CONTENTS
4 The Company
8 Chairman's Letter
10 Economic & Financial Highlights
14 Innovation
20 Health & Safety
24 Environment
32 Human Resources
36 Value Chain
40 Communities
46 Governance
52 Management's Report
64 Consolidated Financial Statements
146 Parent Financial Statements
159 Risk Factors
3. Annual Report 2018
THE COMPANY
TERNIUM is Latin America’s leading flat steel producer. We
run manufacturing facilities, service center and distribution
networks in several countries in the region and the southern
United States, serving customers from various industries.
4. Ternium
ABOUT TERNIUM
Ternium is Latin America’s leading flat steel producer
with an annual crude steel production capacity of 12.4
million tons. We operate in Mexico, Brazil, Argentina,
Colombia, the southern United States and Central
America through regional manufacturing facilities, service
center and distribution networks. In addition, Ternium
participates in the control group of Usiminas, a leading
flat steel company in the Brazilian market.
Our customers range from small businesses to large global
companies in the automotive, home appliances, HVAC
(heat, ventilation and air conditioning), 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.
OUR OPERATIONS
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, rebars and wire rods as well as slit and cut-to-
length products.
Our broad range of high value added steel products and
advanced customer integration systems enable us to
A COMPREHENSIVE MANAGEMENT APPROACH
• Proactive approach to environment,
energy, health and safety management
• Focus on differentiation through
sophisticated products and services
• Deep ties with our communities
• Commitment to integrity
• Recruitment, training, and retention
of talent
• Quest for excellence in industrial
management and technology
• Fostering of steel value chain
differentiate from our competitors through the offering of
sophisticated products and services. Ternium's innovative
culture, industrial expertise and long-term view enable the
company to continuously achieve new breakthroughs in
industrial excellence, competitiveness and customer
service.
We operate with a broad and long-term perspective, and
we 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 as issued by the IASB and adopted by the European Union and
presented in U.S. dollars ($) and metric tons.
Some of the statements contained in this annual report are “forward-looking
statements”. Forward-looking statements are based on management’s current
views and assumptions and involve known and unknown risks that could cause
actual results, performance or events to differ materially from those expressed or
implied by those statements. These risks include but are not limited to risks
arising from uncertainties as to gross domestic product, related market demand,
global production capacity, tariffs, cyclicality in the industries that purchase steel
products and other factors beyond Ternium’s control.
Ternium’s results are subject to risks related, among other factors, to changes in
steel demand, prices, input costs and financial conditions. For further
information see the chapter "Risk Factors" included in this annual report.
5. Annual Report 2018
THE COMPANY
STRONG COMMITMENT TO THE ENVIRONMENT, HEALTH AND SAFETY
We devote significant resources to environment, health
and safety (EHS), as we believe they are key to our long-
term sustainability. We have standardized environment,
health and safety management systems. We also have an
energy savings management system in our Brazilian steel
mill and we are advancing the implementation of similar
systems in other facilities. Our employees are extensively
trained in EHS and our management is accountable for
their EHS performance. Ternium's health and safety
system is certified under OHSAS 18001, our environment
system is certified under ISO 14001 and our energy
savings system is certified under ISO 50001. We invest in
the best available technologies to reduce our
environmental footprint and safety risk.
COMMITMENT TO INTEGRITY THROUGH STRONG CORPORATE GOVERNANCE
We believe integrity is key to our long term
sustainability. We have an audit committee solely
composed of independent directors and an Internal
Audit Department reporting to the Chairman of the
Board and the Audit Committee, which strengthens its
independence. We have a Business Conduct Compliance
Officer reporting to the CEO and a compliance
department that oversees SOX certifications and related
party transactions. Our employees are trained and
accountable for ensuring a transparent behavior. We
have established different policies, codes and procedures
for this purpose. In addition, we have confidential
channels to report non-compliant behavior.
FOSTERING THE STEEL INDUSTRY VALUE CHAIN IN MEXICO AND ARGENTINA
We support 1,600 small and medium-sized enterprises
(SMEs), customers and suppliers, through our ProPymes
program. ProPymes provides training, industrial projects
and business consultancy, institutional assistance,
commercial support and financial aid. The program plays
an active role at universities, business schools, government
agencies and industrial associations. ProPymes has helped
create an industrial network that encourages the
professionalization and quest for excellence of SMEs.
6. Ternium
OUR PEOPLE. A program for recently-graduated professionals is at the core of a strategy
to recruit and retain talent.
DEEP TIES WITH OUR COMMUNITIES
We believe that having deep ties with our communities
is also fundamental to the company's long- term
sustainability. We are having a significant positive
impact on our communities, both from a human
perspective as well as in terms of economic
development. We work together with local institutions
to enhance their education and welfare. We provide
scholarships, internships, teachers' training and
infrastructure funding. We also organize and fund
volunteering programs and health prevention
campaigns, and sponsor sports, social and arts events.
UNITED STATES
Shreveport
BC
MEXICO
Monclova
Chihuahua
Culiacán
San Luis
Guadalajara
Las Encimas
Peña Colorada
México
Tuxtla
GUATEMALA
Occidente
Norte
Guerrero*
Pesquería
Universidad
Churubusco*
Apodaca (20F)
Juventud*
Edificios Metálicos
Apodaca Industrial
Apodaca Comercial
Norte
Mérida
Puebla
Veracruz
Petén
Villa Nueva*
EL SALVADOR
San Salvador
COSTA RICA
FACILITIES
Steel production and processing
Service or distribution centers
Iron ore mining and processing
*Includes service centers
NICARAGUA
Managua
San José
Itagüi
Manizales
Cali
Barranquilla
Montería
Medellín
Bucaramanga
Bogotá
COLOMBIA
BRAZIL
Río de Janeiro
ARGENTINA
Rosario
San Nicolás
Serviacero III
Sidercrom
Haedo*
Canning*
Florencia Varela*
Ensenada
7. Annual Report 2018
CHAIRMAN'S LETTER
2018 was a very good year for Ternium. Shipments rose 12% to a record 13 million tons as we incorporated
a full year of sales from our new slab producing facility in Brazil. EBITDA rose 40% to a record $2.7 billion
reflecting favorable market pricing conditions as well as the increase in shipments. Net income rose to $1.7
billion, representing 14.5% of net sales. This included the results of our investment in Usiminas, which
had another good year as it continued to improve its profitability and balance sheet. Our financial position
was strengthened with net debt reduced to $1.7 billion ahead of our planned increase in capital expenditures
to fund our organic expansion strategy. And we are pleased to propose a further increase in the annual
dividend to $1.20 per ADS.
In a presidential election year in Mexico, with additional uncertainty generated by the ongoing negotiations
and ratification of the new USMCA agreement, Ternium’s sales in the country remained stable, thanks to
its strong positioning in the high value automotive and industrial sectors. Demand was more affected in
the construction and infrastructure development sectors reflecting a decline in public and private investment
activity. In these conditions, we focused on improving our customer service and strengthening our product
capabilities, as well as designing and preparing for the installation of our planned hot-rolling mill in
Pesquería. Our investment program over the next two years will focus on building this new mill, which will
integrate high quality slabs from our facility in Brazil and enable us to broaden our range of high-end
products. During 2019, we will also start-up new galvanizing and painting lines in Pesquería to expand our
product offering for the industrial steel markets.
The Roberto Rocca Technical School in Pesquería, Mexico, continues to strengthen its role at the heart of
a growing community and open opportunities for young students. Now, in its third year, the school has
an almost full complement of 374 students. We have invited other industrial companies in Nuevo León to
join us in sponsoring students and offering internships in their operations and have received a strong
response. We are proud that a team from the school was invited to the final of the World Educational Robot
Contest in Shanghai where it placed 18th out of the 200 finalists from around the world.
The Argentine economy in 2018 was hit by its worst drought in more than 50 years, a tightening of global
credit conditions, which drastically reduced the availability of foreign credit, and continued lack of growth
in the neighboring Brazilian economy. This resulted in the onset of a deep recession in the second part of
the year with a steep currency devaluation and very high interest rates and inflation. Although shipments
held up well in the first half of the year, overall shipments declined 8% year on year with recovery not
expected before the second half of 2019.
In this respect, in November 2018 ProPymes launched in Argentina a new program to help our small and
medium-sized customers boost exports to offset weakening local sales. Through our constant support of
ProPymes, we are working to strengthen the industry value chain in Argentina and Mexico, by supporting
smaller suppliers and customers build operations that can be globally competitive and giving them access
to resources through our financial strength, global positioning and focus on training and education. We
support 1,600 small and medium enterprises through this program and this year, with the economic situation
in Argentina, our support has been particularly relevant.
In Brazil, we completed what has been a highly successful integration of the CSA slab mill with the rest of
the Ternium industrial system, accompanied by a deep interchange of best practices. Production of steel
slabs rose to a record 4.6 million tons as we focused on increasing equipment availability and reliability,
improving labor productivity and reducing costs. The further integration with our production system in
Mexico will bring additional opportunities for efficiencies and improving our product offer in the coming
8. Ternium
years. In addition, we completed the certification of our Rio de Janeiro’s environmental management
system under ISO 14001. This achievement has enabled us to reach a 97% certification rate based on total
employees and contractors working in our steel making and steel processing facilities throughout Ternium.
We have updated Ternium’s environmental and energy policy to incorporate additional elements on energy
efficiency management in line with ISO 50001, an energy efficiency management standard under which
our Rio de Janeiro unit is already certified. We also participated in the launch of a new program, led by
worldsteel and the International Energy Agency, to identify the best available technologies to reduce the
industry’s carbon emissions.
In Colombia, we advanced with our investment plan to install a rebar mill with annual capacity of 520,000
tons, which is expected to start up in the second half of 2019. This investment will enable us to reduce
imports and increase our participation in the dynamic Colombian construction sector. We performed
preliminary work on the field to preserve wildlife before starting the construction of the new facilities in
a drive to reduce our footprint as much as we can. We continuously seek the highest standards of
environmental and energy performance as a basis for sustainable development for our employees, our
communities and future generations.
Our safety indicators continue to improve. We are absolutely committed to improving all aspects of our
safety performance. We pursue this through implementing the most rigorous international standards
throughout our operations, constantly working to improve risk awareness and align employee behavior
patterns with these fundamental values, and investing to modernize our facilities.
We have a rich agenda in front of us with the planned transformation of our industrial system and product
development capabilities through our expansion project in Mexico and implementation of Industry 4.0
manufacturing technologies. As a leading industrial company in Latin America, we aim to set new standards
in industrial and technological excellence, customer service and competitive differentiation.
Our performance over the past years together with our highly motivated team of professionals position us
well for the challenges in front of us. Looking ahead, I would like to stress the high levels of uncertainty
in the political and economic environment we are facing in our main markets, as well as the impact of the
recent Vale tailings dam accident in Brazil on the pricing and logistics of iron ore supply for the steel
industry. In our mining operations in Mexico, while we had already introduced stricter standards to the
stability studies and as a result carried out reinforcements in certain areas of Peña Colorada´s tailings dams,
we will continue to review the stability and enhance the monitoring of our dams.
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.
March 18, 2019
Paolo Rocca
Chairman
9. Annual Report 2018
ECONOMIC & FINANCIAL HIGHLIGHTS
Mexico, improvement of environmental and safety
conditions at certain facilities, the upgrade and expansion
of two hot strip mills, the expansion of connectivity and
equipment automation, and those made in Peña
Colorada's iron ore operations.
STEEL SHIPMENTS (2018)
Colombia: 4%
Brazil: 9%
Others: 5%
USA: 15%
Argentina: 16%
Mexico: 51%
ECONOMIC VALUE GENERATED AND DISTRIBUTED (2018)
Suppliers
$7.7 B
Economic
value
generated
$11.5 B
Community
investments
$9.5 M
Research &
Development
$8.9 M
Employees
$941 M
Capex
$520 M
Capital
providers
$368 M
Taxes
$713 M
RECORD RESULTS IN 2018
Ternium produces flat and/or long steel products in
Mexico, Brazil, Argentina, the United States, Colombia
and Guatemala. We report steel shipments under three
geographical regions: Mexico, the Southern Region
(encompassing the steel markets of Argentina, Bolivia,
Chile, Paraguay and Uruguay)and Brazil and Other
Markets (referred to in this document as Other Markets).
During 2018, shipments in the Mexican market were 6.5
million tons, representing 51% of Ternium’s total steel
shipments. The Mexican manufacturing sector performed
well in 2018, yet the country's construction market
remained weak reflecting low public and private
investment. Shipments in the Southern Region reached 2.3
million tons in 2018, or 18% of Ternium’s consolidated
shipments in the steel segment. Most of Ternium’s
shipments in the region are destined for the Argentine
market. Activity levels in Argentina's manufacturing and
construction sectors have declined since September 2018,
following a solid performance during the first half of the
year. By year-end 2018, activity levels were significantly
lower than those recorded in December 2017. Shipments
in the Other Markets region reached 4.1 million tons in
2018, or 32% of Ternium’s consolidated shipments in the
steel segment. Our major shipment destinations in the
Other Markets region are the United States, Brazil,
Colombia and Central America.
Net sales of steel products in 2018 increased 18%
compared to net sales in 2017, reflecting a 1.4-million-ton
increase in shipments and a $47 increase in steel revenue
per ton. Shipments have increased mainly as a result of
the consolidation of Ternium Brasil since September 2017,
partially offset by lower demand for steel products in the
Southern Region, and slightly lower shipments in Mexico.
Revenue per ton in 2018 was higher than in 2017 as a
result of higher steel prices in Mexico and in Other
Markets.
EBITDA rose 40% to $2.7 billion in 2018. EBITDA
margin reached 24%, remaining at an industry-leading
level. Net income attributable to Ternium's equity owners
was $1.5 billion, or $7.67 per ADS, a 70% increase year-
over-year. In 2018, the company’s capital expenditures
were $520.3 million, $110.8 million higher than in 2017,
including the effect of the consolidation of Ternium Brasil
since September 2017. The main investments carried out
during the period included those made in new hot-rolling,
hot-dipped galvanizing and pre-painting production
capacity in the company's Pesquería industrial center in
10. Ternium
STEEL SALES VOLUME (THOUSAND TONS)
Mexico
Southern Region
Other Markets
Total
FINANCIAL INDICATORS ($ 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
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)
(million shares)
2018
2017
2016
2015
2014
6,544.8
2,301.1
4,105.2
12,951.1
11,453.4
2,108.4
2,697.7
102.8
2,031.6
1,506.6
155.5
1,662.1
520.3
1,219.0
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)
12,547.9
12,122.6
2,037.0
1,734.9
5,063.3
6,393.3
1,091.3
0.77
7.67
1.20
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
1,963.1
1,963.1
1,963.1
1,963.1
1,963.1
(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 impairment was registered
in 2016, 2017 and 2018.
(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 investments.
(5) Each ADS represents 10 shares.
(6) Shares outstanding were 1,963,076,776 as of December 31 of each year.
11. Annual Report 2018
CONSOLIDATING OUR LEADERSHIP IN THE MEXICAN FLAT STEEL
MARKET. A new hot-dipped galvanizing facility and a new
painting line that includes the most advanced painting
technology in Mexico for high-end steel products.
350,000
TONS
Annual hot-dipped
galvanizing capacity.
120,000
TONS
Annual painting
capacity.
$280
MILLION
Total
investment.
2019
EXPECTED START UP
INNOVATION
WE FOSTER and reward breakthrough initiatives in our quest
for excellence and improvement. Our teams are at the helm
of our efforts to transform our industrial systems and
business models in this high-speed change era.
14. Ternium
We strive to run safe operations, creating value for our
customers, increasing productivity, enhancing the value
chain's competitiveness, achieving a highly efficient and
sustainable industrial base and establishing a long-term
presence in thriving communities. These tasks require
our commitment to a continuous quest for excellence
and improvement, and a culture of innovation
throughout our organization. We believe that a fresh
approach to old and new challenges and staying up-to-
date with the fast-paced changes in technology are key
elements required to achieve step changes in our
activities, including health and safety management,
environmental stewardship, energy efficiency, product
and process development, training design and
community improvement.
The "Ternium Innovates" program is a contest that
encourages our employees to team up to develop new
ideas. This program is one of many initiatives that seek
to foster a spirit of innovation. In this contest, we
choose winners according to their ability to improve the
way the company does things in four main areas:
quality, workplace climate, productivity and safety. A
committee reviews the ideas presented by the different
teams, many of which are selected for implementation.
ADVANCING OUR DIGITAL TRANSFORMATION PROCESS
Since Ternium's origins in 1969, with the inauguration of
the Ensenada manufacturing unit in Argentina, our
company has acquired various steelmaking and steel
processing facilities in Mexico, Brazil, Argentina,
Colombia, the United States and Central America. The
implementation of Ternium's business model, a
coordinated industrial system able to offer a wide range
of products and differentiated services to its customer
base, required a significant digital transformation effort.
The start was a set of diverse information technology (IT)
systems inherited from each of the acquired companies.
For example, the acquisition of Hylsamex and Grupo
Imsa in Mexico, in 2005 and 2007, respectively, required
the consolidation of 28 different information technology
systems into one single system. With that target in mind,
within a couple of years, we brought our company online
in real time with a single unified information technology
system spanning all of our facilities. Once this process
was over, Ternium extended its digital tools to its
customers and suppliers, enabling the integration of our
processes with theirs. We developed and launched a digital
marketplace called "WebService". Today, approximately
80% of Ternium’s commercial customers use this tool to
achieve an efficient interaction with us.
In May 2017, after a two-year preparation process, our
company certified its IT system under the ISO 20,000
standard. This standard describes the best practices in the
management of an organization's IT processes and
services. This certification process has helped the
company to optimize costs, resources and processes,
enhance customer satisfaction, strengthen the
performance assessment of our information technology
system, increase compliance with multiple regulations,
and increase overall business competitiveness. All of these
technologies need to be protected by appropriate
cybersecurity controls. Cybersecurity is one of the
cornerstones of Ternium’s digital transformation. In
addition to extending the connectivity of our
manufacturing processes within the processing plants, we
are connecting devices to the Internet (internet of things)
and performing big data analytics on the enormous
INSPECTION AT HEIGHT. The drone technology replaces manual inspection, thus eliminating
complex tasks.
15. Annual Report 2018
INNOVATION
WEBSERVICE, AN INNOVATIVE
DIGITAL PLATFORM
Webservice has transformed the way in
which many customers interact with
Ternium, offering differentiated
services to strengthen our partnership.
It has 75 functions covering the entire
customer relationship process, such as:
• mobile product catalogs
• order placement (end-to-end orders,
sale from stock, or bidding
and auction)
• production monitoring
• inventory monitoring
• transportation tracking
• on line payment (direct connection
with banks)
IN-HOUSE MONITORING. Ternium runs its own 24/7 monitoring center to oversee all
operations and services.
16. Ternium
amount of data generated by our production lines.
All these new technologies require to be adequately
protected against unauthorized access.
Currently, we are moving towards the construction of a
SMART factory, the acronym for Social, Mobile,
Analytics, Robotics and (internet of) Things. This
concept, supported by Ternium’s information technology
platform, ensures a constant stream of knowledge and
information (data and events) that will lead our facilities
to a more productive and efficient evolutionary stage.
Users achieve a more efficient performance by interacting
from any location (offices, facilities or elsewhere) through
different kinds of devices. Over 1,000 employees working
in our industrial and commercial areas are equipped with
mobile devices that enable them to perform all their tasks
from anywhere with a remarkable increase in productivity.
Analytics and data correlation detect patterns for
various applications to increase safety and efficiency,
and to reduce costs. Through video-feed analysis
(machine learning), new applications include real-time
detection and reporting of unsafe situations or behavior
within the facilities to prevent accidents and, using
drone technology, the identification of potential
damages in either tall structures or confined spaces,
whether internal and external, as well as the assessment
of bulk material stockpiles.
Drone technology replaces human inspection at
height and minimizes the risks inherent to this type of
task. We are implementing a project consisting of the
installation of 600 cameras for tracking operations in
our Argentine and Mexican facilities through video
analytics allowing the implementation of an early
alarm system. The ultimate objective is to be able to
react based on the early detection of deviations from
protocols and to prevent accidents.
In addition, radio frequency identification (RFID)
technology enables the automated handling of steel
products in the yards, speeding up logistic
operations and increasing safety. The aim of
Ternium’s RFID project is to identify and track
each coil from the moment it reaches the yards until
shipment, making inspections easier, improving
inspectors' safety and reducing operations
timeframes. The tracking system has already been
implemented in five stockpile yards in Mexico and
is being implemented in another twelve yards in
Mexico and Argentina. In May 2018, Ternium
received an RFID project award granted by U.S.
RFID Journal in the Best Logistics/Supply Chain
RFID Implementation category.
In the maintenance area, analytics and data correlation
technology has proved its potential with the prediction of
failures two to three weeks in advance. Our objective for
2019 is to apply this technology to shield the strategic
equipment of our continuous casters and other
continuous mills, significantly reducing non-operational
interruptions and, therefore, the impact on the production
process. In order to support Ternium's analytics needs
across all business functions, we are building a single
technological platform, known as "Data Lake" platform,
that meets all our big data and analytics requirements.
Other projects aimed at improving safety and productivity
are the use of virtual reality software for training
purposes, the use of augmented reality for experts
providing remote assistance to operators, 3D printing and
the use of 3D scanning for several applications. We have
also developed virtual reality software to train employees
on risk perception. This software simulates risky
situations in 3D, depicting potential sequences that could
end up in fatal accidents. In addition, we have successfully
finished the proof-of-concept stage for replacing on-site
crane training exercises with VR training facilities,
simulating the cabins of the three types of cranes used by
Ternium: magnetic crane, hook crane and dump.
Moreover, we have developed a virtual reality software to
train our personnel on specific operating procedures
performed in the secondary metallurgy area of our steel
shop in Argentina. We are also developing a project in
Mexico to train employees in water leakage protocols and
in projects to improve productivity using digital twin
technology. This technology generates a digital replica of
physical assets, processes, people, places, systems and
devices that can be used for various purposes.
Ternium has two administrative robots in operation,
running automated processes and tasks in the areas of
VR TRAINING. Virtual reality offers a safe environment to train employees and avoid operational interruptions.
17. Annual Report 2018
INNOVATION
accounts payable, accounts receivable, sales back office
and industrial engineering administration. We are
advancing projects to gain productivity in accounts
payable tasks in Mexico and Argentina, where more than
50% of all suppliers' invoices are expected to be loaded in
our systems using robots.
A COLLABORATIVE APPROACH TO RESEARCH ACTIVITIES
Steel is a highly versatile metal, offering a wide space for
product innovation. For example, over 70% of the
structural steel parts used to build a car today involve
solutions that simply did not exist 20 years ago. Ternium’s
production strategy is based on offering a complete range
of value-added, high-end products, with an emphasis on
creating and manufacturing increasingly sophisticated
steel products for new applications and industries.
The properties of the steel products required by our
customers are usually the result of a combination of their
metal composition and the way metal gets processed into
finished steel products. Ternium has identified synergies in
collaborating with its customers in the early stages of
their projects. Anticipating our customers' upcoming steel
product requirements, through our participation in joint
development projects, is key not only to build customer
relationships but also to plan and develop new processes,
which may sometimes require the incorporation of new
equipment and technology.
At Ternium, we carry out applied research efforts in
different ways. We develop steel products through in-
house programs, joint projects with leading industrial
customers, joint efforts together with recognized
universities or research centers, or through our
participation in international consortia.
Ternium’s research programs are open to a broad-based
international network of industry consortia. Over 50
universities and research laboratories from both the
public and private sectors collaborate with us. The goal
is to find and develop the best solutions to support an
agenda aimed at achieving better and more sustainable
steel. The research spans the entire production cycle,
from primary steelmaking and metallurgy, to rolling
and galvanizing. In 2017, Ternium joined
WorldAutoSteel, an organization comprising 22 of the
world’s major steel producers. Under the auspices of
worldsteel, the group regularly updates the automotive
industry on upcoming new steel capabilities available to
meet their design and manufacturing requirements.
AUTOMOBILE INDUSTRY CERTIFICATIONS
Number of certifications approved
INVESTMENT IN PRODUCT RESEARCH AND DEVELOPMENT
$ million
397
413
363
286
131
9.2
9.8
8.9
8.0
6.2
12.5
10.0
7.5
5.0
2.5
0.0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
500
400
300
200
100
0
18. Ternium
NEW LABORATORY.
During 2018, we
inaugurated a new
laboratory in
Pesquería, Mexico,
to strengthen our
product research
capabilities for
high-end industrial
requirements.
140
NEW PRODUCTS / YEAR
Developed through joint
projects with customers
and institutions.
Over the last five years, Ternium has achieved an average
of 100 product development projects per year in
partnership with industrial customers, and a total of 40
research projects involving university researchers and
students from some of the world’s most prestigious
institutions. We have been increasingly engaging
universities in our research efforts in order to expand and
further diversify Ternium’s research network and
capabilities. This initiative fosters the development of
fundamental knowledge and know-how at participating
universities while enabling the optimization of Ternium’s
in-house research resources. In 2018, approximately
twenty undergraduate and postgraduate students
pursuing degrees in engineering, materials science and
metallurgy took part in the program.
INVESTING TO INCORPORATE NEW EQUIPMENT AND TECHNOLOGIES
The inauguration of the Ternium Industrial Center in
Pesquería, Mexico, in 2013, gave way to an intensive
product development period. We widened our
product range offering to include sophisticated high-
end steel products required by the manufacturing
industry, particularly automotive manufacturers.
These developments were made possible with the
incorporation of new production technologies to our
industrial system through the new Pesquería unit.
Furthermore, the installation in 2015 of state-of-the-
art cooling technology in our hot strip mill in our
Churubusco unit, Mexico, has allowed developing
and processing new advanced high-strength steel
grades, including dual phase, ferrite-bainite,
martensitic and complex phase grades. Based on these
new capabilities, we have further widened our high-
end product portfolio for customers in the
automotive, metal-mechanic, home appliance, oil &
gas and electric motors industries.
19. Annual Report 2018
HEALTH & SAFETY
SAFETY FIRST (primero seguridad), two words and a
statement to convey a primary value for the company.
Our employees have a mandate to observe this value and
promote and share our policies with our communities.
20. Ternium
Ternium has a policy guiding its efforts to achieve
excellence in occupational health and safety. According to
this policy, the assessment of risks and management of
our people's health and safety must be integrated in all
our business processes. Management is responsible and
accountable for achieving excellence in health and safety
performance as part of a comprehensive set of goals.
Ternium ranks occupational health and safety
performance as its top priority with the conviction that all
injuries and work-related illnesses can and must be
prevented. Each of our employees' and contractors' health
and safety is our top concern, and nothing justifies
putting people at risk.
Ternium has a unified health and safety management
system to oversee its production units. The company
periodically certifies its procedures, which helps us find
new opportunities to improve our safety management
systems and ensure their compliance with our policy.
Ternium’s steelmaking and steel processing facilities in
Mexico, Argentina, Colombia and Guatemala are
certified under the Occupational Health and Safety
Assessment Series (OHSAS) 18001 standard, a
concerted effort by leading national standards bodies,
certification bodies and specialist consultancies to
develop high quality management systems.
Our new facility in Rio de Janeiro, Brazil, is implementing
new health and safety tools within its management
systems, leveraging on the experience we gained in other
facilities. During 2019, this new management system will
undergo ISO 45001 certification. While ISO 45001 draws
on OHSAS 18001, it is a new and distinct standard due to
be phased in gradually over the next three years. In
addition, we are working on the certification process of
our mining facilities in Mexico.
Management strives to foster a corporate culture
embodying values centered on safety as an integral part of
its everyday life, as unsafe behavior is the main cause of
safety incidents and accidents in our plants. We are
committed to training all our employees and contractors
on the appropriate application of the company’s health
and safety management systems in performing their tasks,
and to raising awareness of risks. In 2018, the
company delivered 564,341 safety training hours to
18,609 employees and contractors.
ON THE RIGHT PATH. Ternium’s safety
indicators have improved over the
course of the years concomitant with
our relentless quest for zero incidents
and accidents.
LOST TIME INJURIES FREQUENCY RATE
Quantity of day-loss injuries per million hours worked
1.5
1.2
0.9
0.6
0.3
0.0
1.1
1.1
1.0
0.8
0.7
2014
2015
2016
2017
2018
INJURY FREQUENCY RATE
Total quantity of injuries per million hours worked
5
4
3
2
1
0
3.3
3.4
3.3
3.0
3.0
2014
2015
2016
2017
2018
21. Annual Report 2018
HEALTH & SAFETY
SAFETY FIRST
Our Safety First program shows a number of initiatives
to foster a more comprehensive safety culture to prevent
incidents and accidents. Under the Safety Hour
program, middle and senior managers tour operating
areas for an hour, three times a week, talking to
employees about safety conditions in their working
environment. This exchange helps identify potential
risks and enables a fluid and constructive feedback to
implement effective preventive measures. In 2018, the
company held a total of 116,347 Safety Hour sessions,
with the regular participation of 1,016 employees and
contractors, which helped to detect, record and correct
87,112 deviations.
TEN LIFE-SAVING RULES
Ten Life-Saving Rules is a document that consolidates the
main principles of Ternium's safety program. It lists ten
basic actions that all employees must follow in order to
protect their own lives and those of their colleagues. The
rules are the result of a process that included the
contribution of focus groups together with different
stages of analysis to detect the main causes of risks in our
operations. These rules also reflect the scope of safety
regulations in the countries where our company operates,
and are backed by specific behavioral procedures and
routines that must be followed. The Ten Life-Saving rules
have been extensively communicated throughout
Ternium’s operations to foster employees' and
contractors' awareness, and are in addition audited to
ensure their observance. In 2018, we held 63,774 Ten Life-
Saving Rules compliance audits.
