competition, and shortages
and/or price fluctuations of manufacturing inputs.
We consume large quantities of iron ore, scrap,
ferroalloys, electricity, metallurgical coal, natural
gas, oxygen and other gases in operating our blast
and electric arc furnaces. In addition, we are a large
consumer of slabs, which are used as inputs in the
production process. Ternium’s companies depend
on certain key suppliers for some of these and
other inputs.
Ternium may fail to implement its business strategy,
adversely affecting its opportunities for growth
and its competitive position. In addition, future
acquisitions or other significant investments could
have an adverse impact on Ternium’s operations or
profits, and Ternium may not realize the benefits it
expects from these business decisions. Furthermore,
Ternium may be required to record a significant
charge to earnings if it must reassess its goodwill,
other amortizable intangible assets, or investments
in non-consolidated companies. Ternium’s
results, financial condition or net worth could be
affected by the performance of non-consolidated
companies. For example, as of December 31,
2012, September 30, 2014, and December 31, 2015,
Ternium wrote down its investment in Usiminas by
$275.3 million, $739.8 million and $191.9 million,
respectively. As of December 31, 2017, Ternium’s
ownership stake in Usiminas had a market value of
approximately $817.6 million and a carrying value
of $466.3 million.
Our results of operations could be negatively
affected by labor disputes at Ternium’s operating
subsidiaries, as they could result in work
stoppages, strikes, disruptions of operations
or expensive collective bargain agreements. A
substantial majority of Ternium’s employees at its
manufacturing subsidiaries are represented by labor
unions and are covered by collective bargaining or
similar agreements, which are subject to periodic
renegotiation. Strikes or work stoppages could
occur in relation to the negotiation of new collective
bargaining agreements, the negotiation of wages
and benefits or, occasionally, other reasons. Ternium
could also suffer plant stoppages or strikes if it were
to implement cost reduction plans.
Ternium has a controlling shareholder. A controlling
shareholder may be able to take actions that do not
reflect the will or best interest of other shareholders.
As a result, Ternium’s related party transactions
may not always be on terms as favorable as those
that could be obtained from unaffiliated third
parties. Some of Ternium’s sales and purchases are
made to and from other companies controlled by its
controlling shareholder. These sales and purchases
are primarily made in the ordinary course of
business, and we believe that they are made on terms
no less favorable than those we could obtain from
unaffiliated third parties. Ternium will continue to
engage in related party transactions in the future,
and these transactions may not be on terms as
favorable as those that could be obtained from
unaffiliated third parties.
As a significant portion of Ternium’s sales are
carried out in currencies other than the US dollar,
exchange rate fluctuations impact Ternium
135. Annual Report 2017
subsidiaries’ results and net worth as reported
in their income statements, statements of
comprehensive income and statements of financial
position in the form of both translation risk and
transaction risk. In the ordinary course of business,
Ternium subsidiaries enter from time to time into
exchange rate derivatives agreements to manage their
exposure to exchange rate changes. Future regulatory
or financial restrictions in the countries where
Ternium operates may affect its ability to mitigate
its exposure to exchange rate fluctuations, and thus
cause an adverse impact on Ternium’s results of
operations, financial condition or cash flows.
Ternium’s results of operations are also exposed to
specific risks related to our iron ore mining activities,
including environmental damages or exposure to
hazardous substances caused by unexpected natural
and operational catastrophes. Concessions could
be subject to changes or termination, and permits
and rights of use and occupancy could be difficult
to obtain or maintain. Our reserve estimates or
estimates of mine life may prove inaccurate and
exploration activities could be uneconomical
and require substantial write-offs. In addition,
relationships with communities living in the mining
areas could be difficult and could adversely affect our
operations.
As a holding company, Ternium’s ability to pay cash
dividends depends on the results of operations and
financial condition of its subsidiaries and could be
restricted by legal, contractual or other limitations.
Non-controlling interests in our subsidiaries could
delay or impede our ability to complete our strategy.
Ternium holds a 61% ownership interest in Ternium
Argentina and a 51% ownership interest in Tenigal.
We also have a participation in the control group of
Usiminas. The existence of non-controlling interests
in these companies could prevent Ternium from
taking actions that, while beneficial to Ternium,
might not be beneficial to each relevant subsidiary,
considered separately. As a result, we could be
delayed or impeded in the full implementation of
our strategy or the maximization of Ternium’s
competitive strengths.