SAFETY MANAGEMENT OF CRITICAL FACILITIES AND PROCESSES
Iron ore mining, steelmaking and steel processing
activities include potentially hazardous processes. With
the assistance of DuPont, a renowned authority in
industrial safety, we performed a diagnosis and
identification of process hazards at critical processes in
our facilities in Mexico, Argentina, Brazil and Colombia,
and developed safety management tools for those critical
processes. We are now working on the sustainability of
the prevention system to continue consolidating a safe
administration of our critical processes.
In addition, in 2018 we adopted stricter standards to
assess tailings dams, and as a result the dams of our joint
22. Ternium
TERNIUM'S ANNUAL SAFETY DAY.
Since 2014, every July 22nd we have
been holding our Annual Safety Day,
a special occasion to prompt a renewed
commitment to improving safety and
increasing risk awareness, in the belief
that every accident can and must be
prevented.
During this event, we hold safety
management meetings and discussions
to review our performance in the past
year and agree on concrete action to
improve safety in every facility.
venture with ArcelorMittal are being reinforced.
Following the collapse in January 2019 of a tailings dam
at a mine operated by Vale S.A., or Vale, in Brumadinho,
Brazil, we decided to conduct new studies on the stability
of our dams and on the dams of our joint venture with
ArcelorMittal. Together with this, we are reanalyzing all
operating and emergency protocols in connection with
our mining activities.
OCCUPATIONAL HEALTH AND SAFETY POLICY
Ternium, an integrated steel company, along with its subsidiaries is committed to the occupational safety
and health of its personnel, clients, contractors, and suppliers.
The company’s occupational safety and health policy is the baseline for sustainable development across
all its operations.
Policy adherence, dissemination, and compliance apply and are to be promoted throughout Ternium and
its subsidiaries.
Looking out for the occupational safety and health of every person who works for the company or is inside
its facilities is an essential value.
To that end, we promote our commitment through the following principles:
All work-related injuries and illnesses can and should be prevented.
Compliance with all applicable legal and other regulations to which Ternium voluntarily agrees.
Continuous improvement of all processes related to staff's health and safety.
Occupational safety and health must be integrated into all company processes.
No emergency situation, production process or results justify putting people’s occupational safety or health
at risk.
Commitment from and training of the entire staff is essential.
Working safely is an employment condition.
Every person is responsible for looking after his/her own safety and the safety of others.
In each company, everyone is responsible for occupational health and safety:
The company provides the means and resources for activities to be carried out safely so as to preserve everyone's
physical integrity and occupational health.
Managers are in charge of the occupational health and safety of everyone who works for them or is in their area.
All other workers must comply with regulations and instructions, and work with their managers to detect,
control, and resolve any dangerous situations.
Contractor companies and their staff must comply with the Safety Regulations in force at the facilities where
they provide services.
People who enter the facility must comply with the applicable Safety Regulations.
Health and Safety staff must take preventive measures through support, advising and auditing.
At Ternium and its subsidiaries, these principles are shared throughout the entire value chain and in all the
communities where it operates in order to promote people's healthcare and safety.
March 2018
Máximo Vedoya
CEO
Ternium
23. Annual Report 2018
ENVIRONMENT
WE GROW our business to meet the demand for more and
better steel products. In doing so, we take care of our
footprint through continuous progress in environmental
performance and the use of best available technologies.
24. Ternium
EMISSION INTENSITY
Carbon dioxide emissions per ton of steel produced. Year-end.
2.5
2.0
1.5
1.0
0.5
0.0
1.5
1.5
1.4
1.8
1.7
2014
2015
2016
2017
2018
ENERGY INTENSITY
Gigajoules per ton of steel produced. Year-end.
25
20
15
10
5
0
21.6
21.2
21.0
21.7
21.1
2014
2015
2016
2017
2018
The protection of the environment is a fundamental
value for Ternium. Our goal is to reach the highest
standards of environmental performance in order to
minimize the environmental footprint of our operations.
To achieve this, we are continuously working on the
improvement of our integrated production system. Our
Environmental and Energy Policy, approved in 2014 and
updated in 2018, states our views regarding the
preservation of the environment.
As stated in our policy, the monitoring of our activities
leans on a unified environmental management system
throughout all our production units. We periodically audit
and certify our systems and procedures. This process helps
us to identify improvement opportunities, update our
environmental management processes and make sure we
comply with the latest legal regulations.
Our environmental management system is certified 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. In 2018, we completed the certification of
our new facility in Rio de Janeiro, Brazil. This
achievement has enabled us to reach a 97% certification
rate based on total employees and contractors working in
our steel making and steel processing facilities.
Our Rio de Janeiro unit has, in addition, an energy
efficiency management system certified under ISO
50001. The aforementioned update of Ternium's
Environmental and Energy Policy in 2018 formally
integrates energy efficiency concepts and establishes the
principles for the implementation of energy efficiency
management systems in all our production units. During
2018 we started implementing a newly developed energy
efficiency system in our steel making facilities, which we
expect will help us maximize our efforts to reduce
carbon emissions. These efforts are in line with those of
the countries in which we have operations and
contribute to achieving the goals of the Paris Agreement
of the UN's climate change conference.
25. Annual Report 2018
ENVIRONMENT
ENERGY AND CLIMATE
The steel industry is energy intensive. There are two main
technologies for producing steel: the blast furnace / basic
oxygen furnace (BF/BOF) route, which consumes mainly
iron ore and uses metallurgical coal as its main energy
source; and the electric arc furnace (EAF) route, which
consumes mainly steel scrap and/or direct reduced iron
and uses electricity as its main energy input. Direct
reduced iron is produced out of iron ore and uses natural
gas as its energy source. According to worldsteel, the
world average carbon dioxide emission per ton of liquid
steel, which depends on the efficiency of the facilities and
the mix of steel production technologies, reached 1.8 tons
in 2018.
In 2018, Ternium’s steel production technologies
included the BF/BOF route with a 63% participation,
the EAF route with direct reduced iron feed and steel
scrap with a 30% participation, and the EAF route with
full steel scrap feed with a 7% participation. Ternium's
average carbon dioxide emission per ton of liquid steel,
including direct and upstream energy and other
emissions, was 1.7 tons in 2018. The incorporation of
our Rio de Janeiro steel mill (BF/BOF) increased our
emissions rate since 2017, due to a higher share of BF/
BOF route in steel production.
The steel industry has a strong commitment towards
the reduction of greenhouse gas (GHG) emissions.
According to worldsteel, in the last 50 years the steel
industry reduced its energy consumption per ton of
steel produced by 60%. In addition, the
development of new steel product designs has
enabled the use of lighter structures with improved
resistance and performance. Yet, steel production
accounts for approximately 8% of all human-made
GHG emissions.
As members of worldsteel, we are signatory of its
sustainability policy and join its efforts, through our
participation in several programs, to reduce carbon
dioxide emissions. As a participating member, we
submit to worldsteel our performance indicators to
contribute to its statistics and databases, which enable
steelmaking companies to benchmark performance,
share best practices and ultimately set improvement
plans for their industrial processes.
26. Ternium
In 2008, worldsteel launched its Climate Action
Recognition Program. Since then, Ternium has been
collecting and reporting its carbon dioxide emissions to
worldsteel. In 2018 we participated in the launch of a new
program, led by worldsteel and the International Energy
Agency, with the purpose of creating a technology
roadmap for iron and steel. This new initiative will help
identify the best available technologies to reduce the
industry's carbon dioxide emissions.
As part of our initiatives to reduce GHG emissions, in
2014 we launched an energy efficiency program aimed at
identifying opportunities and implementing energy savings
solutions at our production facilities on a continuous
basis. Under this program we have completed 265 projects
that, in the aggregate, have reduced our yearly carbon
dioxide emissions by approximately 123,000 tons.
AIR QUALITY
The steelmaking process, under the main production
routes, is intensive in the generation of particulate
material, nitrogen oxides and sulfur oxides. Some of our
facilities, like the Ternium Industrial Center in Pesquería,
adopted the best-available technologies from the design
phase. In other facilities, particularly those we acquired,
we are consistently adopting the best-available
technologies as part of our drive to continuously improve
our environmental performance.
These improvement plans require significant investments
in new equipment, such as de-dusting systems, material
and scrap- handling facilities or briquetting facilities to
clean and recycle material recovered from air emissions.
Over the last four years, we have made investments of over
$90 million to improve the capture and treatment of air
emissions, especially in our Guerrero and Apodaca mills in
Mexico, and our Manizales mill in Colombia. In 2018, we
advanced our projects for a new de-dusting system at our
steel shop in the Puebla unit in Mexico, which we expect
to start up during 2019. In addition, we developed an
investment plan consisting in the installation of several
stations equipped with advanced monitoring technology.
This new technology enables the immediate detection and
alert of air quality indicators, in order to implement
timely preventive actions.
ENVIRONMENTAL CERTIFICATIONS
LEED. We design our facilities
considering the best available building
solutions. In Pesquería, Mexico, our
technical school and the industrial
buildings of our production facilities
were certified under the Leadership in
Energy and Environment Design
Certification standards of the U.S.
Green Building Council.
Clean Industry. In Mexico, most of
Ternium's steel and in-use mining
facilities have Clean Industry
certificates issued by the local
environmental authorities. The
standard of this program was created
by the Mexican government and ema,
a technical rating and standardization
institute.
WATER MANAGEMENT
Water is a scarce resource and we are committed to using
it responsibly. We design our water management strategy
on a case-by-case basis in accordance with the specific
situation at each of our operating sites. Over the last few
years, we carried out a series of investments to incorporate
best available technologies in the management of water.
We have implemented a zero discharge treatment plant
from the design stage in our Pesquería unit in Mexico, and
we have incorporated treatment plants for sewage water in
our Churubusco and Pesquería units in Mexico.
In addition, in our San Nicolás unit in Argentina we
invested in new equipment to close the gas scrubbing
circuit of a blast furnace, and we developed new runoff
water capturing systems for the raw material yards.
MATERIAL EFFICIENCY
In Ternium we continuously develop strategies to
maximize the use of co-products and reduce the
production of waste. We believe that the recovery and
proper use of co-products is central to the application
of circular economy concepts in the steel industry's
value chain. The use of co-products reduces the
consumption of raw materials and energy, with a
positive effect on carbon dioxide emissions and waste
generation.
All the steel scrap generated in our facilities is recycled.
In addition, we purchase steel scrap generated by other
steel processors in our value-chain and by the recycling
of steel waste. In 2018, we recycled 2 million tons of
steel scrap, including scrap generated in our facilities, to
produce new steel with all its properties.
All granulated slag generated in the blast furnaces is sold
to the cement industry. The re-use of slag enables yearly
carbon dioxide emission savings of 1.0 million tons in the
cement production process. Likewise, the slag generated in
the steel shop is used to consolidate roads.
In addition, we have sinter and briquetting facilities that
enable us to recycle different materials captured by our air
and water cleaning equipment, including fines of iron ore,
coal, lime and dolomite.
27. Annual Report 2018
ENVIRONMENT
CO-PRODUCTS (T)
Million tons of co-products
Million tons of CS production
7.5
6.0
4.5
3.0
1.5
0.0
2.3
2.3
1.8
2.8
5.0
12.5
10.0
7.5
5.0
2.5
0.0
2014
2015
2016
2017
2018
n Co-products
l Crude steel (CS)
CARBON DIOXIDE RECYCLING. Our steel
shops in Puebla and Guerrero,
Mexico, capture carbon dioxide. The
purpose of this innovative solution is
to deliver carbon dioxide to the
beverage industry for preparing soft
drinks. The delivery of recycled
carbon dioxide from our facilities
enables yearly emission savings of up
to 210,000 tons.
The preparation of metallurgical coal for the steelmaking
production process yields significant co-product gas
volumes. Those gases stem from the distillation process in
the coking batteries. We clean those coking battery gases
and obtain chemical products that we sell in the market,
including tar, benzol and hydrated lime. In addition, the
gases obtained from the coking batteries, blast furnaces
and, in the case of the Rio de Janeiro unit, the steel shop,
once cleaned, are used to provide heat to certain
equipment and to produce steam for the generation of
electricity. All these processes have enabled us to achieve a
material efficiency rate of 99.7%.
BIODIVERSITY CARE
Our Rio de Janeiro unit is located near a coastline area
rich in mangroves in the Sepetiba bay in Brazil, where we
have our own port. We perform our operations while
maintaining and protecting the fauna and flora of 600
hectares of mangroves. Likewise in Palmar de Varela,
Colombia, before starting the construction of a new steel
bar processing facility, we performed preliminary work on
the field to preserve the local biodiversity. We defined
different areas of ecological connectivity between our
terrain and the natural ecosystems. We developed a
program to rescue and release wildlife in those areas and
we installed wildlife connectivity gates for reptiles,
amphibians and small mammals.
INNOVATION AND RECYCLING - Mix Rock®
Mix Rock® is an innovative product developed by
Ternium in Mexico. The product is obtained through the
processing of our steel shops’ dust and slag. With this
development, we can transform 100% of our EAF dust
into a valuable raw material for the cement industry while
enabling lower carbon dioxide emission in the cement
production process. This project was shortlisted for
worldsteel's 2018 steelie awards.
28. Ternium
ENVIRONMENT AND ENERGY POLICY
Ternium is an integrated steel company committed on preserving the environment.
Its goal is to achieve the highest standards in environmental and energy performance as a basis for sustainable
development throughout its operations in regards to company employees, the community and future
generations. The company has committed to develop a high-quality performance integrated and eco-efficient
production system based on continuous improvement.
Caring for the environment is a fundamental value, and its principles are the following:
Compliance with the applicable legislation, as well as any voluntary agreements in relation to environmental
protection and energy use, consumption and efficiency.
All levels in each area, throughout the company, are responsible for the results of
environmental protection.
The commitment of all our personnel is essential, as is the training provided.
Environmental protection and energy efficiency are responsibilities of Ternium’s staff as well as its subsidiaries,
suppliers and contractor personnel.
Environmental and energy components are an integral part of the company's management processes.
Continuous improvement in environmental and energy performance is actively promoted through the company,
in addition to all the efforts necessary to achieve the objectives and established goals.
Pollution must be prevented at the source, controlling the most significant environmental aspects of our
operations and minimizing their impacts and risks.
Promoting the acquisition of energy efficient products, technologies, services and implementing projects
that enhance our energy performance.
Use energy and natural resources efficiently.
Encourage the use of best technologies and practices, as well as renewable energies, when feasible.
In each company, everyone is responsible for environmental and energy management:
The company supplies the means and resources to enable compliance with this policy, thereby supporting
the sustainability of all operations, depending on the operations context.
All persons entering company facilities, such as own personnel, suppliers, contractors and customers,
must comply with this policy.
The company seeks to share these principles throughout its value chain and across the communities where
it operates, to promote the protection of the environment, encourage the efficient use and consumption of
energy resources and foster an open dialogue with stakeholders.
This Policy applies to Ternium and its subsidiaries. It will be actively disseminated with a view to ensuring
compliance throughout the organization.
June 2018
Máximo Vedoya
CEO
Ternium
29. Annual Report 2018
GROWTH OPPORTUNITY IN COLOMBIAN LONG STEEL MARKET. A
new reinforcing bar facility to expand our participation
in the construction sector in the north/northwest of
Colombia, a region with no local steel bar production.
520,000
TONS
Annual hot-rolling
capacity.
$90
MILLION
Total
investment.
180
EMPLOYEES
To work in the
new facilities.
2019
EXPECTED START UP
HUMAN RESOURCES
WE FEEL STRENGTHENED as we grow and achieve an
increasingly diverse employee base across the Americas.
We work on long-term strategies to maximize their
potential leaning on development and training.
32. Ternium
Over the last decade, Ternium has become a leading flat
steel producer in the region by virtue of its main asset: a
team of committed, innovative, industrious, diverse and
highly qualified individuals. In 2018, Ternium's team was
composed of approximately 20,500 persons, the majority
of whom are distributed throughout our facilities and
offices in the Americas. As Ternium embarks on a new
phase of growth for the coming years, we rely on the
talent and determination of our people to successfully
shape our company in this new stage.
Ternium has a Human Resources policy guiding our
efforts in managing talent and attracting, retaining and
helping motivated professionals to develop their careers.
Ternium is an equal opportunity employer that embraces
diversity in its different forms, including age, gender,
nationality, race, ethnicity and creed. We believe that the
coexistence of diverse perspectives and angles helps our
teams achieve rational solutions to challenges and more
effectively accomplish their goals.
Over the years, we have grown increasingly diverse and we
will continue to welcome and adopt new and different
viewpoints. Mexicans, Argentinians, Brazilians,
Colombians, Guatemalans and Americans account for the
largest share of our team members, yet a total of 31
nationalities are represented among our staff. We have
recently launched a Diversity Policy to strengthen our
commitment and formalize our initiatives in this field. In
addition, our Code of Conduct forbids unlawful
discrimination in employment relations and grants all
persons the right to apply for a position in the company
or to be considered for a new position based on the skills
required.
Since 2006, we periodically commission international
consultancy agencies to conduct confidential surveys
among our employees. The company develops corporate
and regional action plans based on the results of those
surveys, and tackles areas of opportunity to improve
overall labor climate. In 2018 we completed a new poll
covering 16,700 employees across our operations,
including salaried and hourly employees.
WORK CLIMATE. We look for ways to
improve our employees’ working
experience. Innovative programs, such
as alternative offices with remote
connection and flexible days every
month, all year-round, were well
received.
96%
OVERALL SATISFACTION
Surveyed hourly
87%
OVERALL SATISFACTION
Surveyed salaried
employees, on working
employees, on working
at Ternium.
at Ternium.
HEADCOUNT
# of people
25,000
20,000
15,000
10,000
5,000
0
21,335
20,660
16,919
16,739
16,725
2014
2015
2016
2017
2018
33. Annual Report 2018
HUMAN RESOURCES
SALARIED EMPLOYEES BY GENDER
# of people
4,031
3,956
3,274
3,201
3,149
2014
2015
2016
2017
2018
5,000
4,000
3,000
2,000
1,000
0
n Men
n Women
SALARIED EMPLOYEES BY NATIONALITY
December 2018
Colombia: 7%
Guatemala: 1%
Brazil: 19%
Others: 2%
Mexico: 44%
Argentina: 27%
34. Ternium
The overall participation rate reached 88% of targeted
employees. The findings from the analysis of the poll
included the following:
• Hourly employees. 96% of surveyed participants
indicated overall satisfaction in their responses; 97%
stated that they felt proud of working at Ternium.
• Salaried employees. 87% of surveyed participants
indicated overall satisfaction in their responses; 95%
stated that they felt proud of working at Ternium.
In 2018, Ternium's resignation rate was 3%.
DEVELOPMENT AND TRAINING
Ternium's constant pursuit of excellence in our operations
requires our teams to consolidate and progress in their
quest for continuous improvement and innovation. We
believe training is a key tool to achieve this goal. Over the
last five years, each salaried employee has received an
average of 44 hours per year of training and each hourly
employee has received an average of 108 hours per year of
training, including on-the-job classes.
Ternium's program for professionals spans a person’s
entire career, from his initial level as a young
professional to management levels. Our program for
supervisors includes a 40-hour course discussing the
components of the supervisory role. This course has
received the Excellence in Practice Award from the
Association for Talent Development. A total of
approximately 1,100 supervisors have completed the
course since its launch in 2015. During 2018, our
supervisors received an average of 90 hours of training.
The Leaders’ Development Program provides dedicated
training for the company’s current and future leaders. The
course is designed to enhance middle management
leadership skills, as they advance their careers.
Approximately half of the company’s middle-level
managers have taken part in the program. The leadership
course is a joint effort with the EGADE Business School
of Monterrey, Mexico, and the Torcuato Di Tella
University of Buenos Aires, Argentina. As of year-end
2018, the program involved 61 participants.
PERFORMANCE MANAGEMENT
The individual performance of each of Ternium's salaried
employees is assessed annually through a formal
performance assessment process. There is a link between
the feedback and the final instances provided by the
evaluation process, and the different aspects of an
employee's corporate life, such as compensation and
career development, performance improvement
opportunities and training requirements.
Ternium has an IT system to manage its performance
assessment processes. The system includes a set of
measurable objectives for each employee. This is a key
component of the process as it ensures that everyone’s
goals are in line with the company’s objectives and
guarantees transparency and fairness in the
assessment of each employee’s work throughout the
year. The set of objectives is assessed through a
combination of different sources: the employee
himself, internal customers, assessment committees
and feedback meetings, as well as mid-year reviews.
In addition, the system includes an upward feedback
tool for management positions accessible to the
manager’s supervisor. Although this tool is not
mandatory, 74% of our employees provided upward
feedback in 2018's performance assessments, which is
an indication of the credibility achieved by Ternium´s
procedures.
A performance assessment process based on a measurable
set of objectives is an important aspect of our Human
Resources Policy. It aims at improving our employees’
working experience throughout their careers and their
relationship with their supervisors.
During 2018, the company introduced new features to
enhance its performance assessment systems, which
enabled the consolidation of a 360-degree approach to
the process. The new features offer employees
additional options to provide and receive assessments,
including the possibility of submitting spontaneous
client-supplier opinions related to specific objectives,
and the introduction of more clearly-worded
descriptions for the upward feedback review stage.
EMPLOYEES TRAINING
Average hours of training per year and employee
UPWARD FEEDBACK
%
111
112
120
119
94
105
90
53
48
37
76
67
42
33
52
125
100
75
50
25
0
100
80
60
40
20
0
85
72
64
93
89
94
91
77
74
64
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
n Supervisors
n Hourly Employees
n Salaried Employees
n Employees that evaluated their supervisor
n Supervisors with at least one evaluation
35. Annual Report 2018
VALUE CHAIN
WE SUPPORT the development of our small and medium-sized
customers and suppliers under a long-term commitment.
We understand that the future of our industrial project is
connected to that of our communities and value chain.
36. Ternium
ProPymes' industrial assistance programs focus on a
broad array of issues from the use of automation
technology and the optimization of production
facilities, to the development of environment,
health and safety protocols and human resources
management. During 2018, ProPymes delivered over
400 industrial projects.
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.
PROPYMES AND INNOVATION. Under
ProPymes sponsorship, a trailer
manufacturer, a transportation
company, a development center and
Ternium set up a team to develop
high-performance trailers. In 2018,
Mexico’s Automotive Industry
Cluster granted this project its 2018
Award in "Innovation".
Ternium offers support to small and medium sized
enterprises (SMEs) through a program that provides a
variety of services, including training, industrial
assistance, institutional assistance, commercial support
and financial aid. With the participation of approximately
1,600 companies, our program, called ProPymes, fosters
the industrial value chain in Mexico and Argentina.
ProPymes has helped create an industrial network that
encourages the professionalization and quest for
excellence of SMEs, which, based on knowledge sharing,
reciprocal learning and exchange of experiences, aims at
the implementation along the whole value chain of the
best practices utilized in the industry.
ProPymes designs and implements an annual training
agenda, among other initiatives. The course contents are
continuously updated to keep pace with the new
requirements of managers and their salaried and hourly
employees. Every year the program incorporates
additional subjects to the curriculum to meet SMEs´
increasingly sophisticated range of needs, as they advance
their learning curves. Training activities are performed in-
house or at universities or business schools. During 2018,
ProPymes has sponsored training courses for 4,700
attendants, who spent an aggregate 92,000 hours in class.
PROPYMES' SPONSORED INDUSTRIAL PROJECTS
# of projects
408
376
316
307
232
2014
2015
2016
2017
2018
450
375
300
225
150
75
0
n Mexico
n Argentina
37. Annual Report 2018
VALUE CHAIN
TECHNICAL GENE. In 2013,
ProPymes incorporated
Ternium's Technical
Gene initiative to its
programs.
Aimed at enhancing
the quality of technical
education, Technical
Gene coordinates the
efforts of SMEs and
their communities to
improve technical
educational institutes,
and train their teachers
and students.
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. Since its
creation through to year-end 2018, the program has
financed investment projects of Ternium's customers
for an amount in excess of $100 million.
WHY AN SME WOULD NEED ASSISTANCE?
From time to time, Mexico and Argentina suffer periods
of economic volatility. One of the consequences of these
difficult times is that some industrial companies have no
choice but to resize their operations to be able to
withstand short-term challenges arising during such
conditions. On the path to overcoming a short-term
critical situation, their long-term growth strategies
suffer. Consequently, their development plans are
postponed, they fall behind their learning curves and
are unable to reach their growth potential. Ternium
believes that its role as a large industrial project is to
work with SMEs to help them reach their potential,
enhancing their professional, management and financial
capabilities, and helping them participate competitively
in both domestic and foreign markets.
38. Ternium
PROPYMES SPONSORED TECHNICAL SCHOOLS
# of Schools
32
24
22
19
35
28
21
14
7
0
10
2014
2015
2016
2017
2018
The ProPymes program was first launched in
Argentina in 2002, named after the acronym PYME,
which in Spanish stands for SME. In Mexico, the
program was introduced four years later. ProPymes
institutionalizes the cooperation between Ternium
and the company’s small and medium-sized
customers and suppliers.
ADVANCING THE SMEs AGENDA
SMEs making up Ternium’s value chain are key
players for the social integration of their
communities, as they generate a substantial share of
total industrial jobs. The ProPymes program plays an
important role in advancing the SME policy agenda in
Mexico and Argentina.
Ternium organizes major events under the auspices of
the ProPymes initiative, bringing SME´s representatives
together with government officials, economists and
journalists to discuss the sector’s economic context and
outlook. In Mexico, the ProPymes biannual event
showcases awards for SMEs excelling in areas such as
industrial safety, logistics services, delivery, raw material
handling and other services. The occasion also includes
a Supplier of the Year award. In Argentina, the event is
held every year and features several panels designed to
allow SME executives share their experiences and
lessons learned.
Since 2017, the Argentine government sponsors the
Ecosistema Pyme program, or SME Ecosystem, which
considers the ProPymes program a model to be
replicated by other large companies in the support of
their value chains. In Argentina, the stories of SMEs
that are part of Ternium’s ProPymes program
appeared in video-narrations published in the web
platform of one of the country’s largest media groups
and have been widely circulated on social media.
Different companies founders and owners were
featured sharing how their enterprises started and
grew, the difficulties they had to overcome, and the
potential they envisage for the future.
39. Annual Report 2018
COMMUNITIES
OUR COMMUNITY programs reflect the values and heritage
of our corporate history, emphasizing education as a
source of personal and social development, with a special
focus on technical schooling.
40. Ternium
With more than seventy years of industrial
experience, Ternium´s corporate history has
inspired our work with our communities along
these years, which is guided by an underlying
premise: We believe that the long-term success of an
industrial project depends on the support it receives
from the community around it and on its ability to
grow together with its neighbors.
We have developed and carried out several
programs in education, arts and culture, health and
sports, and social integration areas together with
local institutions. We support initiatives that
improve life quality and strengthen institutions that
foster education and welfare, and promote a culture
of hard work, diversity and social mobility.
Access to quality education is limited in several
communities in Latin America, resulting in a lack
of qualified technicians and professionals required
by the industrial sector. On top of this, the industry
is going through a technological transformation
process, known as Industry 4.0, which demands
workers with increasingly sophisticated skills and
knowledge. Among our educational initiatives, we
devote significant efforts to technical schools, in the
knowledge that the steel manufacturing industry
seeks to recruit skilled employees who need a solid
education all the way through to tertiary level. In
2018, our educational programs accounted for 65%
of our total community investment.
THE ROBERTO ROCCA TECHNICAL SCHOOL
In 2016, Ternium inaugurated the Roberto Rocca
Technical School (ETRR) in Pesquería, Mexico. Our
sister company in the Techint Group, Tenaris, opened
the first ETRR in Campana, Argentina, in 2013. These
modern schools are the spearhead of an international
educational network geared towards providing high-
quality technical education.
The ETRR in Pesquería offers two specializations,
mechatronics and electromechanics. By December 2018,
374 young students were attending classes at the school, a
number that is close to its capacity. All students have
different levels of scholarships, depending on their needs.
The first cohort of students will graduate by mid-2019,
following three years of studies. We have invited other
companies in the state of Nuevo León, Mexico, to join
efforts to fund scholarships for current and future
students. The list of sponsor companies already includes
Kia Motors, Corporativo Alfa (and its affiliates Nemak,
Sigma, Alpek, Axtel and Newpek), Festo, Techgen,
Praxair, Dedutel, Denso and Rheem. The school´s
students started their internships in the industrial plants
of these companies.The ETRR in Pesquería is equipped
with state-of-the-art laboratories and classrooms, and the
building itself obtained the gold category of the LEED
environmental certification awarded by the U.S. Green
Building Council. The school uses a Project Based
SUPPORT IN NUMBERS. We invested $60
million in community programs
in the last five years, including
$29 million in our flagship educational
program, the Roberto Rocca Technical
School in Pesquería, Mexico.
COMMUNITY PROGRAMS
$ million
25
20
15
10
5
0
23.7
8.2
6.8
12.6
9.5
2014
2015
2016
2017
2018
n Ongoing programs
n ETRR in Pesquería, Mexico
41. Annual Report 2018
COMMUNITIES
TECHNICAL GENE PROGRAM – TEACHERS TRAINED
# of Teachers
160
156
152
228
73
250
200
150
100
50
0
2014
2015
2016
2017
2018
TECHNICAL GENE PROGRAM – PARTICIPANTS
# of Students
2,059
1,355
1,341
1,426
2,500
2,000
1,500
1,000
500
0
100
2014
2015
2016
2017
2018
42. Ternium
Learning methodology in technical classes, an innovative
way to learn and develop teamwork and leadership skills.
The ETRRs holds standardized testing for math, reading
and socio-emotional skills including items from the
Program for International Student Assessment (PISA)
Math and Reading tests.
During 2018, five teams from the ETRR in Pesquería
participated in the Mexican national championship of the
World Educational Robot Contest. One of the teams
succeeded to the international final in Shanghai, China,
reaching the 8th place in its category and the 18th place in
the overall score among over 200 teams that took part in
the contest.
SPONSORING PUBLIC TECHNICAL SCHOOLS
At Ternium, we have developed the Technical Gene
program designed to support technical education. Under
this program, we support several state-run technical
schools near our 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 in the training level of
graduates. In addition to Ternium, this program involves
local governments and the Hermanos Agustín y Enrique
Rocca foundation, a non-governmental organization
committed to community development.
The program provides technical internships at workshops
and at operating areas of the company’s industrial
centers. In addition, it organizes technical training
programs in the schools, and an annual innovation contest
targeting pro-community projects. Moreover, the program
offers activities for teachers and managers to strengthen
teaching skills and the management of the schools, funds
the expansion and improvement of school infrastructure,
and provides new technical equipment.
During 2018, we initiated the sponsorship of a new
technical school in Mexico. We will start our activities in
the new school as soon as we get governmental
authorizations. In addition, under this program 146 high-
school students completed their internships in our mills in
Argentina and Mexico. 110 high-school students
participated in the innovation contest in Argentina, in
which we evaluated proposals for community projects. In
addition, one technical school in San Nicolas inaugurated
a new 468 square meters building, housing the new
physical/chemical and electro-mechanics laboratories.
cost of this project was entirely financed by Ternium and
its employees.
VOLUNTEERING TO IMPROVE BASIC SCHOOLS
Ternium's employees and their families volunteer to
improve local schools 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,
29 schools have been revamped in Mexico, Argentina,
Brazil, Colombia and Guatemala. During 2018, 1,644
volunteers joined efforts to transform nine schools.
Following the integration of the company’s new plant in
Rio de Janeiro, during the year we undertook our first
volunteering activity in Brazil. In 2018, our community
programs in Brazil received the Parceiros da Escola
award from the country's education minister.
We also coordinate help for communities facing natural
disasters. During 2018, Ternium and other affiliate
companies built 191 houses for families affected by the
September 2017 earthquakes in southern Mexico. The
QUALITY EDUCATION FOR THE COMMUNITIES
Ternium has different programs aimed at improving skills
and education in developing communities near its
facilities. We organize workshop academies in Pihuamo,
Aquila and Alzada in Mexico. In addition, through the
Afterschool program, we provide support to primary
schools in San Nicolás de los Garza, Mexico, and in
Ramallo, Argentina. The Afterschool program fosters
the integration and stay of the students in the classrooms,
and seeks to improve the quality of education. The
program was very successful, evidenced by a substantial
increase in student enrollment and the extension of
activities outside school hours. Afterschool also helps
improve the schools' infrastructure. In 2018, the school in
Ramallo inaugurated a new 273 square meters building,
housing three new classrooms and a meeting room. In
addition, we provided the required equipment and
furniture. The enrollment in this school reached 398
students in 2018, representing a 70% increase since the
launch of the initiative.
VOLUNTEERING PROGRAM. Ternium's employees and their families volunteered to improve the Japão municipal school in Santa Cruz, Rio de Janeiro, Brazil.
43. Annual Report 2018
COMMUNITIES
SUPPORT TO HIGH-SCHOOL STUDENTS
Our Merit Awards program was founded in 1976 in
Argentina, making it the longest-lasting program.
Initially designed to benefit the children of our
employees, in 2007 it was opened up to our
communities. The program focuses on fostering
academic excellence for high-school students.
Scholarships are awarded based on academic
performance, attendance and commitment to the
educational process. In 2018, we awarded 712
scholarships.
ROBERTO ROCCA EDUCATION PROGRAM
Together with the Hermanos Agustín y Enrique Rocca
foundation, Ternium funds scholarships for high-school
and university students from local communities in
Mexico, Argentina, Colombia and Guatemala. The
program, called Roberto Rocca Education Program, has
awarded fellowships and scholarships since 2005 to
promote the study of engineering and applied sciences at
undergraduate and graduate level in the countries where
we have a major presence. In 2018, the program funded 12
fellowships for students pursuing PhDs and 276
scholarships for undergraduate students.
AFTER SCHOOL PROGRAM PARTICIPATION
# of Students
252
266
196
214
2015
2016
2017
2018
300
250
200
150
100
50
0
n Argentina
n Mexico
44. Ternium
249
135
200
125
348
298
317
350
115
111
120
90
92
163
16
5
276
MERIT AWARDS
# OF SCHOLARSHIPS
MEXICO
2018
2017
2016
2015
ARGENTINA
2018
2017
2016
2015
OTHER COUNTRIES
2018
2017
2016
2015
ROBERTO ROCCA EDUCATION PROGRAM
# OF SCHOLARSHIPS (2018)
Mexico
Argentina
Colombia
Guatemala
Total
SPORTS AND A HEALTHY LIFESTYLE
As part of our drive to promote a healthy lifestyle, we
organize the 10K Ternium annual local race in several
locations, together with local institutions. In 2018,
approximately 4,000 runners participated in the 14th
edition of the 10K Ternium in San Nicolás,
Argentina; approximately 5,000 runners participated
in the 10th edition of the race in Monterrey, Mexico,
and over 1,500 runners participated in the 7th edition
of the 10K Ternium race in Colima, Mexico. The
proceedings from the San Nicolás race, together with
matching funds provided by Ternium, are donated to
a local hospital. In addition, we organize sport
leagues involving schools in
10K Ternium race. A drive for a healthy
lifestyle motivates us to organize races
along with local entities. Thousands of
runners dare beat every year the three
and 10-kilometers challenges. The first
10K edition took place in 2008, in San
Nicolás. Later on, we launched the race
in Monterrey, Colima and Santa Cruz
where it also became popular.
11,500
RUNNERS
Participated in
14
EDITIONS
Since the first race
the 2018 edition.
in San Nicolás.
neighboring communities with the participation of
thousands of children. On health care initiatives, we
organize health fairs, clinical examinations, 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 funds improvements in health care
infrastructure in different countries.
ARTS AND CULTURE TO FOSTER DIVERSITY AND INTEGRATION
Ternium’s Art and Culture program aims to bring
the company’s diverse cultures together as well as to
reinforce the identity of each community. Large
audiences enjoy every year´s opera, ballet, concert
and cinema festivals organized by Ternium together
with local institutions.
Ternium's film festivals bring to employees and
the community different movies from Latin
American producers. In 2018, we held five film
festivals in Mexico and Argentina, which were
attended by approximately 10,000 persons. In San
Nicolás, Argentina, Ternium also sponsors and
organizes, along with the PROA Foundation, the
Ternium Cultural Program at a local theater in
San Nicolás, Argentina.
We also sponsor a photo library program, a way of
honoring the history and tradition of the local
communities by preserving and sharing their visual
memoirs. In a joint effort with community
organizations, curators source and compile historic
photos into digital archives, painting a unique
portrait of the past and present of these
communities. As of 2018, the Photo Libraries in the
cities of San Nicolás, Argentina, and Monterrey,
Mexico, had digitized over 63,000 images.
45. Annual Report 2018
GOVERNANCE
INTEGRITY is key to the long-term sustainability of our
company. With ethical behavior and the observance of law
as a core company value, we continuously work on
building a corporate culture of integrity.
46. Ternium
Ternium S.A. is organized as a public limited liability
company (société anonyme) 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 Faustin S.A., the holding
company of the Techint Group, an international group of
companies, has a 62% controlling interest in Ternium.
San Faustin 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 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, 2018, 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
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 shall take place in
Luxembourg, or in a foreign country whenever
circumstances of force majeure take place, within six
months from the end of the previous financial year.
COMMITMENT TO INTEGRITY THROUGH
STRONG CORPORATE GOVERNANCE
• Audit committee (three independent
directors)
• Internal Audit Department
reporting to the Chairman and
the Audit Committee
• Business Conduct Compliance
Officer reporting to the CEO
• Compliance department that
oversees SOX certifications and
related party transactions
• Employee accountability and
training to ensure transparent
behavior
• Confidential channels to report
noncompliant behavior
47. Annual Report 2018
GOVERNANCE
SELECT CODES
POLICIES
PROCEDURES
Code of Conduct
Transparency
Disclosure Procedure (relevant
information)
Business Conduct
Code of Conduct for suppliers
Anti-Fraud
Transactions Between Related Parties
Securities Trading
Code of Ethics for Senior Financial
Officers
Diversity and Work Environment Free
of Harassment
Conflict Mineral Disclosure
Human Rights
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 apply 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
Policy on Business Conduct, a Code of Conduct for
Suppliers, an Antifraud Policy, a Policy on Securities
Trading, a Human Rights Policy and a Policy on
Diversity and Work Environment Free of Harassment.
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 internal
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.
48. Ternium
ACKNOWLEDGMENT. All our white-collar
employees must confirm that they
received and understood our Code of
Conduct (CC) and Policy on Business
Conduct (PBC), a condition for
employment.
Ternium has a 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, and for designing, implementing and supervising
a Compliance Program aligned with the requirement of
applicable national and international laws against
corruption and bribery. The Business Conduct
Compliance Program is focused on preventive activities
including risk assessment, normative, advising,
communications, training, certifications, third parties,
monitoring and auditing, discipline and remediation, and
benchmarking.
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 stewardship.
49. Annual Report 2018
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
Secretary
Arturo Sporleder
(*) Independent Directors and Audit Committee Members
Ternium Mexico
President
César Alejandro Jiménez
Ternium Argentina
Martín Berardi
President
Ternium Brasil
President
International Area
President
Planning and Global
Business Development
General Director
Engineering, Industrial
Coordination and EHS
Director
Quality and R&D
Director
Marcelo Chara
Héctor Obeso Zunzunegui
Oscar Montero
Pablo Hernán Bassi
Rubén Herrera
Chief Information Officer
Roberto Demidchuck
Human Resources
Director
Rodrigo Piña
50. Ternium
INVESTOR INFORMATION
Investor Relations Director
IR Inquiries
Sebastián Martí
smarti@ternium.com
Phone: +54 11 4018 8389
U.S. toll free: 866 890 0443
Luxembourg Office
29 Avenue de la Porte-Neuve
L2227 - Luxembourg
Luxembourg
Phone: +352 2668 3153
Fax: +352 2659 8349
Stock Information
New York Stock Exchange (TX)
CUSIP Number: 880890108
Internet
www.ternium.com
TERNIUM Investor Relations
ir@ternium.com
ADS Depositary Bank
BNY Mellon
Proxy services: BNY Mellon Shareowner
Services
P.O. Box 505000
Louisville, KY 40233-5000
Toll free number for U.S. calls:
+1 888 269 2377
International calls: +1 201 680 6825
shrrelations@cpushareownerservices.com
www.mybnymdr.com
51. Annual Report 2018
MANAGEMENT'S REPORT
RECORD RESULTS. We reported EBITDA of $2.7 billion, the
highest in Ternium's history, with a 40% year-over-year
increase. This strong performance led to earnings of $7.67
per ADS and free cash flow of $1.2 billion.
52. Ternium
This review of Ternium’s financial condition and results
of operations is based on, and should be read in
conjunction with, the Company’s consolidated financial
statements as of December 31, 2018 and 2017 and for
the years ended December 31, 2018, 2017 and 2016
(including the notes thereto), which are included
elsewhere in this annual report.
SUMMARY RESULTS
Steel shipments (tons)
Iron ore shipments (tons)
Net sales ($ million)
Operating income ($ million)
EBITDA ($ million)
EBITDA margin (% of net sales)
EBITDA per ton ($)
Income tax expense ($ million)
Profit for the year ($ million)
Profit attributable to owners of the parent ($ million)
Basic earnings per ADS ($)
2018
12,951,000
3,616,000
11,454.8
2,108.4
2,697.7
23.6%
208.3
(369.4)
1,662.1
1,506.6
7.67
2017
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
Dif.
12%
2%
18%
45%
40%
364 bps
25%
10%
62%
70%
70%
• EBITDA of $2.7 billion in 2018, a 40% year-over-year
increase mainly as a result of higher EBITDA per ton
and shipments.
• Earnings per American Depositary Share (ADS) of
$7.67, a year-over-year increase of $3.16 per ADS.
• Capital expenditures of $520.3 million, up from $409.4
million in 2017.
• Free Cash Flow of $1.2 billion in 2018.
• Net debt position of $1.7 billion at the end of
December 2018, a $1.0 billion decrease and equivalent
to 0.6 times net debt to last twelve months EBITDA.
increase in steel shipments and $47 increase in steel
revenue per ton, partially offset by an $11 increase in
steel operating cost per ton7. The increase in steel
volumes was the result of higher shipments in the Other
Market's region, due to the consolidation of Ternium
Brasil's slab sales from September 2017, partially offset
by a 155,000-ton decrease in the Southern Region and a
78,000-ton decrease in Mexico. The increase in steel
cost per ton mainly reflected higher purchased slab and
raw material costs, partially offset by higher integration
in our operations.
Operating income in 2018 was $2.1 billion, the highest on
record, reflecting strong steel market prices in Mexico and
the consolidation of Ternium Brasil. Ternium Brasil
enabled us to integrate our operations and at the same
time was able to take advantage of a strong slab market in
2018. Compared to 2017, operating income in 2018
increased $651.6 million, mainly due to 1.4 million-ton
(7) Steel operating cost per ton is equal to steel cost of sales plus steel SG&A, divided by shipments..
Net income in 2018 was $1.7 billion, reflecting the
strength of our operations and a low effective tax rate.
The effective tax rate in 2018 included a $104.1 million
tax gain due to the effect of an asset revaluation for tax
purposes at Ternium's Argentine subsidiary. Compared
to net income of $1.0 billion in 2017, net income in 2018
increased $639.2 million, mainly due to the above-
mentioned higher operating income and low effective
tax rate in 2018, and higher results from equity in
earnings of Usiminas, partially offset by slightly higher
net financial expenses.
53. Annual Report 2018
MANAGEMENT'S REPORT
NET SALES
Net sales in 2018 were $11.5 billion, 18% higher than net
sales in 2017. The following table outlines Ternium’s
consolidated net sales for 2018 and 2017.
NET SALES ($ MILLION)
SHIPMENTS (THOUSAND TONS)
REVENUE/TON ($/TON)
Mexico
Southern Region
Other Markets
Total steel products
Other products (8)
Steel reporting segment
2018
6,134.0
1,933.4
3,023.6
11,091.0
362.4
11,453.4
2017
5,378.6
2,313.6
1,699.0
9,391.2
309.1
9,700.3
Dif.
14%
-16%
78%
18%
17%
18%
2018
6,544.8
2,301.1
4,105.2
2017
6,622.8
2,456.0
2,517.7
12,951.1
11,596.6
Dif.
-1 %
-6 %
63 %
12 %
2018
2017
937
840
737
856
812
942
675
810
Dif.
15 %
-11 %
9 %
6 %
Mining reporting segment
282.0
271.5
4%
3,616.3
3,551.1
2%
78
76
2%
Intersegment eliminations
Net sales
(280.6)
11,454.8
(271.4)
9,700.3
18%
(8) 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, Argentina, Brazil, 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 Ltda.
(Ternium Brasil), Ternium Argentina S.A. (Ternium
Argentina, a company in which we have a 61% equity
interest), Ternium USA Inc. (Ternium USA), Ternium
Colombia S.A.S. (Ternium Colombia), Ternium
Guatemala S.A. (Ternium Guatemala), and Tenigal S.R.L.
de C.V. (Tenigal, a Mexican corporation in which we own
a 51% equity interest, with Nippon Steel & Sumitomo
Metal Corporation having the remaining 49% interest).
We report steel shipments under three geographical
regions: Mexico, the Southern Region (encompassing the
steel markets of Argentina, Bolivia, Chile, Paraguay and
Uruguay) and Other Markets.
Net sales of steel products in 2018 increased 18%
compared to net sales in 2017, reflecting a 1.4-million-ton
increase in shipments and a $47 increase in steel revenue
per ton. Shipments increased 12% year-over-year mainly
due to higher shipments in Other Markets, as a result of
54. Ternium
the consolidation of Ternium Brasil from September 2017,
partially offset by lower shipments in the Southern Region
and slightly lower shipments in Mexico, reflecting lower
demand for steel products in our two main markets.
Revenue per ton in 2018 was higher than in 2017 as a
result of higher steel prices in Ternium Mexico and in
Other Markets. Although steel prices in he Southern
Region were relatively stable year-over-year, revenue per
ton decreased due to the effect of inflation adjustment.
MEXICO
During 2018, shipments in the Mexican market were 6.5
million tons, representing 51% 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 25.9 million tons in 2018 with steady
demand from the manufacturing sector and weak
commercial markets, usually driven by construction
activity, as a result of low public and private investment.
Within the Mexican industrial sectors, light vehicle
production remained stable in 2018, reflecting an increase
in the production of light trucks and a decrease in the
production of sedans. As for sales, light vehicle exports
increased and domestic shipments decreased. With 3.9
million units produced in 2018, Mexico ranks as the
world’s seventh largest motor vehicle manufacturer.
Ternium’s strategy aims at the offering of a full range
product catalog, a significant local presence, logistics
management and the introduction of new information
Ternium has participated in the expansion of this
sector in Mexico through investments in steel
manufacturing capacity, mainly the construction of
an 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 56% of our total shipments in the
country.
Our modern facilities in Pesquería enabled the
development of new value-added high-end products
mainly for 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 these
added capabilities, we are widening our high-end
product portfolio for customers in the automotive,
metal mechanic, home appliances, oil & gas and electric
motors 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
automotive industry, as well as the home appliance,
machinery, energy and construction sectors. The new
hot-rolling mill will be supplied with high-end slabs
produced in our facility in Rio de Janeiro as well as
slabs purchased to third parties. The facility is expected
to start up by the end of 2020.
In addition, during 2019 we will start up new hot-dip
galvanizing and pre-painting facilities in Pesquería.
These new mills will enable Ternium to produce
additional high-end value-added products for the home
appliance, HVAC and automotive industries.
APPARENT STEEL USE - MEXICO
All products (million tons)
25
25.5
26.4
25.9
23.5
30
25
20
15
10
5
0
2014
2015
2016
2017
2018
Source: worldsteel
LIGHT VEHICLE PRODUCTION - MEXICO
Million tons
3.2
3.4
3.5
3.9
3.9
5
4
3
2
1
0
2014
2015
2016
2017
2018
Source: Mexican Automotive Industry Association
55. Annual Report 2018
MANAGEMENT'S REPORT
technology tools. For more information on the
development of new products and services for our
customers see the chapter "Innovation" in this
annual report.
During the first quarter of 2018, steel prices in Mexico
increased compared to those prevailing during 2017,
supported by higher raw material costs in international
markets. On March 8, 2018, the U.S. imposed a 25%
tariff on steel imports under Section 232 of the U.S.
Trade Expansion Act, which entered in force on March
23, 2018. The immediate consequence of that action
was a steep increase in U.S. steel prices, which remained
at very strong levels until August and normalized
gradually thereafter. This price dynamic in the U.S. steel
market influenced the Mexican market, as U.S. steel
imports represent a large share of total steel imports
into the Mexican market. Therefore, steel prices in
Mexico in 2018 remained strong most of the year,
returning by year-end to levels similar to those
prevailing in 2017.
During 2018, Mexico and the U.S. advanced their trade
negotiations. In November 2018, Mexico, the U.S. and
Canada signed a new agreement to substitute NAFTA
(called USMCA), which needs to be ratified by each
country´s congress. Mexico, the U.S. and Canada are
currently negotiating an agreement on Section 232 steel
tariffs, which, if successful, should help normalize steel
trade flows within North America.
Utilization rates in our integrated steelmaking facilities
in Mexico remained high during 2018, 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 remained being a cost efficient input vis-à-vis
steel scrap. In our downstream facilities, including our
re-rolling facilities, production rates showed a mixed
performance year-over-year in 2018, in line with a
weakening in steel demand. Towards the second half
2018, Ternium continued implementing the SMART
factory concept, a digital transformation process that
will lead our facilities to a more productive and efficient
stage. For more information on SMART factory please
see the chapter "Innovation" in this annual report.
56. Ternium
Ternium’s capital expenditures in the steel segment in
Mexico amounted to $297 million in 2018, compared to
$194 million in 2017. The main investments carried out
during the period included the construction of new hot-
rolling, galvanizing and pre-painting facilities in our
Pesquería unit, the expansion of connectivity and
equipment automation throughout Ternium Mexico’s
industrial system (SMART factory), and the improvement
of environmental and safety conditions at certain
facilities.
Capital expenditures are expected to increase in 2019 and
2020, as Ternium's investment in a new hot-rolling mill in
Pesquería gains momentum.
SOUTHERN REGION
Shipments in the Southern Region reached 2.3 million
tons in 2018, or 18% of Ternium’s consolidated
shipments in the steel segment, decreasing 6% year-
over-year. Most of Ternium’s shipments in the region
are made in the Argentine market, where Ternium
Argentina is the leading supplier of flat steel products.
Apparent flat steel demand in Argentina decreased year-
over-year in 2018 to approximately 2.6 million tons. The
Argentine economy was affected during the year by
weak agricultural production due to adverse weather
conditions, financial market volatility and a significant
increase in interest rates. Activity levels in the country's
main flat steel consuming sectors experienced a
significant decline during the second half of 2018. In
addition, apparent flat steel demand was impacted
during the fourth quarter by a destocking process in the
value chain.
The construction sector, which showed a solid
performance during the first half of the year, suffered a
significant decline from September 2018 due to lower
public infrastructure investment and a lack of credit for
developers and mortgage borrowers. Likewise, vehicle
production showed solid levels in the first half of 2018
and weakened significantly from September, reflecting a
significant decrease in local vehicle sales partially offset
by higher exports. In this scenario, construction activity
and vehicle production in December 2018 fell 21% and
39%, respectively, compared to the levels achieved in
December 2017.
Our product development efforts in Argentina
focused on new high-strength steel applications for
vehicles, trucks and heavy equipment, on attractive
pre-painted steel finishings for the construction sector
and home-appliance manufacturers, and on new
products for wind and solar power mills. For more
information on the development of new products and
services for our customers see the chapter
"Innovation" in this annual report.
The decrease in Ternium’s shipments in the Argentine
market in 2018 was partially offset by increased year-over-
year shipments in Bolivia. Economic activity in Paraguay,
Bolivia, Uruguay and Chile continued growing at
sustained rates during 2018.
Utilization rates in our crude steel production
facilities in Argentina remained relatively stable in
2018 compared to 2017. In our downstream facilities,
production rates decreased year-over-year in 2018
reflecting lower finished steel shipments. Ternium’s
capital expenditures in the Southern
Region, mainly in Argentina, amounted to $68 million in
2018, mainly related to the upgrade of the hot-rolling
mill, the improvement of environmental and safety
conditions, the expansion of connectivity and equipment
automation, and maintenance activities.
OTHER MARKETS
Shipments in the Other Markets region reached 4.1
million tons in 2018, or 32% of Ternium’s consolidated
shipments in the steel segment. Our major shipment
destinations in the Other Markets region are the United
States, Brazil, Colombia and Central America.
Shipments in this region in 2018 increased 1.6 million
tons year-over-year, or 63%, including a 1.5 million-
ton increase in slab shipments. On September 7, 2017,
Ternium acquired CSA from thyssenkrupp
AG, a slab-making facility in Rio de Janeiro, Brazil,
renamed it Ternium Brasil and started consolidating
its financial statements as from that date.
Consequently, 2018 is the first full year reflecting the
CONSTRUCTION INDICATOR - ARGENTINA
Growth (% year / year)
MOTOR VEHICLE PRODUCTION - ARGENTINA
Thousand units
12.7
0.8
7.1
-0.4
15
10
5
0
-5
-10
-15
-20
-12.7
800
600
400
200
0
617
527
473
473
467
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Source: Argentine Statistics Institute
Source: Argentine Automotive Producers Association
57. Annual Report 2018
MANAGEMENT'S REPORT
effect of the consolidation of Ternium Brasil on our
shipments in the Other Markets region.
Ternium Brasil has an agreement to supply slabs to
thyssenkrupp AG’s former re-rolling facility in
Calvert, Alabama, United States. Under this
agreement, a total of 2.2 million tons of slabs will be
supplied between January 2019 and December 2020.
Slabs exports from Brazil to the U.S. are subject to a
quota system and are, therefore, exempted from the
25% tariff set on steel imports under Section 232. In
addition, Ternium Brasil ships slabs to other
Ternium's subsidiaries, which are eliminated in the
process of consolidation, and to third parties in Brazil
and other countries.
Slab production in our Rio de Janeiro unit reached a
record 4.6 million tons in 2018. Since we took over the
facilities, we focused our efforts on increasing
equipment availability and reliability. In addition, we
improved labor productivity and reduced production
costs. We are working on coordinating production and
logistics plans between our Rio de Janeiro unit and our
re-rolling mills in Mexico to further increase efficiency
and reduce working capital.
In the United States, apparent demand for finished
steel increased 2.3% year-over-year in 2018, 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) decreased in 2018 as
steel imports from Mexico were affected by the 25%
tariff set under Section 232. The company’s finished
steel production in the United States increased slightly
year-over-year in 2018, achieving new records.
In Colombia, Ternium is a leading supplier of
finished steel products. With apparent steel use of 3.6
million tons, the country is the fourth largest steel
market in Latin America. After a decrease in steel
demand in 2017, Colombia’s steel market stabilized in
2018. During the year, oil and gas activity continued
recovering in the country. On the other hand, weak
infrastructure investment and a slow recovery in
residential building investment weighed on industry
growth. Ternium’s shipments in the country increased
slightly in 2018.
Ternium is advancing the construction of a new rebar hot-
rolling mill in Colombia, with annual production capacity
of 520,000 tons. The new facilities will enable us to
expand market share in the construction sector by
substituting imports in the north of the country. With a
total investment of $90 million, the mill is expected to
start operations by year end 2019.
Our capital expenditures in the Other Markets region
amounted to $102 million in 2018, mainly related to the
construction of the above-mentioned new steel bar
processing facility in the north of Colombia, the
improvement of environmental and safety conditions, and
maintenance activities.
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 2018, most of our iron
ore production was consumed at Ternium’s steelmaking
facilities in Mexico.
At the end of 2018, 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
58. Ternium
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.
mainly including a $108.1 million increase in
depreciation of property, plant and equipment due to
the full consolidation of Ternium Brasil and the effect
of inflation adjustment in Argentina, a $47.6 million
increase in services and fees, and a $39.1 million
increase in maintenance expenses.
Consorcio Peña Colorada operates 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.
IRON ORE RESERVES
(END OF 2018) (9)
Volume
(million tons)
Average
iron grade
(%)
Estimated
mine life
(years)
Las Encinas (10)
Peña Colorada (11)
20
209
40
22
7
13
(9)
(10)
(11)
Iron ore reserves, proven and probable, on a run-of-mine basis
Includes exclusively the Las Encinas and Las Palomas mines
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 2018 were 4% higher
than those in 2017, reflecting a 2% increase in
shipments and a 2% increase in revenue per ton, with
relatively stable utilization rates in Consorcio Peña
Colorada’s and Las Encinas' iron ore pellet
production facilities. Capital expenditures in the
mining segment in 2018, including Las Encinas and
Ternium’s share in Peña Colorada’s capital
expenditures, amounted to $53 million, mainly
related to preparation works at new iron ore bodies
and maintenance activities.
COST OF SALES
Cost of sales was $8.5 billion in 2018, an increase of
$1.1 billion compared to 2017. This was principally due
to a $883.5 million, or 15%, increase in raw material
and consumables used, mainly reflecting a 12% increase
in steel shipments and higher raw material and
purchased slab costs, partially offset by lower energy
costs; and to a $196.8 million increase in other costs,
Reference prices in $ per ton
Iron Ore
Hard Coking
Coal
1Q 2016
2Q 2016
3Q 2016
4Q 2016
1Q 2017
2Q 2017
3Q 2017
4Q 2017
1Q 2018
2Q 2018
3Q 2018
4Q 2018
48.0
55.7
58.5
70.7
85.6
63.1
70.8
65.7
74.3
65.3
66.7
71.4
76.6
91.3
135.3
265.6
169.3
193.3
188.9
205.5
228.3
190.4
188.8
221.8
Slab
245.9
356.9
321.2
379.9
418.6
406.0
451.8
484.5
547.6
536.7
515.0
446.2
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
SG&A expenses in 2018 were $876.8 million, or 7.7% of
net sales, an increase of $52.5 million compared to SG&A
expenses in 2017 mainly due to higher freight and
transportation expenses and labor costs, partially offset
by lower services and fees expenses.
OTHER NET OPERATING INCOME
Other net operating income in 2018 was a $13.7 million
gain, compared to a $16.2 million loss in 2017. Other net
operating income in 2018 was mainly related to a recovery
of tax credit in Ternium Brasil.
OPERATING INCOME
Operating income in 2018 was $2.1 billion, or 18.4% of
net sales, compared to operating income of $1.5 billion,
or 15.0% of net sales, in 2017. The following table
outlines Ternium’s operating income by segment for
2018 and 2017.