Ternium’s results of operations are subject to
the risks of doing business in emerging markets,
principally in Mexico, Brazil and Argentina and to a
lesser extent in Colombia, and have been, and could
in the future be, affected from time to time to varying
degrees by economic, political, social and regulatory
developments, such as nationalization, expropriation
or forced divestiture of assets; restrictions on
production, domestic sales, imports and exports;
interruptions to essential energy inputs; restrictions
on the exchange or transfer of currency, repatriation
of capital, or payment of dividends, debt principal
or interest, or other contractual obligations;
inflation; devaluation; war or other international
conflicts; civil unrest and local security concerns
that threaten the safe operation of our facilities;
direct and indirect price controls; tax increases,
changes (including retroactive) in the enforcement or
interpretation of tax laws and other retroactive tax
claims or challenges; changes in laws or regulations;
cancellation of contract rights; and delays or denial
of governmental approvals. Both the likelihood
of such occurrences and their overall effect upon
Ternium vary greatly from country to country and
are not predictable. Realization of these risks could
have an adverse impact on the results of operations
and financial condition of Ternium’s subsidiaries
located in the affected country and, depending on
their materiality, on the results of operations and
financial condition of Ternium as a whole.
International trade-related legal actions and
restrictions pose a constant risk for Ternium’s
operations and sales throughout the world. We
purchase steel products, including significant
quantities of steel slabs, for our operations in
Mexico and we also purchase steel products for
our operations in Colombia and for our operations
in Argentina. Subject to certain conditions, steel
products are imported to these markets under zero
or low import duties. If governments imposed
new duties, increased applicable duties or imposed
136. Ternium
will continue to incur expenditures to comply with
applicable laws and regulations, there always remains
a risk that environmental incidents or accidents may
occur that may negatively affect our reputation or
our operations.
Some of the activities for which Ternium supplies
products, such as canning for consumption,
construction and the automotive industry, are subject
to inherent risks that could result in death, personal
injury, property damage or environmental pollution,
and subject us to potential product liability risks that
could extend to being held liable for the damages
produced by such products. Furthermore, Ternium’s
products are also sold to, and used in, certain safety-
critical appliances. Actual or claimed defects in our
products may give rise to claims against us for losses
suffered by our customers and expose us to claims
for damages. The insurance we maintain may not
be adequate or available to protect us in the event
of a claim, its coverage may be limited, canceled
or otherwise terminated, or the amount of our
insurance may be less than the related impact on
enterprise value after a loss.
import quotas, there could be an adverse impact
on Ternium’s results of operations. In addition,
Ternium’s domestic market share could be eroded
in the face of foreign imports as the number of
antidumping and countervailing actions limiting
trade to third countries has increased substantially,
leaving producers from certain countries in the need
to find alternatives for their products. Moreover,
countries can impose restrictive import duties and
other restrictions on imports potentially affecting
Ternium’s exports. Recently, the US president
advanced his intention to seek 25% duty on steel
imports into the United States excluding imports
from Mexico and Canada, based on the results of
the Department of Commerce investigation carried
out under Section 232 of the Trade Expansion Act of
1962, as amended, and on the resulting Commerce
Secretary recommendations. Mexico, the United
States and Canada are currently re-negotiating
NAFTA’s terms of trade.
Our steelmaking and mining activities are subject
to a wide range of local, provincial and national
laws, regulations, permit requirements and decrees
relating to the protection of human health and the
environment, including laws and regulations relating
to hazardous materials and radioactive materials and
environmental protection governing air emissions,
water discharges and waste management due to the
risks inherent in the industries in which we operate.
Laws and regulations protecting the environment
have become increasingly complex and more
stringent in recent years, leading to higher costs of
compliance. Environmental laws and regulations
may, in some cases, impose strict liability rendering
a person liable for damages to natural resources or
threats to public health and safety without regard to
negligence or fault. Some environmental laws provide
for joint and several strict liability for remediation
of spills and releases of hazardous substances. These
laws and regulations may expose us to liability for
the conduct of, or conditions caused by others or for
acts that were in compliance with all applicable laws
at the time they were performed. While we incur and
137. Annual Report 2017
www.ternium.com
138. Ternium