59. Annual Report 2018
MANAGEMENT'S REPORT
$ million
Net Sales
Cost of sales
SG&A expenses
Other operating income (expense), net
Operating income
STEEL SEGMENT
MINING SEGMENT
INTERSEGMENT ELIMINATIONS
TOTAL
2018
2017
2018
2017
2018
2017
2018
2017
11,453.4
(8,524.9)
(860.9)
12.9
2,080.6
9,700.3
(7,465.8)
(811.5)
(17.0)
1,406.0
282.0
(239.9)
(15.9)
0.7
26.9
78.3
271.5
(212.9)
(12.8)
0.8
46.6
96.4
(280.6)
281.5
(271.4)
275.6
—
—
0.8
0.8
—
—
4.1
4.1
11,454.8
(8,483.3)
(876.8)
13.7
2,108.4
9,700.3
(7,403.0)
(824.2)
(16.2)
1,456.8
2,697.7
1,931.1
EBITDA
2,618.5
1,830.5
EBITDA
EBITDA in 2018 was $2.7 billion, or 23.6% of net sales,
compared to $1.9 billion, or 19.9% of net sales, in 2017.
NET FINANCIAL RESULTS
Net financial results amounted to a $179.6 million loss in
2018, compared to a $165.1 million loss in 2017. During
2018, Ternium’s net financial interest results totaled a loss
of $109.9 million, compared with a loss of $95.2 million
in 2017, reflecting higher average indebteness and a lower
average cost of debt.
Net foreign exchange results included a $112.2 million
year-over-year negative difference mainly related to the
effect of the fluctuations of the Argentine and Mexican
peso against the U.S. dollar. In 2018, the Argentine peso
depreciated 51% against the U.S. dollar compared to 15%
in 2017, resulting in a non-cash negative impact in
Ternium Argentina’s U.S. dollar financial position (which
applies the Argentine peso as functional currency).
Change in fair value of financial instruments included in
net financial results was a $99.3 million loss in 2018
compared to a $3.1 million gain in 2017. The loss in 2018
was mainly related to certain derivative instruments
entered into to compensate for the interest rate charges
derived from Ternium’s Argentine subsidiary's financial
debt denominated in local currency and currency
derivatives in Mexico.
The effect of inflation on Ternium’s Argentine
subsidiaries and associates’ short net monetary position
was a gain of $191.4 million as a result of the application
of IAS 29 from 2018.
60. Ternium
USIMINAS
Improved performance and financial
position in 2018.
• Steel shipments up 4%
• Iron ore shipments up 76%
• Adjusted EBITDA of BRL2.7 billion
(up 23%)
• Net debt/EBITDA of 1.6x
(down from 2.0x)
EQUITY IN RESULTS OF NON-CONSOLIDATED COMPANIES
Equity in results of non-consolidated companies was a
gain of $102.8 million in 2018, compared to a gain of
$68.1 million in 2017 mainly due to better results from
Ternium's investment in Usiminas.
INCOME TAX EXPENSE
Income tax expense in 2018 was $369.4 million, or 18%
of income before income tax, compared to an income
tax expense of $336.9 million, or 25% of income before
income tax in 2017. The unusually low effective tax rate
in 2018 was mainly the result of a $104.1 million tax
gain related to the effect of an asset revaluation for tax
purposes at Ternium's Argentine subsidiary. In 2017,
the effective tax rate included a non-cash gain on
deferred taxes due to the 5% appreciation of the
Mexican peso against the U.S. dollar during the year
which reduces, in U.S. dollar terms, the tax base used to
calculate deferred tax at our Mexican subsidiaries
(which have the U.S dollar as their functional currency).
LIQUIDITY AND CAPITAL RESOURCES
We obtain funds from our operations, as well as from
short-term and long-term borrowings from financial
institutions.
These funds are primarily used to finance our working
capital and capital expenditures requirements, as well as
our acquisitions and dividend payments.
We hold money market investments, time deposits and
variable-rate or fixed-rate securities. We reduced our
financial indebtedness to $2.0 billion at the end of 2018,
from $3.2 billion at the end of 2017, mainly reflecting
strong free cash flow less dividend payments in 2018. The
following table shows the changes in our cash and cash
equivalents for each of the periods indicated below:
In $ million
FOR THE YEAR ENDED DECEMBER 31,
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Effect of exchange rate changes
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
2018
1,739.3
(457.0)
(1,322.3)
(40.0)
(47.2)
337.8
250.5
2017
383.9
(2,030.0)
1,802.3
156.2
(1.8)
183.5
337.8
OPERATING ACTIVITIES
Net cash provided by operating activities in 2018 was $1.7
billion. Working capital increased by $228.6 million in
2018 as a result of a $186.4 million increase in inventories
and an aggregate $114.7 million net increase in trade and
other receivables, partially offset by an aggregate $72.6
million increase in accounts payable and
other liabilities. The inventory value increase in 2018 was
mainly due to $159.5 million higher volume and price of
raw materials, supplies and other; and net $90.5 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; partially
offset by $63.6 million net lower steel volume.
$ million
CHANGE IN INVENTORY DEC'18/DEC'17
Finished goods
Steel goods to undergo processing
Total steel goods
Raw materials, supplies and other items
Total inventory
Price
36.7
53.8
90.5
Volume
16.7
(80.3)
(63.6)
Total
53.5
(26.6)
26.9
159.5
186.4
61. Annual Report 2018
MANAGEMENT'S REPORT
INVESTING ACTIVITIES
Net cash used in investing activities in 2018 was $457.0
million, primarily attributable to capital expenditures of
$520.3 million and loans to non-consolidated company
Techgen for a net amount of $24.5 million, partially offset
by a decrease in other investments. The main investments
carried out during 2018 included those made for new hot-
rolling, hot-dipped galvanizing and pre-painting
production capacity in the company’s Pesquería industrial
center, improvement of environmental and safety
conditions at certain facilities, the upgrade and expansion
of two hot strip mills, the expansion of connectivity and
equipment automation, and those made in Peña
Colorada’s iron ore operations.
FINANCING ACTIVITIES
Net cash used in financing activities was $1.3 billion
in 2018, primarily attributable to net repayment of
borrowings of $1.1 billion and total dividend
payments of $236.8 million ($215.9 million to the
Company’s shareholders and $20.9 million to non-
controlling interest).
PRINCIPAL SOURCES OF FUNDING
FUNDING POLICY
Management’s policy is to maintain a high degree of
flexibility in operating and investment activities by
maintaining adequate liquidity levels and ensuring access
to readily available sources of financing. We obtain
financing primarily in U.S. dollars, Argentine pesos and
Colombian pesos. Whenever feasible, management bases
its financing decisions, including the election of currency,
term and type of the facility, on the intended use of
proceeds for the proposed financing and on costs. For
information on our financial risk management, please see
note 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.
62. Ternium
DIVIDEND PAYMENTS
$ per ADS
1.20
1.10
1.00
0.90
0.90
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2014
2015
2016
2017
2018*
*Proposed dividend
FINANCIAL LIABILITIES
Our financial liabilities consist mainly of loans with
financial institutions. As of December 31, 2018, these
facilities were mainly denominated in U.S. dollars (98.7%
of total financial liabilities). Total financial debt (inclusive
of principal and interest accrued thereon) decreased by
$1.2 billion in the year, from $3.2 billion as of
December 31, 2017, to $2.0 billion as of December 31,
2018. As of December 2018, current borrowings were
19.6% of total borrowings, none of which corresponded
to borrowings with related parties.
Net financial debt (total financial debt less cash and cash
equivalents plus other investments) decreased by
$1.0 billion in 2018, from $2.7 billion as of December 31,
2017, to $1.7 billion as of December 31, 2018. Net
financial debt as of December 31, 2018 equaled 0.6 times
2018 EBITDA.
Ternium’s weighted average interest rate for 2018 was
3.7%, a decrease compared to the 4.8% average interest
rate in 2017. This rate was calculated using the rates set
for each instrument in its corresponding currency and
weighted using the U.S. dollar-equivalent outstanding
principal amount of each instrument as of December 31,
2018. The year-over-year decrease in average interest rates
was due mainly to lower participation of Argentine peso
denominated debt in the currency mix, as nominal interest
rates in Argentina reflect high local inflation rates.
MOST SIGNIFICANT BORROWINGS AND FINANCIAL COMMITMENTS
Our most significant borrowings as of December 31,
2018, were those outstanding under Ternium
$ million
DATE
BORROWER
TYPE
2012/2013
Tenigal
September 2017
Ternium Investments
June 2018
Ternium Mexico
Syndicated loan
Syndicated loan
Syndicated loan
(12) From the original principal amount of $1.0 billion, $400 million were disbursed as of December 31, 2018.
The remainder $600 million are available to be drawn until June 2019.
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). As of December 31, 2018, we
were in compliance with all covenants under our loan
agreements. Our most significant financial commitments
as of December 31, 2018, 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, 2018,
Ternium’s guarantee amounted to approximately $288
million, based on an outstanding loan amount of $600
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, 2018, 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, 2018, the outstanding value of this
commitment was approximately $250 million. Our
exposure under the guarantee in connection with these
agreements amounts to $120 million, corresponding to
48% of the outstanding value of the agreements as of
December 31, 2018.
Investments S.à.r.l.’s (Ternium Investments) 2017
syndicated loan facility to finance the acquisition of
Ternium Brasil and related transactions, Ternium
Mexico’s 2018 syndicated loan facility and Tenigal’s
2012 syndicated loan facility.
Original principal
amount
Outstanding principal
amount as of December
31, 2018
Maturity
200
1,500
1,00012
100
1,125
400
July 2022
September 2022
June 2023
For further information on our derivative financial
instruments, borrowings, financial leases, commitments
and financial risk management please see notes 22, 23, 24,
25 and 29 to our consolidated financial statements
included in this annual report.
RECENT DEVELOPMENTS
TECHGEN REFINANCING
On February 13, 2019, Techgen entered into a $640
million loan agreement with several banks to refinance its
obligations under the existing syndicated loan. Techgen’s
obligations under the new facility, which is non-recourse
on the sponsors, will be guaranteed by a Mexican security
trust covering Techgen’ shares, assets and accounts as well
as Techgen’s affiliates rights under certain contracts. For
further information on this transaction please see note 30
to our consolidated financial statements included in this
annual report.
ANNUAL DIVIDEND PROPOSAL
On February 19, 2019, the Company’s board of
directors proposed that an annual dividend of $0.12 per
share ($1.20 per ADS), or approximately $235.5 million
in the aggregate, be approved at the Company’s annual
general shareholders’ meeting, which is scheduled to be
held on May 6, 2019. If the annual dividend is approved,
it will be paid on May 14, 2019. Ternium’s dividend
payments have been growing over the years, starting
from $0.50 per ADS in 2006, the year of the initial
public offering and listing.
63. Annual Report 2018
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31 2018,
2017 and for the years ended
December 31, 2018, 2017 and
2016
29 Avenue de la Port Neuve,
3rd Floor
L-2227 Luxembourg.
R.C.S Luxembourg B-98-668
TERNIUM S.A.
INDEX TO THE CONSOLIDATED
FINANCIAL STATEMENTS
66
70
71
72
73
76
77
Report of Independent Registered Public
Accounting Firm
Consolidated Income Statements for the years
ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive
Income for the years ended December 31, 2018,
2017 and 2016
Consolidated Statements of Financial Position
as of December 31, 2018 and 2017
Consolidated Statements of Changes in Equity
for the years ended December 31, 2018, 2017
and 2016
Consolidated Statements of Cash Flows for the
years ended December 31, 2018, 2017 and 2016
Index to the Notes to the Consolidated
Financial Statements
CONSOLIDATED INCOME STATEMENTS
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2018 and 2017 and for the years
ended December 31, 2018, 2017 and 2016
All amounts in thousands U.S. dollars
YEAR ENDED DECEMBER 31,
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
Equity in earnings (losses) of non-consolidated companies
Profit before income tax expense
Income tax expense
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interest
Profit for the year
NOTES
2018
5
6
7
9
10
10
10
14
11
11,454,807
(8,483,328)
2,971,479
(876,764)
13,656
2,108,371
(131,172)
21,236
(69,640)
102,772
2,031,567
(369,435)
1,662,132
1,506,647
155,485
1,662,132
2017
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
2016
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
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 $ per
share)
0.77
0.45
0.30
The accompanying notes are an integral part of these restated consolidated financial statements.
70. Ternium
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2018 and 2017 and for the years
ended December 31, 2018, 2017 and 2016
All amounts in thousands U.S. dollars
YEAR ENDED DECEMBER 31,
Profit for the year
Items that may be reclassified subsequently to profit or loss:
Currency translation adjustment
Currency translation adjustment from participation
in non-consolidated companies
Changes in the fair value of financial instruments at fair value through
other comprehensive income
Income tax related to financial instruments at fair value
Changes in the fair value of derivatives classified as cash flow hedges
Income tax relating to cash flow hedges
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
Other comprehensive loss for the year, net of tax
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive income for the year
The accompanying notes are an integral part of these restated consolidated financial statements.
2018
1,662,132
(376,220)
(73,761)
(1,036)
122
(132)
(73)
(897)
499
(38,263)
9,259
(3,780)
(484,282)
1,177,850
1,176,964
886
1,177,850
2017
1,022,927
(95,462)
(8,931)
—
—
735
(107)
(96)
191
(15,068)
4,916
3,954
(109,868)
913,059
815,434
97,625
913,059
2016
706,929
(141,665)
53,858
—
—
641
(192)
(1,542)
1,054
(14,735)
2,571
(15,817)
(115,827)
591,102
534,827
56,275
591,102
71. Annual Report 2018
CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2018 and 2017 and for the years
ended December 31, 2018, 2017 and 2016
All amounts thousands U.S. dollars
BALANCE AS OF DECEMBER 31,
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment, net
Intangible assets, net
Investments in non-consolidated companies
Other investments
Derivative financial instruments
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
Total Equity and Liabilities
The accompanying notes are an integral part of these restated consolidated financial statements.
72. Ternium
NOTES
2018
2017
12
13
14
18
22
20
15
16
15
22
17
16
18
18
19
20
21
23
24
21
22
23
24
5,817,609
1,012,524
495,241
7,195
818
134,224
649,447
4,766
309,750
770
2,689,829
1,128,470
44,529
250,541
643,950
474,431
414,541
935
65,798
8,121,824
4,423,889
2,149
4,426,038
12,547,862
6,393,255
1,091,321
7,484,576
5,349,753
1,092,579
478,348
3,380
—
121,092
677,299
4,832
362,173
2,304
2,550,930
1,006,598
132,736
337,779
768,517
513,357
373,046
2,259
69,005
7,727,283
4,392,520
2,763
4,395,283
12,122,566
5,010,424
842,347
5,852,771
1,637,101
3,236,756
1,716,337
3,442,521
150,276
351,216
904,171
12,981
8,030
399,856
1,826,530
5,063,286
52,940
357,001
897,732
6,001
8,030
1,505,570
2,827,274
6,269,795
12,547,862
12,122,566
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CONSOLIDATED STATEMENTS
OF CASH FLOWS
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2018 and 2017 and for the years
ended December 31, 2018, 2017 and 2016
NOTES
2018
2017
2016
1,662,132
1,022,927
706,929
12 & 13
27 (b)
14
27 (b)
19
27 (b)
12 & 13
14
18
3
3
14
589,299
(154,366)
(102,772)
(13,014)
(7,659)
(228,577)
(5,778)
1,739,265
(520,250)
(24,480)
86,857
861
—
—
—
—
474,299
(273,443)
(68,115)
19,484
2,783
(864,970)
70,894
383,859
(409,402)
(23,904)
14,986
1,124
65
(1,890,989)
278,162
—
(457,012)
(2,029,958)
406,890
182,332
(14,624)
12,699
1,678
(162,373)
(33,936)
1,099,595
(435,460)
(92,496)
86,340
1,212
183
—
—
(114,449)
(554,670)
(176,677)
(50,829)
—
910,577
(215,938)
(20,940)
(7,565)
1,188,731
(2,266,560)
(1,322,272)
(40,019)
337,779
(47,219)
(40,019)
250,541
(196,308)
(30,573)
(4,157)
3,239,121
(1,205,827)
(1,191,770)
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
—
77,035
—
All amounts in thousands U.S. dollars
YEAR ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Profit for the year
Adjustments for:
Depreciation and amortization
Income tax accruals less payments
Equity in earnings of non-consolidated companies
Interest accruals less payments
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 in other investments
Proceeds from the sale of property, plant and equipment
Dividends received from non-consolidated companies
Acquisition of business
Purchase consideration
Cash acquired
Investment in non-consolidated companies
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
Proceeds from borrowings
Repayments of borrowings
Net cash provided by (used in) financing activities
(Decrease) Increase in cash and cash equivalents
MOVEMENT IN CASH AND CASH EQUIVALENTS
At January 1,
Effect of exchange rate changes and inflation adjustment
4 (cc)
(Decrease) Increase in cash and cash equivalents
Cash and cash equivalents at December 31, (2)
Non-cash transactions:
Acquisition of PP&E under lease contract agreements
(1) The working capital is impacted by non-cash movement of $(216.6) million as of December 31, 2018 ($(70.0) million and $(73.8)
million as of December 31, 2017 and 2016, respectively) due to the variations in the exchange rates used by subsidiaries with
functional currencies different from the $.
(2) It includes restricted cash of $2,216, $50 and $83 as of December 31, 2018, 2017 and 2016,
respectively. In addition, the Company had other investments with a maturity of more than three months
for $44,521, $135,864 and $150,851 as of December 31, 2018, 2017 and 2016,
respectively.
The accompanying notes are an integral part of these consolidated financial statements.
76. Ternium
INDEX TO THE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
TERNIUM S.A.
Consolidated Financial Statements as of
December 31, 2018 and 2017 and for the years
ended December 31, 2018, 2017 and 2016
78
78
81
84
100
104
105
105
106
106
107
108
109
110
114
115
116
116
117
118
120
123
125
126
128
133
134
136
138
145
1. General information
2. Basis of presentation
3. Acquisition of business
4. Accounting policies
5. Segment information
6. Cost of sales
7. Selling, general and administrative expenses
8. Labor costs (included in cost of sales and selling, general and administrative expenses)
9. Other operating income (expenses), net
10. Other financial income (expenses), net
11. Income tax expense
12. Property, plant and equipment, net
13. Intangible assets, net
14. Investments in non-consolidated companies
15. Receivables, net - non-current and current
16. Trade receivables, net – non-current and current
17. Inventories, net
18. Cash, cash equivalents and other investments
19. Allowances and provisions – non-current and current
20. Deferred income tax
21. Other liabilities – non-current and current
22. Derivative financial instruments
23. Finances leases
24. Borrowings
25. Contingencies, commitments and restrictions on the distribution of profits
26. Related party transactions
27. Other required disclosures
28. Recently issued accounting pronouncements
29. Financial risk management
30. Subsequent events - Techgen refinancing
77. Annual Report 2018
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 $1.00 per share. As of December 31,
2018, there were 2,004,743,442 shares issued. All issued
shares are fully paid.
Ternium’s American Depositary Shares ("ADSs") trade
on the New York Stock Exchange under the symbol TX.
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 $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.
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
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, 2018 and 2017, this
special tax reserve amounted to $6.7 billion and $6.9
billion, respectively. The Company expects that, as a
result of its corporate reorganization, its current overall
tax burden will not increase, as all or substantially all of
its dividend income will come from high income tax
jurisdictions. In addition, the Company expects that
dividend distributions for the foreseeable future will be
imputed to the special reserve and therefore should be
exempt from Luxembourg withholding tax under
current Luxembourg law.
2. BASIS OF PRESENTATION
A. BASIS OF PRESENTATION
These consolidated financial statements have been
prepared in accordance with IFRS (International Financial
Reporting Standards) issued and effective or issued and
early adopted as at the time of preparing these statements
(February 2019), as issued by the International
Accounting Standards Board and in conformity with
International Financial Reporting Standards as adopted
by the European Union (EU). These consolidated financial
statements are presented in thousands of United States
dollars ($), except otherwise indicated.
These Consolidated financial statements fairly present
the consolidated equity and consolidated financial
situation of Ternium as of December 31, 2018, and
the consolidated results of its operations, the Changes
78. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
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
prepared under the historical cost convention, as modified
by the revaluation of available-for-sale financial assets,
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.
These consolidated financial statements have been
approved for issue by the Board of Directors on
February 19, 2019.
Detailed below are the companies whose financial
statements have been consolidated and accounted for
interest in these consolidated financial statements.
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Ternium S.A.
Ternium Investments S.à.r.l.
Ternium Solutions A.G. (1)
Ternium Participaçoes S.A. (1)
Ternium Investments Switzerland AG (1)
Ternium Internacional España S.L.U. (1)
Ternium USA Inc. (1)
Ternium Argentina S.A. (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)
Transamerica E. & I. Trading Corp. (6)
Técnica Industrial S.A. de C.V. (6)
Galvacer Chile SA (6)
Imsamex Ecuador, S.A. (6)
Ternium Gas México S.A. de C.V. (7)
Consorcio Minero Benito Juarez Peña Colorada S.A.de C.V. (8)
Luxembourg
Luxembourg
Switzerland
Brazil
Switzerland
Spain
USA
Argentina
Holding
Holding
Services
Holding
Holding
Marketing of steel products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Argentina
Manufacturing of pipe products
Uruguay
Mexico
Mexico
Mexico
Mexico
USA
Mexico
Chile
Ecuador
Mexico
Mexico
Holding
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Exploration, exploitation and
pelletizing of iron ore
Scrap services company
Scrap services company
Services
Distributing company
Distributing company
Energy services company
Exploration, exploitation and
pelletizing of iron ore
Peña Colorada Servicios S.A. de C.V. (8)
Mexico
Services
Exiros B.V. (8)
Netherlands
Procurement and trading services
Servicios Integrales Nova de Monterrey S.A. de C.V. (9)
Ternium Internacional Nicaragua S.A.
Ternium Internacional Honduras S.A. de C.V.
Ternium Internacional El Salvador S.A. de C.V.
Mexico
Nicaragua
Honduras
El Salvador
Medical and Social Services
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
2018
2017
2016
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%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
44.39%
44.39%
50.00%
66.14%
99.38%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
44.39%
44.39%
50.00%
66.14%
99.38%
88.78%
88.78%
88.78%
88.78%
88.78%
88.78%
44.39%
44.39%
50.00%
66.14%
99.38%
99.18%
99.18%
99.18%
99.92%
99.92%
99.92%
79. Annual Report 2018
COMPANY
COUNTRY OF
ORGANIZATION
MAIN ACTIVITY
PERCENTAGE OF OWNERSHIP
AT DECEMBER 31,
Ternium Internacional Costa Rica S.A.
Costa Rica
Manufacturing and selling of steel
products
Ternium Internacional Guatemala S.A. (10)
Guatemala
Selling of steel products
Ternium Colombia S.A.S. (formerly Ferrasa S.A.S.) (10)
Colombia
Ternium del Cauca S.A.S. (formerly Perfilamos del Cauca S.A.S.) (10)
Colombia
Ternium Siderúrgica de Caldas S.A.S. (formerly Siderúrgica de Caldas
S.A.S.) (10)
Colombia
Tenigal S. de R.L. de C.V. (11)
Ternium Internacional S.A. (12)
Ternium Treasury Services S.A. (12)
Ternium Internationaal B.V. (13)
Ternium International Inc. (13)
Ternium Procurement S.A. (14)
Technology & Engineering Services S.A. (14)
Ternium International USA Corporation (15)
Ternium Ingeniería y Servicios de México S.A. de C.V. (16)
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Holding and marketing of steel
products
Mexico
Uruguay
Uruguay
Financial Services
Netherlands
Marketing of steel products
Panama
Uruguay
Uruguay
USA
Mexico
Marketing of steel products
Procurement services
Engineering and other services
Marketing of steel products
Engineering and other services
Soluciones Integrales de Gestión S.A. (17)
Argentina
Other services
Ternium Staal B.V. (18)
Ternium Brasil Ltda. (18)
Ternium del Atlántico S.A.S (19)
Ternium Solutions S.A. (formerly Tericer Trading S.A.) (20)
Acedor, S.A. de C.V. (21)
Ecosteel Gestao de Efuentes Industriais S.A. (22)
Galvatubing Inc (23)
Galvamet America Corp (24)
Netherlands
Brazil
Colombia
Uruguay
Mexico
Brazil
USA
USA
Holding and marketing of steel
products
Manufacturing and selling of steel
products
Manufacturing and selling of steel
products
Other services
Holding
Other services
Manufacturing and selling of pipe
Products
Manufacturing and selling of
insulated panel products
Ternium Internacional de Colombia S.A.S. (25)
Colombia
Marketing of steel products
Ecosteel Gestao de Águas Industriais S.A. (26)
Galvacer America Inc (27)
Brazil
USA
Other services
Distributing company
2018
2017
2016
99.98%
99.98%
99.98%
99.98%
100.00%
99.98%
100.00%
99.98%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
51.00%
51.00%
51.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.89%
100.00%
—
—
—
—
88.78%
—
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.89%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.89%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
—
—
—
—
—
—
—
100.00%
—
88.78%
100.00%
88.78%
88.78%
88.78%
100.00%
100.00%
—
88.78%
100.00%
—
88.78%
(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
de Gestión 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) Indirectly through Ternium Mexico S.A. de C.V. and Tenigal S. de R.L. de C.V. Total voting rights held:
100.00%.
(8) Total voting rights held: 50.00%.
(9) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 74.50%.
(10) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held: 100.00%.
(11) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held: 51.00%.
(12) Indirectly through Ternium Investments Switzerland AG. Total voting rights held: 100.00%.
(13) 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. (14) 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.
80. Ternium
(15) 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.
(16) Indirectly through Technology & Engineering Services S.A. and Ternium México S.A. de C.V. Total voting
rights held 100.00%.
(17) 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.
(18) Indirectly through Ternium Investments S.à r.l. Total voting rights held: 100.00%.
(19) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held: 100.00%.
(20) Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%.
(21) Merged with Ternium México as of December 31, 2018.
(22) This company was dissolved as of May 4, 2018.
(23) This company was dissolved as of July 19, 2018.
(24) On August 3, 2018, the shareholders gave its consent to proceed with the liquidation and dissolution
of this subsidiary.
(25) This company was dissolved as of October 3, 2018.
(26) This company was dissolved as of December 3, 2018.
(27)This company was dissolved as of December 11, 2017.
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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,
2018, that revenues amounted to $1,959 million (2017:
$2,301 million), net profit from continuing operations
to $254 million (2017: $337 million), total assets to
$3,184 million (2017: $2,820 million), total liabilities
to $606 million (2017: $874 million) and shareholder's
equity to $2,578 million (2017: $1,945 million). All the
information related to this investment could be found
in the Buenos Aires Stock Exchange webpage.
3. ACQUISITION OF BUSINESS
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 was
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 $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..
B. FAIR VALUE OF NET ASSETS ACQUIRED
The application of the purchase method required
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 were based mainly on discounted
cash flows and other valuation techniques.
The allocation of the fair values determined for the assets
and liabilities arising from the acquisition was as follows:
Property, plant and equipment and Intangible assets
Inventories
Cash and cash equivalents
Trade receivables
Other receivables
Deferred tax assets
Provisions
Trade payables
Other assets and liabilities, net
Net assets acquired
$
1,573,946
400,047
278,162
63,710
705,058
13,686
(799,938)
(219,604)
(124,078)
1,890,989
According to this purchase price allocation, no goodwill
was recorded.
Ternium entered into several derivative contracts to
partially hedge the currency volatility risk associated with
the Euro-denominated transaction price. As of the date of
the closing of the acquisition, the fair value of those
contracts amounted to $75.9 million. Such value was
deducted from the purchase consideration.
81. Annual Report 2018
The purchase price allocation disclosed above was
prepared with the assistance of a third-party expert. As of
December 31, 2018, no adjustment has been recorded to
the assets and liabilities assumed in comparison to the
amounts registered as of December 31, 2017.
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 $24.5 million was recorded at the acquisition
date in connection with this matter ($19.7 million as of
December 31, 2018).
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, 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 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 2016,
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
82. Ternium
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
$57.7 million was recorded as of the acquisition date in
connection with this matter ($46.9 million as of
December 31, 2018).
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.
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 unconstitutional.
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
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Supplementary Law No. 160. On March 6, 2018, the State
of Rio de Janeiro published its list of ICMS incentives,
including, among others, the ICMS benefit granted to
Ternium Brasil. ICMS Convention 190/2017 also required
that all relevant documents concerning such incentives be
filed with CONFAZ, and the State of Rio de Janeiro
satisfied such requirements as well. On July 27, 2018, the
Governor of Rio de Janeiro issued Executive Order
(Decreto) No. 46,78, pursuant to which the State of Rio
de Janeiro reconfirmed, in accordance with ICMS
Convention 190/2017, the ICMS tax benefits listed in its
official gazette publication made pursuant to the
Convention, including, among others, Ternium Brasil’s
ICMS tax benefits.
In October 2018, the State of Rio de Janeiro and the
Federation of Industries of the State of Rio de Janeiro
(Federação das Indústrias do Estado do Rio de Janeiro ,
or FIRJAN) filed petitions arguing that the action of
unconstitutionality against the March 31, 2005 Rio de
Janeiro State Law No. 4,529 could not be judged by the
Federal Supreme Court since, following the revalidation of
such law under Supplementary Law No.160/17 and the
ICMS Convention 190/2017, such action of
unconstitutionality had lost its purpose. Following the
filing of such petitions, the Reporting Justice Minister in
charge of the case summoned the plaintiff in such action
of unconstitutionality, the Federal Attorney General’s
Office (Advocacia-Geral da União, or AGU) and the Chief
of the Public Minister (Procuradoria-Geral da República,
or PGR) to submit statements expressing their respective
views on the arguments presented by the State of Rio de
Janeiro and the FRIJAN with respect to the effect of
Supplementary Law No.160/17 and the ICMS Convention
190/2017 on the pending action of unconstitutionality. In
their respective statements, the plaintiff argued that
Supplementary Law No.160/17 and the ICMS Convention
190/2017 do not affect the unconstitutionality of ICMS
benefits granted through State Law No. 4,529, while the
AGU stated that, in light of the additional legal support
provided by Supplementary Law No.160/17 and the ICMS
Convention 190/2017, a finding of unconstitutionality of
State Law No. 4,529 would not be warranted. In turn, the
PGR stated that a decision on the case should be
postponed until the Federal Supreme Court completes its
analysis of Supplementary Law No.160/17 and ICMS
Convention 190/2017. As of the date of these consolidated
financial statements, the Federal Supreme Court has not
yet ruled on the above-referred petitions filed by the State
of Rio de Janeiro and FIRJAN.
The tax benefits accumulated under Ternium Brasil’s
ICMS incentive as of the acquisition date amounted to
approximately $1,089 million. In accordance with the
guidance in IFRS 3, the Company recorded as of the
acquisition date a provision of $651.8 million (including
estimated penalties and interest) in connection with this
matter, together with an asset of $325.9 million arising
from its right to recover part of the contingency amount
from thyssenkrupp Veerhaven B.V. ($529.4 million and
$264.7 million, respectively, as of December 31, 2018).
The calculation of this contingency has been determined
taking into consideration the probability of negative
outcome for the Company, if any, on an estimated total
risk of $1,630 million (including estimated penalties and
interests).
D. ACQUISITION FINANCING
The acquisition was mainly financed through an
unsecured 5-year syndicated facility in the principal
amount of $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. During 2018, the
Company made prepayments of principal for $375
million. As of December 31, 2018, the outstanding value
of this syndicated facility was $1.125 million and both the
borrower and the guarantor were in compliance with all
of its covenants.
83. Annual Report 2018
4. ACCOUNTING POLICIES
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.
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
84. Ternium
acquisition-date fair value of any previous equity interest
in the acquiree over the fair value of the Company's share
of the identifiable net assets acquired is recorded as
goodwill. If this is less than the fair value of the net assets
of the subsidiary acquired in the case of a bargain
purchase, the difference is recognized directly in the
income statement.
The measurement period is the earlier of the date that the
acquirer receives the information that it is looking for or
cannot obtain the information and one year after the
acquisition date. Where the accounting for a business
combination is not complete by the end of the reporting
period in which the business combination occurred
provisional amounts are reported.
The Company treats transactions with non-controlling
interests as transactions with equity owners of the
Company. For purchases from non-controlling interests,
the difference between any consideration paid and the
relevant share acquired of the carrying value of net
assets of the subsidiary is recorded in equity. Gains or
losses on disposals to non-controlling interests are also
recorded in equity.
When the Company ceases to have control or significant
influence, any retained interest in the entity is
remeasured to its fair value, with the change in carrying
amount recognized in profit or loss. The fair value is the
initial carrying amount for the purposes of
subsequently accounting for the retained interest as an
associate, joint venture or financial asset. In addition,
any amounts previously recognized in other
comprehensive income in respect of that entity are
accounted for as if the group had directly disposed of
the related assets or liabilities. This may mean that
amounts previously recognized in other comprehensive
income are reclassified to profit or loss.
Inter-company transactions, balances and unrealized
gains on transactions between group companies are
eliminated. Unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of
the transferred asset. Accounting policies of
subsidiaries have been changed where necessary to
ensure consistency with the policies adopted by the
group. However, the fact that the functional currency of
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
some subsidiaries is their 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 $ 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.
85. Annual Report 2018
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 fair
value through other comprehensive income are included in
other gains/(losses).
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.
From January 1, 2018, the Company classifies its financial
instruments in the following measurement categories:
- Amortized cost: instruments that are held for
collection or repayment of contractual cash flows where
86. Ternium
those cash flows represent solely payments of principal
and interest are measured at amortized cost. Interest
income and expenses from these financial instruments
are included in finance income or expense using the
effective interest rate method. Any gain or loss arising
on derecognition is recognized directly in profit or loss
and presented in finance income or expense, together
with foreign exchange gains and losses. Impairment
losses are presented as separate line items in the
statement of profit or loss.
- Fair value through other comprehensive income
(FVOCI): financial assets that are held for collection of
contractual cash flows and for selling the financial
assets, where the assets’ cash flows represent solely
payments of principal and interest, are measured at
FVOCI. Movements in the carrying amount are taken
through OCI, except for the recognition of impairment
gains or losses, interest revenue and foreign exchange
gains and losses which are recognized in profit or loss.
When the financial asset is derecognized, the cumulative
gain or loss previously recognized in OCI is reclassified
from equity to profit or loss and recognized in other
gains/(losses). Interest income from these financial
assets is included in finance income using the effective
interest rate method. Foreign exchange gains and losses
are presented in other gains/(losses) and impairment
expenses are presented as separate line item in the
statement of profit or loss.
- Fair value through profit or loss (FVPL): financial
instruments that do not meet the criteria for amortized
cost or FVOCI are measured at FVPL. A gain or loss on a
debt investment that is subsequently measured at FVPL is
recognized in profit or loss and presented net within other
gains/(losses) in the period in which it arises.
The classification depends on the Company’s business
model for managing the financial instruments and the
contractual terms of the cash flows.
For financial instruments measured at fair value, gains
and losses will either be recorded in profit or loss or OCI.
For investments in equity instruments that are not held for
trading, this will depend on whether the group has made
an irrevocable election at the time of initial recognition to
account for the equity investment at FVOCI.
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
At initial recognition, the Company measures a
financial instrument at its fair value plus, in the case of
a financial instrument not at FVPL, transaction costs
that are directly attributable to the acquisition of the
financial instrument. Transaction costs of financial
instruments carried at FVPL are expensed in profit
or loss. Subsequent measurement of debt instruments
depends on the Company’s business model for
managing the asset and the cash flow characteristics
of the asset.
Financial assets were 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, were 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.
Until December 31, 2017, Ternium non derivative
financial instruments were classified into the following
categories:
•
Financial instruments at fair value through profit or
loss: comprising mainly cash and cash equivalents and
investments in debt securities held for trading;
• Held-to-maturity instruments: measured at amortized
Impairment of financial assets
From January 1, 2018, the Company assesses on a
forward-looking basis the expected credit losses
associated with its debt instruments carried at amortized
cost and FVOCI. The impairment methodology applied
depends on whether there has been a significant increase
in credit risk.
cost using the effective interest method less
impairment losses. As of December 31, 2017, there
were $6.1 million classified under this category;
•
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 were
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 were recognized directly in
profit or loss. Where the investment was disposed of
or was determined to be impaired, the cumulative
gain or loss previously recognized in OCI was
included in the income statement for the period. As
of December 31, 2017, there were no AFS amounts
classified under this category;
• Other financial liabilities: measured at amortized cost
using the effective interest method.
The classification depended on the nature and purpose of
the financial assets and was determined at the time of
initial recognition.
Financial assets and liabilities were recognized and
derecognized on the settlement date.
For trade receivables, the Company applies the simplified
approach permitted by IFRS 9, which requires expected
lifetime losses to be recognized from initial recognition of
the receivables, see Note 4 (I) for further details.
Until December 31, 2017, the Company assessed at the
end of each reporting period whether there was
objective evidence that a financial asset or group of
financial assets was impaired. A financial asset or a
group of financial assets was impaired and impairment
losses were incurred only if there was 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) had an impact on
the estimated future cash flows of the financial asset or
group of financial assets that could be reliably
estimated. The Company first assessed whether
objective evidence of impairment existed.
For loans and receivables category and for held-to-
maturity investments, the amount of the loss was
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
was reduced and the amount of the loss was recognized in
the consolidated income statement.
87. Annual Report 2018
If, in a subsequent period, the amount of the impairment
loss decreased and the decrease could be related
objectively to an event occurring after the impairment was
recognized, the reversal of the previously recognized
impairment loss was recognized in the consolidated
income statement.
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).
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.
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:
88. Ternium
Land
Buildings and improvements
Production equipment
Vehicles, furniture and fixtures and other equipment
No Depreciation
10-50 years
5-40 years
5-20 years
Property, plant and equipment used in mining activities
are depreciated over its useful life or over the remaining
life of the mine if shorter and there is no alternative use
possible.
The assets' useful lives are reviewed, and adjusted if
appropriate, at each year end. The re-estimation of assets
useful lives by the Company did not materially affect
depreciation charges in 2018, 2017 and 2016.
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.
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, 2018, 2017 and 2016, is
approximately 8%, 7% and 7% 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;
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
• 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.
As of December 31, 2018 and 2017, the carrying amount
of goodwill allocated to the Mexico CGUs was $662.3
million, of which $619.8 million corresponds to steel
operations and $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, 2018, 2017 and 2016 totaled $8.9 million, $9.8 million
and $9.2 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. These
customer relationships were amortized using the straight-
line method over a useful life of approximately 10 years.
89. Annual Report 2018
As of December 31, 2017, these assets were 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. As of December 31,
2017, these assets were 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.
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, 2018 the discount rate used to test
goodwill allocated to the Steel and Mining Mexico
CGUs for impairment was 11.68% (as of December 31,
2017, 11.49%).
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.
Considering the economic situation in Argentina, the
increase in the inflation rates, the devaluation of the
Argentine peso and a weaker industrial environment,
the Company decided to assess the recoverability of
its investments in Argentina, resulting in no
impairment charges to be recognized. As of
December 31, 2018, the discount rate used to test the
investment in Argentine subsidiaries for impairment
was 13.5%.
90. Ternium
During the years 2018, 2017 and 2016, 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.
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.
Income from financial instruments at fair value through
profit or loss is recognized in Other financial income
(expenses), net in the consolidated income statement. The
fair value of quoted investments is based on current bid
prices. If the market for a financial investment is not
active or the securities are not listed, the Company
estimates the fair value by using standard valuation
techniques. Dividends from investments in equity
instruments are recognized in the income statement when
the Company's right to receive payments is established.
Certain fixed income financial instruments purchased by
the Company have been categorized as at fair value
through other comprehensive income. 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.
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
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)).
I. TRADE RECEIVABLES AND THE OTHER RECEIVABLES
Trade and other receivables are recognized initially at fair
value, generally the original invoice amount. Since
January 1, 2018, the Company applies the IFRS 9
simplified approach to measuring expected credit losses
which uses a lifetime expected loss allowance for all trade
receivables. To measure the expected credit losses, trade
receivables are grouped based on shared credit risk
characteristics and the days past due. The Company keeps
an allowance for trade receivables, recorded in an asset
account to offset the trade receivables in an amount
estimated sufficient to cover the losses resulting from the
impossibility for the debtors to cancel the amounts owed.
This allowance for trade receivables is recorded with a
charge to selling expenses.
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
91. Annual Report 2018
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, 2018 and 2017 totals $2.1
million and $2.8 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
92. Ternium
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
is probable that the temporary difference will not reverse
in the foreseeable future.
Deferred tax assets and liabilities are re-estimated if
tax rates change. These amounts are charged or
credited to the consolidated income statement or to
the item Other comprehensive income for the year in
the consolidated statement of comprehensive income,
depending on the account to which the original
amount was charged or credited.
O. EMPLOYEE LIABILITIES
1. Post-employment obligations
The Company has defined benefit and defined
contribution plans. A defined benefit plan is a pension
plan that defines an amount of pension benefit that
an employee will receive on retirement, usually
dependent on one or more factors such as age, years
of service and compensation.
The liability recognized in the statement of financial
position in respect of defined benefit pension plans is the
present value of the defined benefit obligation at the end
of the reporting period less the fair value of plan assets.
The defined benefit obligation is calculated annually (at
year end) by independent actuaries using the projected
unit credit method. The present value of the defined
benefit obligation is determined by discounting the
estimated future cash outflows using interest rates of
high-quality corporate bonds that are denominated in the
currency in which the benefits will be paid, and that have
terms to maturity approximating to the terms of the
related pension obligation. In countries where there is no
deep market in such bonds, the market rates on
government bonds are used.
Actuarial gains and losses arising from experience
adjustments and changes in actuarial assumptions are
charged or credited to equity in other comprehensive
income in the period in which they arise. Past-service costs
are recognized immediately in income.
For defined benefit plans, net interest income/expense is
calculated based on the surplus or deficit derived by the
difference between the defined benefit obligations less
plan assets.
For defined contribution plans, the Company pays
contributions to publicly or privately administered
pension insurance plans on a mandatory, contractual or
voluntary basis. The Company has no further payment
obligations once the contributions have been paid. The
contributions are recognized as employee benefit expense
when they are due. Prepaid contributions are recognized
as an asset to the extent that a cash refund or a reduction
in the future payments is available.
Mexico
Ternium Mexico has defined benefit and defined
contribution plans.
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
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
Argentina
Ternium Argentina implemented an unfunded defined
benefit employee retirement plan for certain senior
officers. The plan is designed to provide certain benefits to
those officers (additional to those contemplated under
applicable Argentine labor laws) in case of termination of
the employment relationship due to certain specified
events, including retirement. This unfunded plan provides
defined benefits based on years of service and final
average salary.
2. Termination benefits
Termination benefits are payable when employment is
terminated before the normal retirement date, or
whenever an employee accepts voluntary redundancy in
exchange for these benefits. The Company recognizes
termination benefits when it is demonstrably committed
to either: (i) terminating the employment of current
employees according to a detailed formal plan without
possibility of withdrawal or (ii) providing termination
benefits as a result of an offer made to encourage
voluntary redundancy.
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
93. Annual Report 2018
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, 2018 and 2017, the outstanding
liability corresponding to the Program amounts to $43.0
million and $30.8 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, 2018 and 2017, is $42.2 million and $30.3
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.
Q. REVENUE RECOGNITION AND OTHER INCOME
Revenue is recognized at a point of time from sales to
direct customers upon the satisfaction of performance
obligations, which occurs when control of the goods
transfers to the customer and the customer obtains the
benefits from the goods, the potential cash flows and
the transaction price can be measured reliably, and it is
probable that the Company will collect the
consideration in connection with the exchange of the
goods. The control over the goods is obtained by the
customer depending on when the goods are made
available to the shipper or the customer takes possession
of the goods, depending on the delivery terms. The
Company considers that it has completed its
performance obligations when the goods are delivered
to its customers or to a shipper who will transport the
goods to its customers. The revenue recognized by the
Company is measured at the transaction price of the
consideration received or receivable to which the
Company is entitled to, reduced by estimated returns
and other customer credits, such as discounts and
volume rebates, based on the expected value to be
realized and after eliminating sales within the group.
Interest income is recognized on an effective yield basis.
S. BORROWING COSTS
General and specific borrowing costs that are directly
attributable to the acquisition, construction or production
of a qualifying asset are capitalized during the period of
time that is required to complete and prepare the asset for
its intended use or sale. Qualifying assets are assets that
necessarily take a substantial period of time to get ready
for their intended use or sale.
Investment income earned on the temporary investment of
specific borrowings pending their expenditure on
qualifying assets is deducted from the borrowing costs
eligible for capitalization.
Other borrowing costs are expensed in the period in
which they are incurred.
94. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The amount of borrowing costs that Ternium capitalized
during a period will not exceed the amount of borrowing
costs incurred during that period. At December 31, 2018,
2017 and 2016, the capitalized borrowing costs were of
$7.4 million, $0.5 million and $1.7 million, respectively.
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
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, 2018 and
95. Annual Report 2018
2017, the effective portion of designated cash flow hedges
(net of taxes) amounted to $0.5 million and $0.7 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, 2018 was 11.68% and no impairment
charge resulted from the impairment test performed. See
Notes 4(F) and 4(E)(4).
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.
96. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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
$643.9 million and $768.5 million as of December 31,
2018 and 2017, respectively.
4. Allowance for obsolescence of supplies and spare parts and
slow-moving inventory
Management assesses the recoverability of its inventories
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, 2018 and 2017, the Company
recorded no allowance for net realizable value and
$55.5 million and $36.2 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.
When assessing whether an impairment indicator may
exist, the Company evaluates both internal and external
sources of information, such as the following:
• 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;
97. Annual Report 2018
• 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 the economic situation in Argentina, the
Company tested the recoverability of its investment in
Ternium Argentina as of December 31, 2018, resulting
in no impairment charges to be recognized.
Considering that no impairment indicators were
identified in the rest of subsidiaries as of December 31,
2018 and 2017, the Company additionally 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 applies the
IFRS 9 simplified approach to measuring expected credit
losses, which uses a lifetime expected loss allowance for all
trade receivables. To measure the expected credit losses,
trade receivables are grouped based on shared credit risk
characteristics and the days past due.
Allowances for doubtful accounts are adjusted
periodically in accordance with the results obtained in
the provision matrix. To calibrate the provision
matrix, Management adjusts its historical credit loss
experience with current and forward-looking
information that might affect the customers’
historical default rates As of December 31, 2018 and
2017, allowance for doubtful accounts totals $14.3
million and $16.5 million, respectively.
7. Mining reserve estimates
Reserves are estimates of the amount of product that can
be economically and legally extracted from the
Company’s mining concessions. In order to estimate
reserves, a range of geological, technical and economic
factors is required to be considered. Estimating the
quantity and/or grade of reserves requires complex and
difficult geological judgments to interpret the data.
Because the economic assumptions used to estimate
reserves change from period to period, and because
additional geological data is generated during the course
of operations, estimates of reserves may change from
period to period.
Changes in reported reserves may affect the Company’s
financial results and financial position, including the
following:
• Asset carrying amounts may be affected due to changes
in estimated future cash flows.
• Depreciation and amortization charges may change
where such charges are determined by the units of
production basis, or where the useful economic lives
of assets change.
• Stripping costs recognized in Mining assets or
charged to results may change due to changes in
stripping ratios or the units of production basis of
depreciation.
• Asset retirement obligations may change where changes
in estimated reserves affect expectations about the
timing or cost of these activities.
8. Post-employment obligation estimates
The Company estimates at each year-end the provision
necessary to meet its post-employment obligations in
accordance with the advice from independent actuaries.
The calculation of post-employment and other
employee obligations requires the application of various
assumptions. The main assumptions for post-
employment and other employee obligations include
discount rates, compensation growth rates, pension
growth rates and life expectancy. Changes in the
assumptions could give rise to adjustments in the results
and liabilities recorded and might have an impact on the
post-employment and other employee obligations
recognized in the future.
98. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
CC. APPLICATION OF IAS 29 IN FINANCIAL REPORTING OF ARGENTINE
SUBSIDIARIES AND ASSOCIATES
IAS 29 "Financial Reporting in Hyperinflationary
Economies" requires that the financial statements of
entities whose functional currency is that of a
hyperinflationary economy to be adjusted for the effects
of changes in a suitable general price index and to be
expressed in terms of the current unit of measurement at
the closing date of the reporting period. Accordingly, the
inflation produced from the date of acquisition or from
the revaluation date, as applicable, must be computed in
the non-monetary items.
In order to conclude on whether an economy is
categorized as hyperinflationary under the terms of IAS
29, the Standard details a series of factors to be
considered, including the existence of a cumulative
inflation rate in three years that approximates or exceeds
100%.
Considering that the downward trend in inflation in
Argentina observed in the previous year has reversed and
observing a significant increase in inflation during 2018,
which exceeded the 100% three-year cumulative inflation
rate, and that the rest of the indicators do not contradict
the conclusion that Argentina should be considered a
hyperinflationary economy for accounting purposes, the
Company considered that there was sufficient evidence to
conclude that Argentina is a hyperinflationary economy
under the terms of IAS 29 as from July 1, 2018, and,
accordingly, applied IAS 29 as from that date in the
financial reporting of its subsidiaries and associates with
the Argentine peso as functional currency.
economy should be stated in terms of the measuring unit
current on the date of the financial statements. All
statement of financial position amounts that are not
stated in terms of the measuring unit current on the date
of the financial statements must be restated by applying a
general price index. All income statement components
must be stated in terms of the measuring unit current on
the date of the financial statements, applying the change
in the general price index that occurred since the date
when revenues and expenses were originally recognized in
the financial statements.
The inflation adjustment on the initial balances was
calculated by means of conversion factor derived from the
Argentine price indexes published by the National
Institute of Statistics (INDEC). The average index for the
year period ended December 31, 2018, was 1.48.
The main procedures for the above-mentioned adjustment
are as follows:
•Monetary assets and liabilities which are carried at
amounts current at the balance sheet date are not restated
because they are already expressed in terms of the
monetary unit current at the balance sheet date.
•Non-monetary assets and liabilities which are not carried
at amounts current at the balance sheet date, and
components of shareholders' equity are adjusted by
applying the relevant conversion factors.
•All items in the income statement are restated by
applying the relevant conversion factors.
•The effect of inflation on the Company’s net monetary
position is included in the income statement, in Other
financial income (expenses), net, under the caption
Inflation adjustment results.
•The ongoing application of the re-translation of
comparative amounts to closing exchanges rates under
IAS 21 and the hyperinflation adjustments required by IAS
29 will lead to a difference in addition to the difference
arising on the adoption of hyperinflation accounting.
According to this principle, the financial statements of an
entity that reports in the currency of a hyperinflationary
The comparative figures in these consolidated financial
statements presented in a stable currency are not adjusted
for subsequent changes in the price level or exchange
99. Annual Report 2018
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 CEO.
rates. This resulted in an initial difference, arising on the
adoption of hyperinflation accounting, between the
closing equity of the previous year and the opening equity
of the current year. The Company recognized this initial
difference directly in equity.
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 four operating segments:
Mexico, Southern Region, Brazil and Other markets.
These four segments have been aggregated considering the
economic characteristics and financial effects of each
business activity in which the entity engages; the related
economic environment in which it operates; the type or
class of customer for the products; the nature of the
products; and the production processes. The Mexico
operating segment comprises the Company’s businesses in
Mexico. The Southern region operating segment manages
the businesses in Argentina, Paraguay, Chile, Bolivia and
Uruguay. The Brazil operating segment includes the
business generated in Brazil. The Other markets operating
segment includes businesses mainly in 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
100. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
YEAR ENDED DECEMBER 31, 2018
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
Effect of inflation adjustment (Note (4(CC))
Operating income - IFRS
Financial income (expense), net
Equity in earnings (losses) of non-consolidated companies
Income before income tax expense - IFRS
11,453,420
(8,524,890)
2,928,530
(860,881)
12,950
2,080,599
282,000
(239,893)
42,107
(15,883)
706
26,930
(280,613)
281,455
842
—
—
842
11,454,807
(8,483,328)
2,971,479
(876,764)
13,656
2,108,371
11,723,883
1,768,115
333,892
91,418
(332,505)
11,725,270
(6,213)
1,853,319
541,492
(286,440)
2,108,371
(179,576)
102,772
2,031,567
Depreciation and amortization - IFRS
(537,885)
(51,415)
—
(589,299)
101. Annual Report 2018
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 earnings (losses) of non-consolidated companies
Income before income tax expense - IFRS
9,700,260
(7,465,751)
2,234,509
(811,487)
(17,011)
1,406,011
271,477
(212,860)
58,617
(12,760)
771
46,628
(271,441)
275,586
4,145
9,700,296
(7,403,025)
2,297,271
—
—
(824,247)
(16,240)
4,145
1,456,784
9,700,260
1,065,605
287,152
66,694
(287,116)
(1,291)
9,700,296
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)
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 earnings (losses) of non-consolidated companies
Income before income tax expense - IFRS
7,221,751
(5,391,038)
1,830,713
(677,007)
(9,543)
1,144,163
204,894
(192,038)
12,856
(10,935)
(382)
1,539
(202,670)
198,686
(3,984)
7,223,975
(5,384,390)
1,839,585
—
—
(687,942)
(9,925)
(3,984)
1,141,718
7,221,751
936,164
208,230
3,871
(206,006)
269
7,223,975
940,303
201,415
1,141,718
(37,885)
14,624
1,118,457
Depreciation and amortization - IFRS
(361,685)
(45,205)
—
(406,890)
102. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
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.
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, 2018
Net sales
Non-current assets (1)
YEAR ENDED DECEMBER 31, 2017
Net sales
Non-current assets (1)
YEAR ENDED DECEMBER 31, 2016
Net sales
Non-current assets (1)
(1) Includes Property, plant and equipment and Intangible assets.
(2) Includes the assets related to the business acquisition disclosed in Note 3.
Mexico
Southern
region
Brazil and
Other markets
(2)
Total
6,345,137
4,093,288
1,941,168
1,071,705
3,168,502
1,665,140
11,454,807
6,830,133
5,629,267
4,042,914
2,316,444
643,411
1,754,585
1,756,007
9,700,296
6,442,332
4,491,761
4,108,539
1,867,622
634,048
864,592
235,947
7,223,975
4,978,534
103. Annual Report 2018
REVENUES BY PRODUCT
YEAR ENDED DECEMBER 31,
Semi-finished (1)
Slabs
Hot rolled (2)
Cold rolled
Coated (3)
Roll-formed and tubular (4)
Other products (5)
Total Sales
2018
103,099
1,818,235
3,961,144
1,264,940
3,506,040
437,514
363,835
11,454,807
2017
123,752
715,513
3,366,697
1,321,663
3,391,328
472,253
309,090
9,700,296
2016
19,878
—
2,763,403
1,110,671
2,900,009
413,991
16,023
7,223,975
(1) Semi-finished includes slabs, billets and round bars.
(2) Hot rolled includes hot rolled flat products, merchant bars, reinforcing bars, stirrups and rods.
(3) Coated includes tin plate and galvanized products.
(4) Roll-formed and tubular includes tubes, beams, insulated panels, roofing and
cladding, roof tiles, steel decks and pre-engineered metal building systems.
(5) Other products include mainly pig iron.
6. COST OF SALES
YEAR ENDED DECEMBER 31,
INVENTORIES AT THE BEGINNING OF THE YEAR
Acquisition of business (Note 3)
Effect of initial inflation adjustment (Note 4 (CC))
Translation differences
PLUS: CHARGES FOR THE YEAR
2018
2,550,930
—
191,708
(413,436)
Raw materials and consumables used and other movements
6,961,704
Services and fees
Labor cost
Depreciation of property, plant and equipment
Amortization of intangible assets
Maintenance expenses
Office expenses
Insurance
Charge of obsolescence allowance
Recovery from sales of scrap and co-products
Others
LESS: INVENTORIES AT THE END OF THE YEAR
Cost of Sales
158,551
699,447
456,522
25,374
519,625
8,586
8,769
17,322
(27,744)
15,799
(2,689,829)
8,483,328
2017
1,647,869
400,047
—
(97,148)
6,337,283
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
2016
1,579,120
—
—
(82,515)
4,060,783
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
104. Ternium
7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
Services and fees (1)
Labor cost
Depreciation of property, plant and equipment
Amortization of intangible assets
Maintenance and expenses
Taxes
Office expenses
Freight and transportation
Increase of allowance for doubtful accounts
Others
Selling, general and administrative expenses
2018
76,066
241,552
13,561
93,842
5,096
95,072
35,663
300,676
1,629
13,607
876,764
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2017
86,990
229,529
12,345
78,264
5,038
98,786
35,922
259,898
685
16,790
824,247
2016
65,965
193,118
13,589
38,427
3,092
90,166
36,223
234,801
288
12,273
687,942
(1) For the year ended December 31, 2018, it includes fees accrued for professional services rendered by PwC
to Ternium S.A. and its subsidiaries that amounted to $4,704, including $3,937 for audit services, $61 for
audit-related services, $281 for tax services and $425 for all other services.
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 $3,501, including $2,863 for audit services, $91
for audit-related services, $229 for tax services and $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 $3,385, including $2,869 for audit services, $99 for audit-
related services, $251 for tax services and $166 for all other services.
8. LABOR COSTS (INCLUDED IN 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
2018
884,536
26,601
29,862
940,999
2017
849,354
25,783
28,213
903,350
2016
698,825
27,048
27,758
753,631
As of December 31, 2018, 2017 and 2016, the quantity of
employees was 20,660, 21,335 and 16,725, respectively.
105. Annual Report 2018
9. OTHER OPERATING INCOME (EXPENSES), NET
YEAR ENDED DECEMBER 31,
Results of sundry assets
Provision for legal claims and other matters (Note 19 and 25 (II))
Other operating income
Other operating income
Provision for legal claims and other matters (Note 19 and 25 (II))
Other operating expense
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
Inflation adjustment results (Note 4 (CC))
Change in fair value of financial assets
Derivative contract results
Others
Other financial income (expenses), net
2018
1,895
7,625
4,136
13,656
—
—
—
13,656
2018
(131,172)
(131,172)
21,236
21,236
(177,645)
191,427
—
(99,259)
15,837
(69,640)
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)
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
106. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
11. INCOME TAX EXPENSE
Income tax expense for each of the years
presented is as follows:
YEAR ENDED DECEMBER 31,
Current tax
Effect of changes in tax law (1)
Deferred tax (Note 20)
Deferred tax
Effect of changes in tax law (1)
Withholding tax on dividend distributions (2)
Recovery of income tax (3)
Income tax expense
2018
(588,773)
(28,596)
232,485
—
—
15,449
(369,435)
2017
(450,384)
—
106,047
7,455
—
—
(336,882)
2016
(394,045)
—
(16,821)
2,028
(2,690)
—
(411,528)
(1) For 2018, it includes mainly the option exercised by the Company of the asset revaluation for tax purposes
in Argentina, for which an amount of $28.6 million was included. The option could be formally presented until
February 28, 2019.
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.
It also includes the effects of the U.S. tax reform, which among other provisions, reduced the U.S. 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 $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.
(2) It includes the 10% withholding tax on dividend distributions made by Argentine companies to foreign
beneficiaries since 2013.
(3) It includes the recovery of tax credits in Ternium Brasil Ltda.
Income tax expense for the years ended December 31,
2018, 2017 and 2016 differed from the amount computed
by applying the statutory income tax rate in force in each
country in which the company operates to pre-tax income
as a result of the following:
YEAR ENDED DECEMBER 31,
Income before income tax
Income tax expense at statutory tax rate
Non taxable income
Non deductible expenses
Effect of currency translation on tax base (1)
Recovery of income tax
Withholding tax on dividend distributions
Effect of changes in tax law
Income tax expense
2018
2,031,567
(604,493)
102,870
(16,201)
161,536
15,449
—
(28,596)
(369,435)
2017
1,359,809
(387,666)
16,232
(24,070)
51,167
—
—
7,455
(336,882)
2016
1,118,457
(324,592)
606
(5,838)
(81,042)
—
(2,690)
2,028
(411,528)
(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.
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.
107. Annual Report 2018
12. PROPERTY, PLANT AND EQUIPMENT, NET
YEAR ENDED DECEMBER 31, 2018
Values at the beginning of the year
Cost
Accumulated depreciation
Land
Buildings and
improvements
Production
equipment
Vehicles,
furniture
and
fixtures
Work in
progress
Spare
parts
Total
562,042
2,096,959
4,927,478
151,883
456,021
113,188
8,307,571
—
(563,523)
(2,286,828)
(104,303)
—
(3,164)
(2,957,818)
Net book value at January 1, 2018
562,042
1,533,436
2,640,650
47,580
456,021
110,024
5,349,753
Opening net book value
562,042
1,533,436
2,640,650
Effect of initial inflation adjustment (Note 4 (CC))
Translation differences
Additions
Capitalized borrowing costs
Disposals / Consumptions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
Cost
Accumulated depreciation
19,646
(2,217)
1,888
—
—
5,815
—
434,683
282,577
(140,879)
(124,066)
4,083
—
(93)
3,647
—
(2,186)
80,197
187,284
47,580
5,698
(5,102)
3,569
—
(1,236)
11,726
456,021
25,568
(29,005)
446,002
7,368
(3,563)
110,024
5,349,753
19,858
788,030
(10,836)
(312,105)
23,880
483,069
—
7,368
(24,470)
(31,548)
(284,441)
2,543
3,124
(129,229)
(315,952)
(14,847)
—
(10,055)
(470,083)
587,174
1,782,198
2,671,954
47,388
617,950
110,944
5,817,608
587,174
3,303,174
6,803,932
264,782
617,950
124,220
11,701,232
—
(1,520,976)
(4,131,978)
(217,394)
—
(13,275)
(5,883,623)
Net book value at December 31, 2018
587,174
1,782,198
2,671,954
47,388
617,950
110,945
5,817,609
YEAR ENDED DECEMBER 31, 2017
Land
Buildings and
improvements
Production
equipment
Work in
progress
Spare
parts
Total
Vehicles,
furniture
and
fixtures
Values at the beginning of the year
Cost
Accumulated depreciation
528,991
1,590,063
4,238,201
165,590
337,814
82,652
6,943,311
—
(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
Accumulated depreciation
528,991
1,051,515
2,091,327
(677)
32,187
2,778
—
(1,139)
(98)
—
(45,808)
505,339
9,385
—
(14,776)
101,661
(42,248)
602,654
84,035
—
(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
16,274
—
1,257,038
456,354
563
(14,063)
(31,679)
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
—
(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
108. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
13. INTANGIBLE ASSETS, NET
YEAR ENDED DECEMBER 31, 2018
Values at the beginning of the year
Cost
Accumulated depreciation
Net book value at January 1, 2018
Opening net book value
Effect of initial inflation adjustment (Note 4 (CC))
Translation differences
Additions
Disposals/Consumptions
Transfer
Depreciation charge
Closing net book value
Values at the end of the year
Cost
Accumulated depreciation
Net book value at December 31, 2018
YEAR ENDED DECEMBER 31, 2017
Values at the beginning of the year
Cost
Accumulated depreciation
Net book value at January 1, 2017
Opening net book value
Translation differences
Acquisition of business (Note 4 (CC))
Additions
Disposals / Consumptions
Transfers
Depreciation charge
Closing net book value
Values at the end of the year
Cost
Accumulated depreciation
Net book value at December 31, 2017
Information
system
projects
Mining
assets
Exploration
and
evaluation
costs
Customer
relationships
and other
contractual
rights
249,379
216,196
(188,470)
(121,859)
60,909
94,337
10,333
—
10,333
604,931
(340,238)
264,693
94,337
10,333
264,693
60,909
4,966
(6,674)
27,594
(87)
480
(15,427)
71,761
—
—
10,243
—
(10,237)
(18,055)
76,288
Trademarks
Goodwill
Total
73,935
(73,935)
—
—
—
—
—
—
—
—
—
662,307
1,817,081
—
(724,502)
662,307
1,092,579
662,307
1,092,579
—
—
—
—
—
—
4,966
(6,674)
40,478
(87)
478
(119,216)
662,307
1,012,524
—
—
—
—
—
(85,734)
178,959
320,600
216,203
(248,839)
(139,915)
71,761
76,288
604,931
(425,972)
178,959
73,935
(73,935)
662,307
1,901,185
—
(888,661)
—
662,307
1,012,524
Information
system
projects
Mining
assets
Exploration
and
evaluation
costs
Customer
relationships
and other
contractual
rights
Trademarks
Goodwill
Total
215,662
202,931
(164,203)
(106,424)
51,459
96,507
5,689
—
5,689
96,507
5,689
51,459
(1,730)
2,731
35,867
(32)
(512)
—
—
8,076
—
5,185
(26,874)
(15,431)
60,909
94,337
249,379
216,196
(188,470)
(121,859)
60,909
94,337
298,475
(272,923)
25,552
25,552
—
314,177
—
—
(4,845)
(70,191)
264,693
73,665
(72,622)
662,307
1,458,729
—
(616,172)
1,043
662,307
842,557
1,043
662,307
842,557
—
—
—
—
—
(1,043)
—
—
—
—
—
—
(1,730)
316,908
53,772
(32)
(5,357)
(113,539)
—
662,307
1,092,579
604,931
(340,238)
264,693
73,935
(73,935)
662,307
1,817,081
—
(724,502)
—
662,307
1,092,579
—
—
2,641
—
10,235
—
23,209
23,209
—
23,209
—
—
9,829
—
(5,185)
—
10,333
10,333
—
10,333
The Company has not registered any impairment charges in connection with Goodwill.
109. Annual Report 2018
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
Dividends from non-consolidated companies
At the end of the year
2018
478,348
102,772
(77,042)
(8,837)
495,241
2017
418,379
68,115
(4,786)
(3,360)
478,348
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
Techgen S.A. de C.V.
Brazil
Mexico
Other non-consolidated companies (1)
Manufacturing and
selling of steel products
2018
34.39%
2017
34.39%
Provision of electric power
48.00%
48.00%
2018
480,084
10,291
4,866
2017
466,299
6,862
5,187
495,241
478,348
(1) It includes the investment held in Finma S.A.I.F., Techinst S.A., Recrotek S.R.L. de
C.V. and Gas Industrial de Monterrey S.A. de C.V.
110. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
A. USINAS SIDERURGICAS DE MINAS GERAIS S.A. – USIMINAS
Ternium, through its subsidiaries Ternium Investments S.à
r.l. (“Ternium Investments”), Ternium Argentina S.A.
(“Ternium Argentina”) and Prosid Investments S.A.
(“Prosid”), owns a total of 242.6 million ordinary shares
and 8.5 million preferred shares, representing 20.5% of
the issued and outstanding share capital of Usinas
Siderurgicas de Minas Gerais S.A. - USIMINAS
(“Usiminas”), the largest flat steel producer in Brazil for
the energy, automotive and other industries.
Ternium Investments, Ternium Argentina and Prosid,
together with Tenaris S.A.’s Brazilian subsidiary Confab
Industrial S.A. (“TenarisConfab”), are part of Usiminas’
control group, comprising the so-called T/T Group. The
other members of Usiminas’ control group are
Previdência Usiminas (Usiminas’ employee pension fund)
and the so-called NSSMC Group, comprising Nippon
Steel & Sumitomo Metal Corporation Group
(“NSSMC”), Nippon Usiminas Co., Ltd., Metal One
Corporation and Mitsubishi Corporation do Brasil, S.A.
On April 10, 2018, the T/T Group, the NSSMC Group
and Previdência Usiminas entered into a new
shareholders’ agreement (the “New SHA”) to govern their
relations as shareholders and members of the control
group of Usiminas. The New SHA sets forth Usiminas’
corporate governance rules, including, among others, an
alternation mechanism for the nomination of each of the
chief executive officer and the chairman of the board of
directors, as well as a mechanism for the nomination of
other members of Usiminas’ executive board. The right to
nominate Usimina’s chief executive officer and chairman
will alternate between Ternium and NSSMC at every 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. The executive board will be
composed of six members, including the chief executive
officer and five vice-presidents, with Ternium and
NSSMC nominating three members each.
Usiminas’ control group holds, in the aggregate, 483.6
million ordinary shares bound to the New SHA,
representing approximately 68.6% of Usiminas’
voting capital, with the T/T Group holding
approximately 47.1% of the total shares held by the
control group (39.5% corresponding to Ternium and
the other 7.5% corresponding to TenarisConfab); the
NSSMC Group holding approximately 45.9% of the
total shares held by the control group; and
Previdência Usiminas holding the remaining 7% of
the total shares held by the control group.
The New SHA provides for an exit mechanism consisting
of a buy-and-sell procedure, exercisable at any time
during the term of the New SHA after November 16,
2022. Such exit mechanism shall apply with respect to
shares held by the NSSMC Group and the T/T Group,
and would allow either Ternium or NSSMC to purchase
all or a majority of the Usiminas shares held by the other
shareholder group.
The 51.4 million ordinary shares of Usiminas acquired by
Ternium on October 30, 2014 and 6.7 million ordinary
shares acquired by NSSMC prior to execution of the
January 16, 2012 shareholders’ agreement remain free
from any transfer restrictions under the New SHA and
will not be subject to the exit mechanism described above.
As of December 31, 2018, the closing price of the
Usiminas ordinary and preferred shares, as quoted on the
BM&F Bovespa Stock Exchange, was BRL 11.44
(approximately $2.95; December 31, 2017: BRL 10.83 -
$3.27) per ordinary share and BRL 9.22 (approximately
$2.38; December 31, 2017: BRL 9.10 - $2.75) per preferred
share, respectively. Accordingly, as of December 31, 2018,
Ternium’s ownership stake had a market value of
approximately $736.5 million and a carrying value of
$480.1 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 higher 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.
111. Annual Report 2018
2017
411,134
63,030
(4,570)
(3,295)
466,299
As of December 31, 2018 and 2017, the value of the
investment in Usiminas is comprised as follows:
VALUE OF INVESTMENT
AS OF DECEMBER 31,
At the beginning of the year
Share of results (1)
Other comprehensive income
Dividends
At the end of the year
(1) It includes the adjustment 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 14, 2019, Usiminas approved its annual
accounts as of and for the year ended December 31, 2018,
which state that revenues, net profit from continuing
operations and shareholders’ equity amounted to $3,766
million, $193 million and $3,685 million, respectively.
USIMINAS
2018
466,299
97,733
(75,195)
(8,753)
480,084
3,681,815
20.43%
752,048
71,013
268,255
(611,232)
480,084
112. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Summarized balance sheet (in million U.S. dollars)
USIMINAS
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
Shareholder's equity
Summarized income statement (in million U.S. dollars)
AS OF DECEMBER 31,
Net sales
Cost of sales
Gross Profit
Selling, general and administrative expenses
Other operating income (loss), net
Operating income
Financial expenses, net
Equity in earnings of associated companies
Profit (Loss) before income tax
Income tax benefit
Net profit (loss) before non-controlling interest
Non-controlling interest in other subsidiaries
Net profit (loss) for the year
2018
4,697
1,711
151
286
6,845
544
1,389
740
121
2,794
369
3,682
USIMINAS
2018
3,766
(3,154)
612
(213)
(153)
246
15
70
331
(110)
221
(28)
193
2017
5,662
1,494
164
535
7,855
637
1,707
622
299
3,265
426
4,164
2017
3,368
(2,854)
514
(206)
(78)
230
(145)
49
134
(34)
100
(26)
74
113. Annual Report 2018
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 $151.6
million as of December 31, 2018, and 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)
Other receivables (Note 3 (C) (iii))
Tax credits
Others
Receivables, net - Non-current
AS OF DECEMBER 31,
Value added tax
Tax credits
Employee advances and loans
Advances to suppliers
Advances to suppliers with related parties (Note 26)
Expenses paid in advance
Government tax refunds on exports
Receivables with related parties (Note 26)
Others
Receivables, net - Current
2018
151,388
2,425
74,741
7,493
264,683
146,711
2,006
649,447
2018
156,627
72,957
4,701
15,563
2,854
15,862
17,311
9,536
14,339
309,750
2017
126,859
4,171
27,734
3,252
311,394
202,853
1,036
677,299
2017
149,021
77,887
6,429
44,239
3
13,244
32,522
29,190
9,638
362,173
114. Ternium
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
AS OF DECEMBER 31, 2018
TRADE RECEIVABLES, NET
Guaranteed
Not guaranteed
Trade receivables
Allowance for doubtful accounts (Note 19)
Trade receivables, net
AS OF DECEMBER 31, 2017
TRADE RECEIVABLES, NET
Guaranteed
Not guaranteed
Trade receivables
Allowance for doubtful accounts (Note 19)
Trade receivables, net
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2018
4,766
4,766
1,096,072
46,744
(14,346)
1,128,470
Total
564,015
583,567
1,147,582
(14,346)
1,133,236
Total
412,036
615,937
1,027,973
(16,543)
1,011,430
2017
4,832
4,832
926,310
96,831
(16,543)
1,006,598
Fully
performing
Past due
502,822
532,214
1,035,036
—
1,035,036
61,193
51,353
112,546
(14,346)
98,200
Fully
performing
Past due
366,902
543,791
910,693
—
910,693
45,134
72,146
117,280
(16,543)
100,737
115. Annual Report 2018
17. INVENTORIES, NET
AS OF DECEMBER 31,
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
AND CURRENT
AS OF DECEMBER 31,
Investments in companies under cost method
Investments in debt instruments
Other investments, net - Non-current
AS OF DECEMBER 31,
(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
2018
850,182
1,187,071
464,154
243,876
(55,454)
2,689,829
2018
252
6,943
7,195
2018
44,529
44,529
87,863
2,216
140,456
20,006
250,541
2017
616,870
1,251,779
423,372
295,106
(36,197)
2,550,930
2017
252
3,128
3,380
2017
132,736
132,736
100,739
50
229,239
7,751
337,779
116. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
19. ALLOWANCES AND PROVISIONS – NON-CURRENT AND CURRENT
PROVISIONS AND ALLOWANCES - NON-CURRENT
YEAR ENDED DECEMBER 31, 2018
Values at the beginning of the year
Effect of initial inflation adjustment (Note 4 (CC))
Translation differences
Additions
Reversals
Uses
At December 31, 2018
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
LIABILITIES
Legal claims
and other
matters
768,517
1,315
(113,571)
6,438
(14,097)
(4,652)
643,950
6,950
(39,757)
799,938
3,112
(329)
(1,397)
768,517
PROVISIONS AND ALLOWANCES - CURRENT
DEDUCTED FROM ASSETS
Allowance for
doubtful
accounts
Obsolescence
allowance
YEAR ENDED DECEMBER 31, 2018
Values at the beginning of the year
Effect of initial inflation adjustment (Note 4 (CC))
Translation differences
Additions
Reversals
Uses
At December 31, 2018
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
16,543
202
(2,076)
2,732
(1,103)
(1,952)
14,346
6,019
(504)
10,822
1,365
(680)
(479)
16,543
36,197
6,530
(2,384)
22,822
(5,500)
(2,211)
55,454
33,433
(860)
12,385
9,959
(13,987)
(4,733)
36,197
Asset
retirement
obligation
27,829
—
82
5,383
(8,740)
—
24,554
18,301
853
—
8,675
—
—
27,829
LIABILITIES
Asset
retirement
obligation
2,659
—
(10)
7,659
—
(457)
9,851
4,262
246
—
443
—
(2,292)
2,659
117. Annual Report 2018
20. DEFERRED INCOME TAX
Deferred income taxes are calculated in full on temporary
differences under the liability method using the tax rate of the
applicable country.
Changes in deferred income tax are as follows:
AT DECEMBER 31,
At the beginning of the year
Acquisition of business (Note 3)
Translation differences
Effect of changes in tax law (Note 11)
Effect of initial inflation adjustment
Credits (charges) directly to other comprehensive income
Deferred tax (charge) credit (Note 11)
At the end of the year
2018
(392,265)
—
(7,201)
—
(182,773)
9,547
232,485
(340,207)
2017
(523,209)
13,686
(1,052)
7,455
—
4,808
106,047
(392,265)
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, 2018
DEFERRED TAX LIABILITIES
At the beginning of the year
Translation differences
Effect of initial inflation adjustment
Income statement credit (charge)
At the end of the year
AT DECEMBER 31, 2018
DEFERRED TAX ASSETS
At the beginning of the year
Translation differences
Credits (Charges) directly to other comprehensive income
Effect of changes in tax law
Income statement credit (charge)
At the end of the year
(1) As of December 31, 2018, the recognized deferred tax assets on tax losses amount to $33,383
and there are net unrecognized deferred tax assets of $0.7 billion and unrecognized tax losses
amounting to $1.2 billion. These two last effects are connected to the acquisition of Ternium
Brasil (see Note 3).
PP&E
Inventories
Intangible
assets
Other
Total
(539,839)
9,726
(161,044)
168,702
(522,455)
(57,006)
527
(20,967)
36,130
(41,316)
(18,692)
497
(762)
3,031
(15,926)
(2,056)
(688)
—
1,656
(1,088)
(617,593)
10,062
(182,773)
209,519
(580,785)
Provisions
Trade
receivables
Tax losses (1)
Other
Total
61,101
(6,036)
—
—
17,882
72,947
8,200
(1,089)
—
—
4,154
11,265
43,355
—
—
—
(9,973)
33,382
112,672
(10,137)
9,547
—
10,903
122,984
225,328
(17,263)
9,547
—
22,966
240,578
118. Ternium
AT DECEMBER 31, 2017
DEFERRED TAX LIABILITIES
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
AT DECEMBER 31, 2017
DEFERRED TAX ASSETS
At the beginning of the year
Translation differences
Acquisition of business (Note 3)
Charges directly to other comprehensive income
Effect of changes in tax law
Income statement credit (charge)
At the end of the year
(2) As of December 31, 2017, the recognized deferred tax assets on tax losses amount to $43,355
and there are net unrecognized deferred tax assets of $0.9 billion and unrecognized tax losses
amounting to $1.5 billion. These two last effects are connected to the acquisition of Ternium
Brasil (see Note 3).
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
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
PP&E
Inventories
Intangible
assets
Other
Total
(625,963)
(48,637)
(28,050)
(3,050)
6,907
—
17,293
61,924
(539,839)
(215)
—
185
(8,339)
(57,006)
67
—
352
8,939
(18,692)
(29)
(108)
11
1,120
(2,056)
(705,700)
6,730
(108)
17,841
63,644
(617,593)
Provisions
Trade
receivables
Tax losses (2)
Other
Total
53,188
(501)
—
—
(2,692)
11,106
61,101
7,488
(273)
—
—
(238)
1,223
8,200
56,297
—
—
—
—
(12,942)
43,355
65,518
(7,008)
13,686
4,916
(7,456)
43,016
112,672
182,491
(7,782)
13,686
4,916
(10,386)
42,403
225,328
2018
153,681
86,897
(538,854)
(41,931)
(340,207)
2017
155,350
69,978
(558,890)
(58,703)
(392,265)
119. Annual Report 2018
21. OTHER LIABILITIES – NON-CURRENT AND CURRENT
AS OF DECEMBER 31,
(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:
AS OF DECEMBER 31,
POST-EMPLOYMENT BENEFITS
Present value of unfunded obligations
Liability in the statement of financial position
The amounts recognized in the consolidated income
statement are as follows:
AS OF DECEMBER 31,
POST-EMPLOYMENT BENEFITS
Current service cost
Interest cost
Total included in labor costs
2018
312,293
38,891
24,554
38,803
414,541
2018
312,293
312,293
2018
7,284
22,578
29,862
2017
275,950
31,312
27,829
37,955
373,046
2017
275,950
275,950
2017
6,555
21,658
28,213
120. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Changes in the liability recognized in the consolidated
statement of financial position are as follows:
AS OF DECEMBER 31,
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
2018
275,950
(3,177)
29,862
38,263
22,575
2,272
13,416
(283)
(28,322)
312,293
The principal actuarial assumptions used were as follows:
YEAR ENDED DECEMBER 31,
MEXICO
Discount rate
Compensation growth rate
ARGENTINA
Discount rate
Compensation growth rate
2018
8.75%
6.00% - 7.00%
6.00% - 7.00%
2.00% - 3.00%
2017
252,624
840
28,213
15,068
(4,950)
14,110
5,908
10,527
(31,322)
275,950
2017
7.75%
5.00%
6.00% - 7.00%
2.00% - 3.00%
121. Annual Report 2018
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
The estimated future payments for the next five years will
be between 23.8 and 29.9 million per year.
AS OF DECEMBER 31,
(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
Change in
assumption
Increase in
assumption
Decrease in
assumption
1.00%
1.00%
1.00%
1
-8.4%
1.4%
-1.5%
3.8%
10.1%
-4.2%
1.8%
-3.8%
2018
2017
177,407
79,060
36,203
1,501
3,341
9,851
43,853
351,216
183,249
79,085
30,927
1,816
6,215
2,659
53,050
357,001
122. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
22. DERIVATIVE FINANCIAL INSTRUMENTS
NET FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
The net fair values of derivative financial instruments at
December 31, 2018 and 2017 were as follows:
AS OF DECEMBER 31,
CONTRACTS WITH POSITIVE FAIR VALUE
Interest rate swap contracts
Foreign exchange contracts
CONTRACTS WITH NEGATIVE FAIR VALUE
Foreign exchange contracts
2018
818
770
1,588
(12,981)
(12,981)
2017
302
2,002
2,304
(6,001)
(6,001)
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, 2018, most of the Company’s long-term
borrowings were at variable rates.
During 2012 and 2013, Tenigal entered into several
forward starting interest rate swap agreements in order
to fix the interest rate to be paid over an aggregate
amount of $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, 2018, the after-tax cash flow
hedge reserve related to these agreements amounted to
$0.5 million.
Charges in fair value of derivate instruments designated
as cash flow hedges for each if the years presented are
included below:
At December 31, 2016
(Decrease)/Increase
Reclassification to income statement
At December 31, 2017
(Decrease)/Increase
Reclassification to income statement
At December 31, 2018
CASH FLOW HEDGES
Gross amount
Income tax
75
363
372
810
(14)
(117)
679
(22)
3
(110)
(129)
(108)
35
(202)
Total
53
366
262
681
(122)
(82)
477
The gross amount of the pre-tax reserve recorded in other
comprehensive income at December 31, 2018 (amounting
to a gain of $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 2019 and up to the end
of the life of the borrowing in 2022.
123. Annual Report 2018
B. Foreign exchange contracts
From time to time, Ternium’s subsidiaries enter into
derivative agreements to manage their exposure to
currencies other than the $, in accordance with the
Company’s policy for derivative instruments.
During 2018, 2017 and 2016, 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,
2018, there were no outstanding agreements.
Furthermore, during 2018, 2017 and 2016, Ternium
Colombia 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, 2018, the notional amount on these
agreements amounted to $30.0 million.
BRL. As of December 31, 2018, the outstanding notional
amounts in $ are offset on these agreements.
During 2018 and 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,
2018, the notional amount on this agreement amounted
to $228.2 million.
During 2018, Ternium Investments S.à r.l., entered into
a several non-deliverable forward and forward
agreements in order to manage the exchange rate
exposure generated by Ternium Argentina’s debt in
ARS, future payables in EUR related to the investment
plan of Ternium Colombia and future receivables in
EUR related to sales of Ternium Internacional España.
As of December 31, 2018, the notional amount on these
agreements amounted to $28.7 million.
As part of the acquisition of the subsidiary in Brazil, the
Company maintained several non-deliverable forward
agreements which were entered into to manage the
exchange rate exposure generated by financial debt in
The net fair values of the exchange rate derivative
contracts as of December 31, 2018 and December 31,
2017 were as follows:
CURRENCIES
CONTRACT
NOTIONAL AMOUNT
2018
FAIR VALUE AT DECEMBER 31,
EUR/$
BRL/$
EUR/$
BRL/$
COP/$
ARS/$
ARS/$
ND Forward - Buy EUR
ND Forward - Buy BRL
ND Forward - Sell EUR
ND Forward - Sell BRL
ND Forward - Sell COP
ND Forward - Buy ARS
ND Forward - Sell ARS
ARS: Argentine pesos; COP: Colombian pesos; EUR: Euros; BRL: Brazilian realis.
212.9 million EUR
(12,954)
34.5 million BRL
1.9 million EUR
32.0 million BRL
194.9 billion COP
6.4 billion ARS
187.0 million ARS
(493)
(27)
1,154
109
—
—
(12,211)
2017
224
1,514
—
247
17
(6,534)
533
(3,999)
124. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
23. FINANCE LEASES
As of December 31, 2018, the Company is a party 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 $8.0 million (2017: $8.0 million) and a
non-current finance lease liability of $65.8 million
(2017: $69.0 million). The total finance lease liability
to be paid on expiry of the lease contract amounts to
$73.8 million (2017: $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
2018
8,328
33,312
71,482
113,122
(39,294)
73,828
8,030
27,208
38,590
73,828
Property, plant and equipment include a net book value of
$25.3 million (2017: $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.
2017
8,328
33,312
79,810
121,450
(44,415)
77,035
8,030
27,208
41,797
77,035
125. Annual Report 2018
2017
1,724,454
(8,117)
1,716,337
1,510,820
(5,250)
1,505,570
3,221,907
2017
1,146,631
2,075,276
3,221,907
24. BORROWINGS
AS OF DECEMBER 31,
(I) NON-CURRENT
Bank borrowings
Less: debt issue costs
(II) CURRENT
Bank borrowings
Less: debt issue costs
Total Borrowings
2018
1,648,124
(11,023)
1,637,101
404,390
(4,534)
399,856
2,036,957
The maturity of borrowings is as follows:
EXPECTED MATURITY DATE
2019
2020
Fixed rate
Floating rate
Total
269,908
129,948
399,856
19,975
508,098
528,073
AT DECEMBER 31, (1)
2021 and
thereafter
—
1,109,028
1,109,028
2018
289,883
1,747,074
2,036,957
(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 U.S. 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
2018
3.65%
2017
4.76%
126. Ternium
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, 2018 and 2017, respectively.
Breakdown of borrowings by currency is as follows:
CURRENCIES
CONTRACT
$
$
ARS
ARS
COP
COP
GTQ
Total Borrowings
Floating
Fixed
Floating
Fixed
Floating
Fixed
Fixed
$: U.S. dollars; ARS: Argentine pesos; COP: Colombian pesos; GTQ: Guatemalan quetzales.
AT DECEMBER 31,
2018
1,747,074
262,873
—
—
—
17,009
10,001
2,036,957
2017
2,061,106
791,158
2,377
328,060
11,793
18,500
8,913
3,221,907
Ternium’s most significant borrowings as of
December 31, 2018, were those incurred under
Ternium México’s syndicated loan facilities, in order
to finance the construction of its hot rolling mill,
hot-dip galvanizing and painting lines in Pesquería,
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 million U.S. dollars
Date
Borrower
Type
Original principal
amount
Outstanding principal
amount as of
December 31, 2018
Maturity
November 2013
Ternium Mexico
Years 2012 and 2013
Tenigal
September 2017
Ternium Investments S. à.r.l
June 2018
Ternium Mexico
Syndicated loan
Syndicated loan
Syndicated loan
Syndicated loan (1)
800
200
1,500
1,000
— November 2018
100
July 2022
1,125
September 2022
400
June 2023
(1) From the original principal amount of $1,000 million, $400 million were disbursed as of December 31, 2018. The
remainder $600 million are available to be drawn until June 2019.
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). As of December 31, 2018, Ternium
was in compliance with all of its covenants.
127. Annual Report 2018
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.
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 Ternium Argentina
S.A., 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. On March 5, 2018, the
court of appeals ruled that CSN’s appeal did not meet
128. Ternium
the requirements for submission to the Superior Court
of Justice and rejected such appeal. On May 8, 2018,
CSN appealed against such ruling and on January 22,
2019, the court of appeals rejected it and ordered that
the case be submitted to the Superior Court of Justice.
The Superior Court of Justice will also review
admissibility of CSN’s appeal, and, if declared
admissible, will then render a decision on the merits.
The Superior Court of Justice is restricted to the
analysis of alleged violations to federal laws and cannot
assess matters of fact.
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 addition, on April 18, 2018, Ternium
filed a petition with the CVM’s reporting
Commissioner requesting that the applicable threshold
for the tender offer requirement be recalculated taking
into account the new ordinary shares issued by
Usiminas in connection with its 2016 BRL1 billion
capital increase and that, in light of the replenishment
of the threshold that would result from such
recalculation, the CVM’s staff 2015 determination be
set aside.In the event the appeal is not successful, under
applicable CVM rules Ternium may elect to sell to third
parties the 5.2 million shares allegedly acquired in
excess of the threshold, in which case no tender offer
would be required.
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 $57.8 million, including interest and
fines. Additionally, in September 2018, the Mexican tax
authority, as a result of a tax audit for the fiscal year
2011 to Ternium Mexico, as predecessor of APM,
objected mainly the deduction of the tax loss remaining
for the year 2008, for which the estimated income tax
adjustment would be of approximately $25.4 million,
including interest and fines.
Ternium Mexico requested an injunction from the
Mexican courts against the audit observations for the
year 2008 and the fiscal credit of the year 2011, 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.
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
D. Class action
The Company is aware that, following its November
27, 2018 announcement that its chairman Paolo
Rocca was included in an Argentine court
investigation known as the Notebooks Case, a
putative class action complaint was filed in the U.S.
District Court for the Eastern District of New York
purportedly on behalf of purchasers of Ternium
securities from May 1, 2014 through November 27,
2018. The individual defendants named in the
complaint are our chairman, our former CEO, our
current CEO and our CFO. That complaint alleges
that during the class period (May 2014-November
2018), the Company and the individual defendants
inflated the price of Ternium’s ADSs by failing to
disclose that sale proceeds received by Ternium when
Sidor was expropriated by Venezuela were received or
expedited as a result of alleged improper payments
made to Argentine officials. The complaint does not
specify the damages that plaintiff is seeking.
II. COMMITMENTS
The following are Ternium’s main off-balance sheet
commitments:
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 $764.0 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 also signed various contracts
for the provision of natural gas, including Tecpetrol,
129. Annual Report 2018
a related company of Ternium, assuming firm
commitments for a total of $33.7 million payable
until April 2019.
C. 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 $21.9 million, which is due to terminate
in 2032.
D. 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
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.
E. 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, 2018, 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 $750 thousand per MW
of the 111.2 MW originally contracted capacity,
130. Ternium
resulting over time in a total value of $83.4 million.
In addition, Iberdrola agreed to recognize to
Ternium México $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 7
months. 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.
F. Following the maturity of a previously existing
railroad freight services agreement during 2013, in April
2014, Ternium México and Ferrocarril Mexicano, S. A.
de C. V. (“Ferromex”) entered into a new railroad
freight services agreement pursuant to which Ferromex
will transport Ternium Mexico’s products through
railroads operated by Ferromex for a term of five years
through 2019. Subject to Ternium’s board approval,
both Ternium Mexico and Ferromex would be required
to make (within a period of 36 months) certain
investments to improve the loading and unloading of
gondolas. The total investment commitment of
Ternium México and Ferromex was already invested as
of December 31, 2018. Under the agreement, Ternium
Mexico has guaranteed to Ferromex its services for the
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.
G. Ternium México issued a guarantee letter
covering up to approximately $25.0 million of the
obligations of Gas Industrial de Monterrey, S.A. de
C.V. (“GIMSA”), under the natural gas trading
agreement between GIMSA and BP Energía México
(“BPEM”). The credit line granted by BPEM in
connection with this natural gas trading agreement
amounted to approximately $25.0 million. As of
December 31, 2018, the outstanding amount under
the natural gas trading agreement was $16.7 million,
which is below the amount included in the guarantee
letter issued by Ternium México.
H. On June, 2018, Ternium Mexico entered into a loan
agreement with a syndicate of banks for a $1,000
million syndicated loan facility for the purpose of
financing capital expenditures, the repayment or
prepayment of existing debt, and other general
corporate purposes. The loan has a one year availability
period in which Ternium Mexico can disburse in one or
several drawings. The Company entered the Facility on
June 12, 2018, and the final maturity date is on June 12,
2023, being payable in eight consecutive and equal semi-
annual installments commencing on December 13, 2019.
The main financial covenant that the Facility requires to
meet is the consolidated net senior leverage ratio to be
not greater than 3.5 to 1.00. As of December 31, 2018,
$400 million were disbursed under the facility and the
Company complied with the aforementioned financial
covenant.
I. Ternium Mexico issued a guarantee letter covering
up to approximately $60.8 million of the obligations
of Techgen, S.A. de C.V. (“Techgen”), under the
Clean Energy Certificates trading agreement between
Techgen and Enel Green Power (“ENEL”). The
amount equals the remnant balance if Techgen
decides to terminate the agreement prior to the
expiration date (and decreases as time of the
contract passes). The contract was signed in May 25,
2018 and terminates on June 30, 2041.
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, 2018, the
outstanding value of this commitment was
approximately $250 million. Ternium’s exposure
under the guarantee in connection with these
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
agreements amounts to $120 million, corresponding
to the 48% of the agreements’ outstanding value as
of December 31, 2018.
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 $800 million and the proceeds
were used by Techgen in the construction of the facility.
As of December 31, 2018, the outstanding amount
under the loan agreement was $600 million, as a result
the amount guaranteed by Ternium was approximately
$288 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, 2018, 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
131. Annual Report 2018
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. As of
December 31, 2018, the outstanding amount of this
commitment was $129.8 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. As of December
31, 2018, the outstanding amount of the mentioned
services was approximately $223.5 million 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
to satisfy the requirements up to January 2029. The
outstanding amount was approximately $343.3 million as
of December 31, 2018. 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 $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.
R. Ternium Brasil signed on May 2016 a contract with
Stahllog Solução Logísticas Ltda. for logistic services.
This agreement is due to terminate on May 2021 and
the outstanding amount was $26.8 million as of
December 31, 2018. The contract has minimum
required volumes.
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, 2018, this reserve reached the
above-mentioned threshold.
As of December 31, 2018, Ternium may pay dividends up
to $2.9 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, 2018
Loss for the year
Total shareholders' equity under Luxembourg GAAP
2018
2,004,743
200,474
1,414,122
59,600
2,887,918
(20,620)
6,546,237
132. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
26. RELATED PARTY TRANSACTIONS
As of December 31, 2018, 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.
The following transactions were carried out with
related parties:
I. TRANSACTIONS
YEAR ENDED DECEMBER 31,
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
2018
774,526
141,230
176
1,286
917,218
483,182
50,928
10,266
90,536
634,912
9,330
9,330
8,837
8,837
1,012
492
1,504
2017
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
2016
—
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
133. Annual Report 2018
2018
201,693
5,975
2,812
7,534
(37,384)
(23,495)
157,135
2017
223,847
29,033
—
3,255
(24,570)
(21,547)
210,018
II. YEAR-END BALANCES
AT DECEMBER 31,
A. ARISING FROM SALES/PURCHASES OF GOODS/SERVICES AND OTHER TRANSACTIONS
Receivables from non-consolidated parties
Receivables from other related parties
Advances from non-consolidated parties
Advances to suppliers with other related parties
Payables to non-consolidated parties
Payables to other related parties
III. OFFICERS AND DIRECTORS’ COMPENSATION
During the year ended December 31, 2018, the cash
compensation of Officers and Directors amounted to
$16,205 (2017: $23,031). In addition, Officers received
894,000 Units for a total amount of $2,851 (2017: $2,069)
in connection with the incentive retention program
mentioned in Note 4 (O)(3).
27. OTHER REQUIRED DISCLOSURES
A. STATEMENT OF COMPREHENSIVE INCOME
CASH FLOW HEDGES
Gross amount
Income tax
75
363
372
810
(14)
(117)
679
(22)
3
(110)
(129)
(108)
35
(202)
CURRENCY
TRANSLATION
ADJUSTMENT
(3,152,645)
(104,393)
—
(3,257,038)
(449,981)
—
(3,707,019)
Total
53
366
262
681
(122)
(82)
477
At December 31, 2016
(Decrease)/Increase
Reclassification to income statement
At December 31, 2017
(Decrease)/Increase
Reclassification to income statement
At December 31, 2018
134. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2018
(186,409)
8,652
(123,388)
17,138
55,430
(228,577)
369,435
(523,801)
(154,366)
131,172
(144,186)
(13,014)
2017
(540,162)
(108,257)
(303,114)
40,230
46,333
(864,970)
336,882
(610,325)
(273,443)
114,583
(95,099)
19,484
2016
(151,263)
488
(161,670)
89,032
61,040
(162,373)
411,528
(229,196)
182,332
89,971
(77,272)
12,699
FINANCIAL DEBT
Finance lease
liabilities
—
364
—
(76,879)
(14,949)
14,429
(77,035)
7,565
—
(47,390)
43,032
(73,828)
Short term
borrowings
(821,893)
(540,918)
(192,547)
—
(32,574)
82,362
Long term
borrowings
(396,742)
(1,511,860)
192,547
—
(371)
89
Total
(1,218,635)
(2,052,414)
—
(76,879)
(47,894)
96,880
(1,505,570)
(1,716,337)
(3,298,942)
1,492,568
(459,520)
(121,801)
194,467
(399,856)
(401,725)
459,520
—
21,441
1,098,408
—
(169,191)
258,940
(1,637,101)
(2,110,785)
B. STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
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
As of December 31, 2016
Cash flows
Reclassifications
Acquisitions - finance leases
Foreign exchange adjustments
Other non cash movements
As of December 31, 2017
Cash flows
Reclassifications
Foreign exchange adjustments
Other non cash movements
As of December 31, 2018
135. Annual Report 2018
28. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The following amendments, standards and
interpretations have been applied on the year starting
January 1, 2018:
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 was adopted without restating comparative.
The reclassifications and the adjustments arising
from the new impairment rules are directly recognized
in the opening balance sheet on January 1, 2018.
The Company has also updated its accounting
policies accordingly.
Closing balance as of December 31, 2017 - IAS 39
Financial instruments
Income tax related to Financial instruments
Allowance for impairment of trade receivables
Income tax related to Allowance for impairment of trade receivables
Effect on Minority interest related to the adoption of IFRS 9
Opening balance as of January 1, 2018 - IFRS 9
Reserves
Retained earnings
1,416,121
6,491,385
733
(124)
—
—
(159)
(658)
124
569
(137)
(45)
1,416,571
6,491,238
IFRS 9 replaces the provisions of IAS 39 related to the
recognition, classification and measurement of
financial assets and financial liabilities, derecognition
of financial instruments, impairment of financial
assets and hedge accounting.
The adoption of IFRS 9 Financial Instruments from
January 1, 2018, resulted in changes in accounting policies
and adjustments to the amounts recognized in the
financial statements.
The total impact on the Company’s financial instruments
as of January 1, 2018 is as follows:
Fair value through
profit
or loss
Fair value through
other
comprehensive
income
Held to maturity
Amortized cost
(Loans and
receivables 2017)
Closing balance as of December 31, 2017 - IAS 39
Reclassification of Investments in bonds from Held to maturity to Fair value
through other comprehensive income
Reclassification of Investments in bonds from Fair value through profit or loss to
Fair value through other comprehensive income
Reclassification of Other financial Instruments from Fair value through profit or
loss to Amortized cost
Adjustment of Other comprehensive income from adoption of IFRS 9
Opening balance as of January 1, 2018 - IFRS 9
332,143
—
(78,258)
(28,343)
—
225,542
—
6,129
78,258
—
75
84,462
6,129
(6,129)
—
—
—
—
131,675
—
—
28,343
—
160,018
136. Ternium
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
The Company applies the IFRS 9 simplified approach to
measuring expected credit losses which uses a lifetime
expected loss allowance for all trade receivables.
To measure the expected credit losses, trade receivables
have been grouped based on shared credit risk
characteristics and the days past due. On that basis, the
loss allowance as of January 1, 2018, was determined as
follows for trade receivables:
Expected loss rate
Non-guaranteed trade receivables - Gross carrying amount
Allowance for trade receivables
Fully
performing
Past due between
1 and 90 days
Past due between
91 and 360 days
Past due more
than 360 days
0.12%
543,792
(668)
0.93%
51,669
(483)
8.08%
6,080
(491)
99.54%
14,397
(14,331)
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.
The Company has adopted IFRS 15 Revenue from
Contracts with Customers, which resulted in no changes
in accounting policies and adjustments to the amounts
recognized in the financial statements. The Company’s
revenues are mainly recognized at a point of time from
sales to direct customers. At December 2018, 2017 and
2016, the Company recognized customer advances in the
amount of $40.3, 39.2 and 31.5 million, respectively. These
amounts related to years 2017 and 2016 were reclassified
to revenues during the subsequent year. In these periods,
no adjustment in revenues were performed related to
performance obligations previously satisfied.
The following standards, amendments to standards
and interpretations are not mandatory for the
financial year beginning January 1, 2018 and have not
been early adopted:
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.
137. Annual Report 2018
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.
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.
138. Ternium
The following table shows a breakdown of Ternium’s
assessed financial position exposure to currency risk
as of December 31, 2018. These balances include
intercompany positions where the intervening parties
have different functional currencies.
In million U.S. dollars
Exposure to
U.S. dollar ($)
EU euro (EUR)
Argentine peso (ARS)
Mexican peso (MXN)
Brazilian real (BRL)
Colombian peso (COP)
Other currencies
Functional Currency
$
—
40
0
(575)
(150)
24
(3)
ARS
(210)
2
—
—
(4)
—
—
The main relevant exposures correspond to:
(a) Argentine peso vs. U.S. dollar
The cumulative devaluation for the Argentine peso
during 2018 was 50.5% (2017: 14.8%). The devaluation
generated a negative effect of $387 million (2017: $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 $188
million (2017: $47 million), included as net foreign
exchange results in the Income Statement, partially
offset by the positive impact of the inflation adjustment
of $173 million.
If the Argentine peso had weakened by 1% against
the U.S. dollar, it would have generated a pre-tax
loss of $2.1 million as of December 31, 2018,
and a pre-tax loss of $1.1 million as of December 31,
2017.
(b) Mexican peso vs. U.S. dollar
If the Mexican peso had weakened by 1% against the U.S.
dollar, it would have generated a pre-tax gain of $5.8
million and $4.3 million as of December 31, 2018 and
2017, respectively.
(c) Colombian peso vs. U.S. dollar
If the Colombian peso had weakened by 1% against the
U.S. dollar, it would have generated a pre-tax loss of 0.2
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
million and $0.2 million as of December 31, 2018 and
2017, respectively.
(d) Brazilian real vs. U.S. dollar
If the Brazilian real had weakened by 1% against the U.S.
dollar, it would have generated a pre-tax gain of $1.5
million and a pre-tax gain of $1.9 million as of December
31, 2018 and 2017, respectively.
We estimate that if the Argentine peso, Mexican peso,
Colombian peso and Brazilian real had weakened
simultaneously by 1% against the U.S. dollar with all
other variables held constant, total pre-tax income for
the year would have been $5.0 million higher ($4.9
million higher as of December 31, 2017), as a result of
foreign exchange gains/losses on translation of U.S.
dollar-denominated financial position, mainly trade
receivables, trade payables, borrowings and other
liabilities.
Considering the same variation of the currencies against
the U.S. dollar of all net investments in foreign operations
amounting to $1.8 billion, the currency translation
adjustment included in total equity would have been $17.7
million lower ($11.9 million lower as of December 31,
2017), 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 3.65% and 4.76% for 2018 and
2017, 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,
2018 and 2017, respectively.
Ternium’s total variable interest rate debt amounted
to $1,747 million (85.8% of total borrowings) at
December 31, 2018 and $2,075 million (64.4% of
total borrowings) at December 31, 2017.
If interest rates on the aggregate average notional of
U.S. dollar denominated borrowings held during
2018, 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, 2018
would have been $26.8 million lower ($20.5 million
lower as of December 31, 2017).
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 82.6% of the Company’s liquid financial
assets correspond to investment grade rated instruments
as of December 31, 2018, in comparison with
approximately 75.7% as of December 31, 2017.
Ternium has no significant concentrations of credit risk
from customers. No single customer accounts for more
than five percent of Ternium’s sales. Ternium’s
subsidiaries have policies in place to ensure that sales are
made to customers with an appropriate credit history, and
that credit insurances, letters of credit or other
instruments are requested to reduce credit risk whenever
deemed necessary. The subsidiaries maintain allowances
for potential credit losses. The utilization of credit limits
is regularly monitored.
139. Annual Report 2018
Trade and other receivables are carried at face value less
allowance for doubtful accounts, if applicable. This
amount does not differ significantly from fair value.
The other receivables do not contain significant
impaired assets.
As of December 31, 2018, trade receivables total $1,133.2
million ($1,011.4 million as of December 31, 2017).
These trade receivables are collateralized by guarantees
under letter of credit and other bank guarantees of $23.3
million ($2.6 million as of December 31, 2017), credit
insurance of $506.8 million ($380.0 million as of
December 31, 2017) and other guarantees of $18.6
million ($15.0 million as of December 31, 2017).
As of December 31, 2018, trade receivables of $1,035.0
million ($910.7 million as of December 31, 2017) were
fully performing.
As of December 31, 2018, trade receivables of $112.5
million ($117.3 million as of December 31, 2017) were
past due (mainly up to 180 days).
The amount of the allowance for doubtful accounts was
$14.3 million as of December 31, 2018 ($16.5 million as
of December 31, 2017).
The carrying amounts of the Company’s trade and other
receivables as of December 31, 2018, are denominated in
the following currencies:
CURRENCY
U.S. dollar ($)
EU euro (EUR)
Argentine peso (ARS)
Mexican peso (MXN)
Brazilian real (BRL)
Colombian peso (COP)
Other currencies
Million U.S. dollars
1,059
60
8
171
444
83
1
1,828
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.
In million U.S. dollars
Borrowings
Interests to be accrued (1)
Trade payables and other liabilities
Total
2019
400
70
907
1,377
2020
528
55
14
597
2021
509
35
13
557
2022
Thereafter
510
15
14
539
90
4
22
116
(1) These amounts do not include the effect of derivative financial instruments.
As of December 31, 2018, total borrowings less
cash and cash equivalents and other current
and non-current investments amounted to $1,734.9
million.
140. Ternium
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
0.21 and 0.36 as of December 31, 2018 and 2017,
respectively. The Company does not have to comply with
regulatory capital adequacy requirements as known in the
financial services industry.
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
2. FINANCIAL INSTRUMENTS BY CATEGORY AND FAIR VALUE
HIERARCHY LEVEL
The accounting policies for financial instruments have
been applied to the line items below. According to the
scope and definitions set out in IFRS 7 and IAS 32,
employers’ rights and obligations under employee
benefit plans, and non-financial assets and liabilities
such as advanced payments and income tax payables,
are not included.
In thousand U.S. dollars
AT DECEMBER 31, 2018
I. Assets as per statement of financial position
Receivables
Derivative financial instruments
Trade receivables
Other investments
Cash and cash equivalents
Total
In thousand U.S. dollars
AT DECEMBER 31, 2018
II. Liabilities as per statement of financial position
Other liabilities
Trade payables
Derivative financial instruments
Finance lease liabilities
Borrowings
Total
Amortized cost
Assets at fair
value through
profit or loss
Assets at fair
value through
OCI
449,077
—
1,133,236
14,843
110,086
1,707,242
—
1,588
—
—
140,455
142,043
—
—
—
36,630
—
36,630
Total
449,077
1,588
1,133,236
51,473
250,541
1,885,915
Liabilities at fair
value through
profit or loss
Amortized cost
Total
—
—
12,981
—
—
12,981
105,659
864,827
—
73,828
2,036,957
3,081,271
105,659
864,827
12,981
73,828
2,036,957
3,094,252
141. Annual Report 2018
In thousand U.S. dollars
AT DECEMBER 31, 2017
I. Assets as per statement of financial position
Receivables
Derivative financial instruments
Trade receivables
Other investments
Cash and cash equivalents
Total
In thousand U.S. dollars
AT DECEMBER 31, 2017
II. Liabilities as per statement of financial position
Other liabilities
Trade payables
Derivative financial instruments
Finance lease liabilities
Borrowings
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
—
6,129
488,718
2,304
1,011,430
135,865
337,779
1,976,096
Derivatives
Other financial
liabilities
Held to maturity
Total
—
—
6,001
—
—
6,001
116,549
860,767
—
77,035
3,221,907
4,276,258
—
—
—
—
—
—
116,549
860,767
6,001
77,035
3,221,907
4,282,259
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).
142. Ternium
The following table presents the assets and liabilities
that are measured at fair value as of December 31, 2018
and 2017:
In thousand U.S. dollars
DESCRIPTION
Financial assets at fair value through profit or loss / OCI
Cash and cash equivalents
Other investments
Derivative financial instruments
Total assets
Financial liabilities at fair value through profit or loss / OCI
Derivatives financial instruments
Total liabilities
In thousand U.S. dollars
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
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
Fair value measurement at December 31, 2018
Total
Level 1
Level 2
140,455
36,630
1,588
178,673
12,981
12,981
140,455
36,630
—
177,085
—
—
—
—
1,588
1,588
12,981
12,981
Fair value measurement at December 31, 2017
Total
Level 1
Level 2
236,335
99,505
2,304
338,144
6,001
6,001
236,335
99,505
—
335,840
—
—
—
—
2,304
2,304
6,001
6,001
143. Annual Report 2018
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.
income statement. Ternium does not hedge its net
investments in foreign entities.
The fair value of financial instruments traded in
active markets is based on quoted market prices at the
reporting date. A market is regarded as active if
quoted prices are readily and regularly available from
an exchange, dealer, broker, industry group, pricing
service, or regulatory agency, and those prices
represent actual and regularly occurring market
transactions on an arm’s length basis. The quoted
market price used for financial assets held by Ternium
is the current 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
144. Ternium
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, 2018,
the effective portion of designated cash flow hedges
amounts to $0.5 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.
TERNIUM S.A.
Notes to the Consolidated Financial
Statements (contd.)
4. FAIR VALUE ESTIMATION
The estimated fair value of a financial instrument is the
amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in
a forced or liquidation sale.
For the purpose of estimating the fair value of financial
assets and liabilities with maturities of less than one year,
the Company uses the market value less any estimated
credit adjustments. For other investments, the Company
uses quoted market prices.
Under the loan agreement, Techgen is committed to
maintain a debt service reserve account covering debt
service becoming due during two consecutive quarters;
such account is funded by stand-by letters of credit
issued for the account of Techgen’s sponsors in
proportion to their respective participations in Techgen.
Accordingly, the Company and its Luxembourg
subsidiaries Ternium S.A. and Ternium Investments S.à
r.l. applied for stand-by letters of credit covering 48% of
the debt service coverage ratio, which as of the date
hereof amounts to $21.4 million.
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 proceeds of the new loan, which is expected to be
drawn on or about February 26, 2019, will be used to
repay all loans outstanding under the existing facility.
Upon repayment of such loans, Ternium’s corporate
guarantee thereunder will be automatically released.
Pablo Brizzio
Chief Financial Officer
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 - TECHGEN REFINANCING
On February 13, 2019, Techgen entered into a $640
million loan agreement with several banks to refinance its
obligations under the existing syndicated loan. Techgen’s
obligations under the new facility, which is “non-
recourse” on the sponsors, will be guaranteed by a
Mexican security trust covering Techgen’ shares, assets
and accounts as well as Techgen’s affiliates rights under
certain contracts. In addition, Techgen’s collection and
payment accounts not subject to the trust have been
pledged in favor of the lenders under the new loan
agreement, and certain direct agreements -customary for
these type of transactions- have been entered into with
third parties and affiliates, including in connection with
the agreements for the sale of energy produced by the
project and the agreements for the provision of gas and
long-term maintenance services to Techgen. The
commercial terms and conditions governing the purchase,
by the Company’s Mexican subsidiaries, of the energy
generated by the project remain unchanged.
145. Annual Report 2018
TERNIUM S.A.
SOCIÉTÉ ANONYME
Audited Annual Accounts
as at December 31, 2018
29 Avenue de la Port Neuve,
3rd Floor
L-2227 Luxembourg.
R.C.S Luxembourg B-98-668
INDEX TO THE ANNUAL ACCOUNTS
148
151
152
153
Audit Report
Balance sheet
Profit and loss account
Notes to the annual accounts
147. Annual Report 2018
BALANCE SHEET
AS OF DECEMBER 31, 2018
Amounts expressed in U.S. dollars
C
II
3
III
1
D
II
2
4
III
2
IV
A
I
II
IV
1
2
V
VI
B
1
C
6
8
ASSETS
Fixed assets
Tangible assets
2.3
Other fixtures and fittings, tools and equipment
108,035
137,804
NOTES
12.31.2018
12.31.2017
Financial assets
Shares in affiliated undertakings
Current assets
Debtors
Amounts owed by affiliated undertakings
a) becoming due and payable within one year
Other debtors
a) becoming due and payable within one year
Investments
Own shares
Cash at bank and in hand
Total assets
CAPITAL, RESERVES AND LIABILITIES
Capital and reserves
Subscribed capital
Share premium account
Reserves
Legal reserve
Reserve for own shares or own corporate units
Profit or loss brought forward
Profit or loss for the financial year
Provisions
Provisions for pensions and similar obligations
Creditors
Amounts owed to affiliated undertakings
a) becoming due and payable within one year
b) becoming due and payable after more than one year
Other creditors
c) Other creditors
i) becoming due and payable within one year
Total capital, reserves and liabilities
2.4 & 3
6,500,998,036
6,501,106,071
6,750,343,423
6,750,481,227
2.5
4
2.6
2.7
5
6
2.8
2.9
4
4
11,202,871
34,947
59,599,747
70,837,565
256,657
71,094,222
518,471
21,043
59,599,747
60,139,261
96,510
60,235,771
6,572,200,293
6,810,716,998
2,004,743,442
1,414,121,505
200,474,346
59,599,747
2,887,917,575
(20,620,484)
6,546,236,131
20,227,485
20,227,485
885,475
2,342,575
2,508,627
5,736,677
6,572,200,293
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
The accompanying notes form an integral part of these annual accounts.
151. Annual Report 2018
PROFIT AND LOSS ACCOUNT
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Amounts expressed in U.S. dollars
7
Value adjustments
a) in respect of formation expenses and of tangible and intangible fixed assets
8
11
Other operating expenses
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
Tax on profit or loss
Profit or loss after taxation
Other taxes not shown under items 1 to 16
Profit or loss for the financial year
15
16
17
18
The accompanying notes form an integral part of these annual accounts.
NOTES
12.31.2018
12.31.2017
7
8
8
(29,769)
(20,094,259)
209,263
115,664
(833,571)
17,696
—
(20,614,976)
(5,507)
(20,620,484)
(29,769)
(31,504,964)
38,604
62,272
(571,159)
652
—
(32,004,364)
(7,693)
(32,012,057)
152. 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 $1,00 per
share. As of December 31, 2018, 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"). Tcrnium'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 anonymc) 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 I , 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
Investmcnts. 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 Tcrnium 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 $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, 2018 and 2017, this
special tax reserve amounted to $6,7 billion and $6,9
billion, respectively. The Company expects that, as a
result of its corporate reorganization, its current overall
tax burden will not increase, as all or substantially all of
its dividend income will come from high income tax
jurisdictions. In addition, the Company expects that
dividend distributions for the foreseeable future will be
imputed to the special reserve and therefore should be
exempt from Luxembourg withholding tax under
current Luxembourg law.
The financial year of the Company starts on January 1
and ends on December 31 of each year.
The Company also prepares consolidated financial
statements, which are published according to the
provisions of the Luxembourg Law.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1. BASIS OF PRESENTATION
These annual accounts have been prepared in accordance
with Luxembourg legal requirements and accounting
standards under the historical cost convention.
Accounting policies and valuation rules are, besides the
ones laid down by the law of December 19, 2002 as
amended on December 18, 2015, determined and applied
by the Board of Directors.
153. Annual Report 2018
TERNIUM S.A.
Notes to the accounts (contd.)
The preparation of annual accounts requires the Board of
Directors to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets
and liabilities. Estimates and judgments are continually
evaluated and are based on historical experience and other
factors, including expectations of future events that are
believed to be reasonable under the circumstances.
Management makes estimates and assumptions
concerning the future. Actual results may differ
significantly from these estimates under different
assumptions or conditions.
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 $.
Transactions expressed in currencies other than $ are
translated into $ at the exchange rate effective at the
time of the transaction. Formation expenses and long-
term assets expressed in currencies other than $ arc
translated into $ 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 arc
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 arc 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 arc 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
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 arc not continued if the reasons for which the
value adjustments were made have ceased to apply.
154. Ternium
TERNIUM S.A.
Notes to the accounts (contd.)
2.7. CASH AT BANK AND IN HAND
Cash at bank and in hand also comprise cash
equivalents, liquidity funds and short-term investments
with a maturity of less than three months at the date of
purchase. Assets recorded in cash and cash equivalents
are carried at fair market value or at historical cost
which approximates fair market value.
2.8. PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS
During 2007, Tcrnium 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 Tcrnium's shareholders' equity (excluding
noncontrolling interest). Also, the beneficiaries of the
Program are entitled to receive cash amounts based on
(i) the amount of dividend payments made by Ternium
to its shareholders, and (ii) the number of Units held by
each beneficiary to the Program. Units vest ratably over
a period of four years and will be redeemed by the
Company ten years after grant date, with the option of
an early redemption at seven years after grant date. As
the cash payment of the benefit is tied to the book value
of the shares, and not to their market value, Ternium
valued this long-term incentive program as a long term
benefit plan as classified in IAS 19. Actuarial gains and
losses are charged or credited in the profit or loss in the
period in which they arise.
As of December 31, 2018, the outstanding liability
corresponding to the Program amounts to $19,2
million.
2.9. CREDITORS
Creditors are recorded at their reimbursement value.
When the amount repayable on account is greater than
the amount received, the difference is shown as an asset
and is written off over the period of the debt based on a
linear method.
3. FINANCIAL ASSETS
On June 12, 2018, as result of the master credit agreement
entered between Ternium Investments S.à r.l. ("Ternium
Investments") and Ternium S.A. where Tcrnium
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 12,
2018 amounted to $249.345.387.
As a result of the transactions detailed above, the
financial assets of the Company as at December 31,
2018, consist of:
COMPANY
COUNTRY
% of beneficial
ownership
Book value at
12.31.2017 $
Net (Decreases)/
Additions $
Book value at
12.31.2018 $
Equity at
12.31.2018 $
Ternium Investments S.à r.l.
Luxembourg
100.00%
6,750,343,423
(249,345,387)
6,500,998,036
7,595,194,456
Shares in affiliated undertakings
6,750,343,423
-249,345,387
6,500,998,036
7,595,194,456
155. Annual Report 2018
TERNIUM S.A.
Notes to the accounts (contd.)
12.31.2018
12.31.2017
11,202,871
11,202,871
2,346,163
638,798
238,774
—
4,315
3,228,050
—
—
518,471
518,471
2,554,629
193,157
679,290
605
3,041
3,430,721
4,011,823
4,011,823
4. BALANCES WITH AFFILIATED UNDERTAKINGS
Amounts expressed in U.S. dollars
ASSETS
Debtors
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.
5. CAPITAL AND RESERVES
Amounts expressed in U.S. dollars
Subscribed
Capital
Share
Premium
Legal Reserve
Reserve for
own shares or
own corporate
units (2)
Profit or loss
brought
forward
Result for the
financial year
Total capital
and reserves
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
Allocation of previous year results (1)
Payment of dividends (1)
Loss for the year
—
—
—
—
—
—
—
—
—
—
—
—
(32,012,057)
32,012,057
—
(215,938,445)
—
(215,938,445)
—
(20,620,484)
(20,620,484)
Balance at December 31, 2018
2,004,743,442
1,414,121,505
200,474,346
59,599,747
2,887,917,575
(20,620,484)
6,546,236,131
(1) As approved by the Annual General Meeting of Shareholders held on May 2, 2018.
(2) As of December 31, 2018, the Company held 41.666.666 shares as treasury shares.
6. LEGAL RESERVE
In accordance with Luxembourg law, the Company is
required to set aside a minimum of 5% of its annual net
profit for each financial period to a legal reserve. This
requirement ceases to be necessary once the balance of
the legal reserve has reached 10% of the Company's
issued share capital. At December 31, 2018, this reserve
reached the above-mentioned threshold, the legal reserve
is not available for distribution to shareholders.
156. Ternium
7. OTHER OPERATING EXPENSES
Amounts expressed in U.S. dollars
AT DECEMBER 31,
Services and fees
Board of director's accrued fees
Other expenses
Total
2018
2017
17,713,800
29,710,733
1,338,331
1,042,128
1,235,000
559,231
20,094,259
31,504,964
Services and fees are mainly composed of professional,
audit and legal services.
8. TAXES
For the year ended December 31, 2018, the Company
did not realize any profits subject to tax in Luxembourg
and will therefore be only subject to the minimum net
wealth tax.
9. INCOME FROM FINANCIAL FIXED ASSETS DERIVED FROM AFFILIATED
UNDERTAKINGS
During the period, the Company did not receive any
dividends.
10. PARENT COMPANY
As of December 31, 2018, Tcchint 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 thc Company's share capital. Each of Techint and
Tenaris were controlled by San Faustin S.A., a
Luxcmbourg company ("San Faustin"). Rocca & Partners
Stichting Administratiekantoor Aandelcn San Faustin
("RP STAK"), a Dutch private foundation (Stichcing), held
voting shares in San Faustin sufficient in number to
control San Faustin. No person or group of persons
controls RP STAK.
11. CONTINGENCIES AND COMMITMENTS.
11.1 CONTINGENCIES
Class Action
The Company is aware that, following its November
27, 2018 announcement that its chairman Paolo
Rocca was included in an Argentine court
investigation known as the Notebooks Case, a
putative class action complaint was filed in the U.S.
District Court for the Eastern District of New York
TERNIUM S.A.
Notes to the accounts (contd.)
purportedly on behalf of purchasers of Ternium
securities from May 1, 2014 through November 27,
2018. The individual defendants named in the
complaint are our chairman, our former CEO, our
current CEO and our CFO. That complaint alleges
that during the class period (May 2014.November
2018), the Company and the individual defendants
inflated the price of Ternium's ADSs by failing to
disclose that sale proceeds received by Ternium when
Sidor was expropriated by Venezuela were received or
expedited as a result of alleged improper payments
made to Argentine officials. The complaint does not
specify the damages that plaintiff is seeking.
11.2 COMMITMENTS
Techgen S.A. dc C.V is a Mexican natural gas-fired
combined cycle electric power plant owned by
Ternium (48%), Tenaris S.A. (22%) and Tecpecrol
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 agreemenc 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
bookrunncrs. The loan agreement amounted to $800
million and the proceeds wcrc used by Tecbgen in
the construction of the facility. As of December 31,
2018, the outstanding amount under the loan
agreement 'svas $600 million, as a result the amount
guaranteed by Ternium was approximately $288
million. The main covenants under the Corporate
Guarantee arc limitations to thc sale of certain assets
and compliance with financial ratios (e.g. leverage
ratio). As of December 31, 2018, Techgen and
Tcrnium, as guarantor, were in compliance with all
of their covenants.
157. Annual Report 2018
TERNIUM S.A.
Notes to the accounts (contd.)
12. SUBSEQUENT EVENTS - TECHGEN REFINANCING
On February 13, 2019, Techgcn entered into a $640
million loan agreement with several banks to refinance its
obligations under the existing syndicated loan. Tcchgen's
obligations under the new facility, which is "non recourse"
on the sponsors, will be guaranteed by a Mexican security
trust covering Techgen' shares, assets and accounts as well
as Techgen's affiliates rights under certain contracts. In
addition, Techgen's collection and payment accounts not
subject to the trust have been pledged in favor of the
lenders under the new loan agreement, and certain direct
agreements -customary for these type of transactions-
have been entered into with third parties and affiliates,
including in connection with the agreements for the sale
of energy produced by the project and the agreements for
the provision of gas and long-term maintenance services
to Techgen. The commercial terms and conditions
governing the purchase, by the Tcrnium's Mexican
subsidiaries, of the energy generated by the project
remain unchanged.
Under the loan agreement, Techgen is committed to
maintain a debt service reserve account covering debt
service becoming due during two consecutive quarters;
such account is funded by stand-by letters of credit issued
for thc account of Techgen's sponsors in proportion to
their respective participations in Techgen. Accordingly,
Ternium S.A. and its subsidiary Ternium Investments S.à
r.l., applied for stand-by letters of credit covering 48% of
the debt service coverage ratio, which as of the date hereof
amounts to $21.4 million.
The proceeds of the new loan, which is expected to be
drawn on or about February 26, 2019, will be used to
repay all loans outstanding under the existing facility.
Upon repayment of such loans, Ternium's corporate
guarantee thereunder will be automatically released.
Pablo Brizzio
Chief Financial Officer
158. Ternium
RISK
FACTORS
RISK FACTORS
You should carefully consider the risks and uncertainties
described below, together with all other information
contained in this annual report, before making any
investment decision. Any of these risks and uncertainties
could have a material adverse effect on our business,
financial condition and results of operations, which could
in turn affect the price of the Company’s shares and
ADSs.
RISKS RELATING TO THE STEEL INDUSTRY
A downturn in global or regional economic activity
would cause a reduction in worldwide or regional demand
for steel and would have a material adverse effect on the
steel industry and Ternium.
Steel demand is sensitive to trends in cyclical industries,
such as the construction, automotive, appliance and
machinery industries, which are significant markets for
Ternium’s products and are also affected by national,
regional or global economic conditions. A downturn in
economic activity would reduce demand for steel
products. This would have a negative effect on Ternium’s
business and results of operations. A recession or
depression affecting developed economies (such as the
global downturn in 2008 and 2009 and the downturn in
Europe in 2012), or slower growth or recessionary
conditions in emerging economies (such as the slowdown
being experienced by the Chinese economy or the recent
recession in Brazil and the current recession in Argentina)
would exact a heavy toll on the steel industry and
adversely affect our business and results of operations.
A protracted fall in steel prices would have a material
adverse effect on the results of Ternium, as could price
volatility.
Steel prices are volatile and are sensitive to trends in steel
demand and raw material costs, such as iron ore and
metallurgical coal costs. Historically, the length and
nature of business cycles affecting steel demand and raw
material costs have been unpredictable. For example, steel
prices in the international markets showed an upward
trend, in a context of stronger steel demand and higher
raw material costs, between the second half of 2009 and
the first quarter of 2011. Thereafter, steel prices followed
a downward trend, accelerating during 2015 and reaching
new multi-year lows at the beginning of 2016, reflecting a
slowdown in steel demand and a sharp reduction in steel
production costs. During the rest of 2016 and 2017, steel
prices again showed an upward trend as a result of higher
160. Ternium
industry steel production costs and improved steel
demand, and in 2018 fluctuated at relatively high levels. A
new fall in steel prices could adversely affect Ternium’s
operating results by means of lower revenues and could
also lead to inventory write-downs. Even if raw material
costs decrease in sync with steel prices, the resulting
decrease in steel production costs would take several
months to be reflected in our operating results as the
company would first consume older inventories acquired
prior to such raw material cost decrease. In addition, we
may be unable to recover, in whole or in part, increased
costs of raw materials and energy through increased
selling prices on our products, or it may take an extended
period of time to do so.
Regional or worldwide excess steel production capacity
may lead to unfair trade practices in the international
steel markets and/or to intense competition, hampering
Ternium’s ability to sustain adequate profitability.
In addition to economic cycles, the steel industry can also
be affected by regional or worldwide production
overcapacity. Historically, the steel industry has suffered,
especially on downturn cycles, from substantial over-
capacity. As a result of a slowdown in steel demand
growth and protracted increase in steel production
capacity in the last decade, there are signs of over-capacity
in all steel markets, particularly in China, which impacted
the profitability of the steel industry and Ternium.
Although steel industry profitability improved in 2017,
excess steel production capacity may require several years
to be absorbed by demand and, as a consequence, may
contribute to an extended period of depressed margins
and industry weakness. International trade of steel
products conducted under unfair conditions increases
particularly during downturn cycles and as a result of
production over-capacity. Unfair trade practices may result
in the imposition by some countries (that are significant
producers and consumers of steel) of antidumping and
countervailing duties or other trade measures, and may
cause fluctuations in international steel trade. The
imposition of such trade remedies or temporary tariffs on
major steel exporters in significant steel producing
countries could in turn exacerbate pressures in other
markets, including Ternium’s, as these exporters target
such other markets to compensate, at least partially, for
the loss of business resulting from the imposition of trade
remedies. China is the largest steel producing country in
the world, accounting for approximately half of
worldwide steel production. In 2014 and 2015, China’s
steel consumption decreased and Chinese exports
expanded rapidly as a result. Consequently, Chinese
exports of steel products, including exports to Europe, the
United States and Mexico, were subject to several
antidumping and countervailing investigations, and to the
imposition of antidumping and countervailing duties and
other trade measures. A decrease in steel consumption in
China in the future could stimulate aggressive Chinese
steel export offers, exerting downward pressure on sales
and margins of steel companies operating in other
markets and regions, including those in which Ternium
operates. Similarly, a downturn in global or regional
economic activity could stimulate unfair steel trade
practices and, accordingly, may adversely affect our
business and results of operations.
Sales may fall as a result of fluctuations in industry
inventory levels.
Inventory levels of steel products held by companies that
purchase Ternium’s products can vary significantly from
period to period. These fluctuations can temporarily
affect the demand for Ternium’s products, as customers
draw from existing inventory during periods of low
investment in construction and other industry sectors that
purchase Ternium’s products and accumulate inventory
during periods of high investment and, as a result, these
companies may not purchase additional steel products or
maintain their current purchasing volume. Accordingly,
Ternium may not be able to increase or maintain its
current levels of sales volumes or prices.
Intense competition could cause Ternium to lose its
share in certain markets and adversely affect its sales
and revenues.
The market for Ternium’s steel products is highly
competitive, particularly with respect to price, quality and
service. In both global and regional markets, Ternium
competes against other global and local producers of steel
products, which in some cases have greater financial and
operating resources, or direct and indirect governmental
support. Competition from such steel producers could
result in declining margins and reductions in sales
volumes and revenues. Ternium’s competitors could use
their resources in a variety of ways that may affect
Ternium negatively, including by making additional
acquisitions, implementing modernization programs,
expanding their production capacity, investing more
aggressively in product development, and displacing
demand for Ternium’s products in certain markets. To the
extent that these producers become more efficient,
Ternium could confront stronger competition and could
fail to preserve its current share of the relevant geographic
or product markets. In addition, there has been a trend in
the past toward steel industry consolidation among
Ternium’s competitors, and current smaller competitors
in the steel market could become larger competitors in the
future. Moreover, Ternium and other steel makers
compete against suppliers of alternative materials,
including aluminum, wood, concrete, plastic and
ceramics. In particular, certain customers are increasing
their consumption of lighter-weight materials, such as
aluminum, composites and carbon fiber, sometimes a
result of regulatory requirements. Competition from
these alternative materials could adversely affect the
demand for, and consequently the market prices of,
certain steel products and, accordingly, could affect
Ternium’s sales volumes and revenues.
Price fluctuations or shortages in the supply of raw
materials, energy and other inputs could adversely affect
Ternium’s profitability.
Like other manufacturers of steel-related products,
Ternium’s operations require substantial amounts of
raw materials, energy and other inputs from domestic
and foreign suppliers. In particular, the Ternium
companies consume large quantities of iron ore,
metallurgical coal, scrap, ferroalloys, natural gas,
electricity, oxygen and other gases in operating their
blast and electric arc furnaces. The prices of these raw
materials, energy and other inputs can be volatile. Also,
the availability and price of a significant portion of such
raw materials, energy and other inputs used in
Ternium's operations are subject to market conditions,
government regulations or other events affecting supply
and demand. For example, the collapse of a tailings
dam at a mine operated by Vale in Brumadinho, Brazil,
followed by Vale's decommissioning of all upstream
tailing dams and the shut down of operations at its
Feijão and Vargem Grande mines, and the government
cancellation of Vale's licenses for eight tailings dams,
contributed to an increase in iron ore prices in the
international markets as well as significant logistic
161. Annual Report 2018
RISK FACTORS
burdens. In Argentina, shortages of natural gas resulted
in the past in supply restrictions that, if repeated in the
future, could lead to higher costs of production and
eventually to production cutbacks at Ternium’s facilities
in Argentina. In Mexico, constraints in natural gas
transportation capacity have led to increased imports of
liquefied natural gas, which, from April 1, 2013,
resulted in increased natural gas costs and, thus, higher
steel production costs. In the past, Ternium has usually
been able to procure sufficient supplies of raw
materials, energy and other inputs to meet its
production needs; however, it could be unable to
procure adequate supplies in the future. Any protracted
interruption, discontinuation or other disruption of the
supply of principal inputs to the Ternium companies
(including as a result of strikes, lockouts, trade
restrictions, accidents or natural disasters, worldwide
price fluctuations, the availability and cost of
transportation or other problems) would result in lost
sales and would have a material adverse effect on
Ternium’s business and results of operations.
Ternium’s companies depend on a limited number of
key suppliers.
Ternium’s companies depend on certain key suppliers for
their requirements of some of their principal inputs,
including Vale for iron ore, BHP Billiton and Warrior for
metallurgical coal and Carbo One for pulverized coal
injection coal. In general, there is a trend in the industry
towards consolidation among suppliers of iron ore and
other raw materials. Ternium’s companies have entered
into long-term contracts for the supply of some (but not
all) of their principal inputs and it is expected that they
will maintain and, depending on the circumstances, renew
these contracts. However, if any of the key suppliers fails
to deliver or there is a failure to renew these contracts, the
Ternium companies could face limited access to some raw
materials, energy or other inputs, or higher costs and
delays resulting from the need to obtain their input
requirements from other suppliers.
RISKS RELATING TO OUR BUSINESS
If Ternium does not successfully implement its business
strategy, its opportunities for growth and its competitive
position could be adversely affected.
Ternium plans to continue implementing its business
strategy of enhancing its position as a competitive steel
producer, focusing on higher margin value-added
products, pursuing strategic growth opportunities,
implementing Ternium’s best practices in acquired and
new businesses, providing services to a wider range of
customers in the local and export markets, improving
utilization levels of our plants, increasing efficiency and
further reducing production costs. For example, on
September 28, 2017, following the acquisition of a steel
slab production plant in Rio de Janeiro, Brazil, Ternium
announced the construction of a hot-rolling mill in its
facility in Pesquería, Mexico, a logical next step to
integrate the Rio de Janeiro unit to our industrial system.
For more information on our 2017 acquisition of Ternium
Brasil see note 3 “Acquisition of business” to our
consolidated financial statements included elsewhere in
this annual report. Any of these components or Ternium’s
business strategy could be delayed or abandoned or could
cost more than anticipated, any of which could impact its
competitive position and reduce its revenue and
profitability. For example, Ternium could fail to develop
its projects and/or to make acquisitions and/or integrate
newly acquired businesses to increase its steel production
capacity, or may lose market share in its regional markets.
Even if Ternium successfully implements its business
strategy, such strategy may not yield the desired goals.
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.
A key element of Ternium’s business strategy is to identify
and pursue growth-enhancing opportunities. As part of
that strategy, we regularly consider acquisitions, greenfield
and brownfield projects and other significant investments.
However, any growth project will depend upon market
and financing conditions. We must necessarily base any
assessment of potential acquisitions or other investments
on assumptions with respect to operations, profitability
and other matters that may subsequently prove to be
incorrect. Furthermore, we may fail to find suitable
acquisition targets or fail to consummate our acquisitions
under favorable conditions. In the past, Ternium acquired
interests in various companies, including Hylsamex S.A.
de C.V., or Hylsamex, one of the main steel producers in
Mexico and Grupo Imsa S.A. de C.V., a leading Mexican
steel processor (both currently Ternium Mexico); Ferrasa
(currently, Ternium Colombia), a Colombian steel
162. Ternium
producer and processor; and more recently CSA
(currently, Ternium Brasil), a Brazilian steel slab producer.
Ternium has also announced plans to build new facilities
in Mexico and Colombia. Ternium also formed, together
with Nippon Steel (currently, NSSMC), Tenigal, a
company that manufactures and sells hot-dip galvanized
and galvannealed steel sheets for the Mexican automotive
market. In 2012, Ternium acquired a participation in the
control group of Usiminas, the largest flat steel producer
in Brazil, and in 2014 and 2016, Ternium significantly
increased its equity investment in that company. Our
acquisitions or other investments may not perform in
accordance with our expectations and could have an
adverse impact on our operations and profits.
Furthermore, we may be unable to successfully integrate
any acquired businesses into our operations, realize
expected synergies or accomplish the business objectives
that were foreseen at the time of deciding any such
investment. Moreover, we may also acquire, as part of
future acquisitions, assets unrelated to our business, and
we may not be able to integrate them or sell them under
favorable terms and conditions. These risks, and the fact
that integration of any acquired businesses will require a
significant amount of time and resources of Ternium’s
management and employees, could have an adverse
impact on Ternium’s ongoing business and could have a
material adverse effect on its business, financial condition
and results of operations.
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.
In accordance with IFRS, management must test for
impairment all of Ternium’s assets whenever events or
changes in circumstances indicate that the carrying
amount may not be recoverable. Assets subject to testing
include goodwill, intangible assets and investments in
non-consolidated companies. In addition, management
must test for impairment goodwill at least once a year
whether or not there are indicators of impairment. IFRS
requires us to recognize a non-cash charge in an amount
equal to any impairment. We performed several
impairment tests on our investment in Usiminas and, as of
December 31, 2012, September 30, 2014 and December 31,
2015, wrote it down by $275.3 million, $739.8 million and
$191.9 million, respectively.
As of December 31, 2018, goodwill in connection with
our Mexican subsidiaries amounted to $662.3 million and
the carrying value of our investment in non-consolidated
companies, mainly related to our investment in Usiminas,
amounted to $495.2 million. If Ternium’s management
determines in the future that the goodwill from our
acquisitions or our investments in non-consolidated
companies are impaired, Ternium will be required to
recognize a non-cash charge against earnings, which could
materially adversely affect Ternium’s results of operations
and net worth.
If Usiminas is not able to successfully implement its
business strategy, or if the business conditions in Brazil or
in the global steel and mining industries were to be worse
than we expected, the Company may be required to
record a significant charge to earnings in the form of a
further impairment of its investment in Usiminas, which
could have a material adverse effect on Ternium’s results,
financial condition or net worth.
On January 16, 2012, Ternium acquired a participation in
the control group of Usiminas, the largest flat steel
producer in Brazil, for a total consideration of $2.2
billion. On October 30, 2014, Ternium acquired
additional ordinary shares of Usiminas for a total
consideration of $249.0 million. Between 2012 and
September 2014, Usiminas improved its performance and
results of operations as a result of the implementation of
certain changes in its strategy and business practices.
Beginning in the fourth quarter of 2014, Brazilian steel-
intensive industrial sectors such as the capital goods,
durable goods, vehicles and machinery and equipment
sectors were adversely affected by low investments, weak
consumption, strong imports and high inventories. These
developments adversely affected demand for steel in Brazil
and Usiminas’ operating results and financial condition,
resulting in the need for additional equity capital, among
other things. In April 2016, Ternium subscribed to
preferred shares of Usiminas for a total subscription price
of $3.1 million, and in July 19, Ternium subscribed to
ordinary shares for a total subscription value of $110.9
million. Ternium now owns 34.4% of ordinary shares and
1.6% of preferred shares representing 20.5% of Usiminas’
capital, and holds 35.6% of the voting rights within the
Usiminas’ control group. Further changes to Usiminas’
strategy and business practices will be required in the
future in order to achieve sustainable profitability, and we
163. Annual Report 2018
RISK FACTORS
cannot assure that such changes will take place or be
successful. In addition, in 2014 a conflict arose within the
Usiminas control group and its board with respect to the
governance of Usiminas, including with respect to the
rules applicable to the appointment of senior managers,
the application of the shareholders’ agreement in matters
involving fiduciary duties, and the company’s strategy.
Although such conflict was resolved with an agreement
between Ternium, NSSMC and Previdência Usiminas
(formerly known as Caixa do Empregados do Usiminas),
Usiminas’ employee pension fund, on new governance
rules for Usiminas, any future conflicts may make it more
difficult to reach consensus within the control group; and,
under the new Usiminas shareholders’ agreement, no
control group member can, without the consent of other
shareholder group or groups, implement any change to
Usiminas’ business strategy, and therefore any necessary
changes may not take place or fail to be implemented. As
indicated above, the Company reviews periodically the
recoverability of its investment in Usiminas, and 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, 2018, the carrying value
of Ternium’s investment in Usiminas was $480.1 million.
Ternium reviews the economic policies of Brazil and
market expectations relating to the BRL/$ exchange rate
on an ongoing basis and will continue to evaluate their
impact on the drivers used to calculate the value in use of
Ternium’s investment in Usiminas. These matters could
lead to further changes in the carrying value of Ternium’s
investment in Usiminas, either through currency
translation adjustments, impairment charges or recoveries
of impairment charges. Any further write-downs to
Ternium’s investment in Usiminas could have a material
adverse effect on Ternium’s results of operations or net
worth.
If we do not comply with laws and regulations designed
to combat governmental corruption in countries in which
we sell our products, we could become subject to fines,
penalties or other sanctions and our sales and profitability
could suffer.
We conduct business in certain countries known to
experience governmental corruption. Although we are
committed to conducting business in a legal and ethical
manner in compliance with local and international
statutory requirements and standards applicable to our
business, there is a risk that our employees or
representatives may take actions that violate applicable
laws and regulations that generally prohibit the making of
improper payments to foreign government officials for the
purpose of obtaining or keeping business, including laws
relating to the 1997 OECD Convention on Combating
Bribery of Foreign Public Officials in International
Business Transactions such as the U.S. Foreign Corrupt
Practices Act, or FCPA.
Labor disputes at Ternium’s operating subsidiaries could
result in work stoppages and disruptions to Ternium’s
operations.
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 prior to or during
the negotiations leading to new collective bargaining
agreements, during wage and benefits negotiations or,
occasionally, during other periods for other reasons.
Ternium could also suffer plant stoppages or strikes if it
were to implement cost reduction plans. From time to
time, Ternium takes measures in order to become more
competitive; none of the measures taken in the past have
resulted in significant labor unrest. However, we cannot
assure that this situation will remain stable or that future
measures will not result in labor actions against us. Any
future stoppage, strike, disruption of operations or new
collective bargaining agreements could result in lost sales
and could increase Ternium’s costs, thereby affecting our
results of operations.
Changes in exchange rates or any limitation in the ability
of the Ternium companies, including associates, to hedge
against exchange rate fluctuations could adversely affect
Ternium’s business and results.
The operations of the Ternium companies expose them to
the effects of changes in foreign currency exchange rates
and changes in foreign exchange regulations. A significant
portion of Ternium’s sales are carried out in currencies
other than the U.S. dollar. As a result of this foreign
currency exposure, exchange rate fluctuations impact the
Ternium companies’ results and net worth as reported in
their income statements, statements of comprehensive
income and statements of financial position in the form of
164. Ternium
both translation risk and transaction risk. In the ordinary
course of business, the Ternium companies may see fit to
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 could cause an adverse impact on Ternium’s results
of operations, financial condition or cash flows.
Cyberattacks could have a material adverse impact on our
business and results of operation.
We rely heavily on information systems to conduct our
business. Although we devote significant resources to
protect our systems and data, from time to time we
experience varying degrees of cyber incidents in the
normal conduct of our business, which may occasionally
include sophisticated cybersecurity threats such as
unauthorized access to data and systems, loss or
destruction of data, computer viruses or other malicious
code, phishing and/or cyberattacks. These threats often
arise from numerous sources, not all of which are within
our control, such as fraud or malice from third parties,
failures of computer servers or other accidental
technological failure, electrical or telecommunication
outages or other damage to our property or assets. Given
the rapidly evolving nature of cyber threats, there can be
no assurance that the systems we have designed to prevent
or limit the effects of cyber incidents or attacks will be
sufficient to prevent or detect such incidents or attacks, or
to avoid a material adverse impact on our systems when
such incidents or attacks do occur. While we attempt to
mitigate these risks, we remain vulnerable to additional
known or unknown threats, including theft, misplacement
or loss of data, programming errors, employee errors and/
or dishonest behavior that could potentially lead to the
compromising of sensitive information, improper use of
our systems or networks, as well as unauthorized access,
use, disclosure, modification or destruction of such
information, systems and/or networks. If our systems for
protecting against cybersecurity risks are circumvented or
breached, this could also result in disruptions to our
business operations (including but not limited to, defective
products or production downtimes), access to our
financial reporting systems, the loss of access to critical
data or systems, misuse or corruption of critical data and
proprietary information (including our intellectual
property and customer data), as well as damage to our
reputation with our customers and the market, failure to
meet customer requirements, customer dissatisfaction
and/or other financial costs and losses. In addition, given
that cybersecurity threats continue to evolve, we may be
required to devote additional resources in the future to
enhance our protective measures or to investigate and/or
remediate any cybersecurity vulnerabilities. Moreover, any
investigation of a cyber-attack would take time before
completion, during which we would not necessarily know
the extent of the actual or potential harm or how best to
remediate it, and certain errors or actions could be
repeated or compounded before duly discovered and
remediated (all or any of which could further increase the
costs and consequences arising out of such cyberattack).
Ternium does not maintain any specific insurance
coverage to protect against cybersecurity risks. Even if we
contracted such coverage in the future, we cannot ensure
that it will be sufficient to cover any particular losses
resulting from a cyberattack.
RISKS RELATING TO OUR MINING ACTIVITIES
Mining is one of Ternium’s two reporting segments, and
iron ore is one of the principal raw materials used by
Ternium’s operating subsidiaries in its steelmaking
segment. Ternium has equity interests in two iron ore
mining companies in Mexico: a 100% interest in Las
Encinas and a 50% interest in Consorcio Peña Colorada.
In addition, although Ternium is currently seeking to
secure a stable supply of iron ore for its own internal
consumption, in the future it could seek to expand its
supplies of iron ore depending upon, among other factors,
market conditions and strategic needs. Our present and
future mining activities are or would be subject to
particular risks, as follows:
Unexpected natural and operational catastrophes may
impact the environment or cause exposure to hazardous
substances, adversely impact our operations and
profitability, and result in material liabilities to us.
We operate extractive, processing and logistical
operations, including tailings dams, in many geographic
locations. Liabilities associated with our mining activities
include those resulting from tailings and sludge disposal,
effluent management, and rehabilitation of land disturbed
during mining processes. Our operations involve the use,
handling, storage, discharge and disposal into the
165. Annual Report 2018
RISK FACTORS
environment of hazardous substances and the use of
natural resources. The iron ore mining industry is
generally subject to significant risks and hazards,
including environmental pollution, such as spilling or
emissions of polluting substances or other hazardous
materials; operational incidents, such as open-cut pit wall
failures, rock falls or tailings dam breaches;
transportation incidents, involving mobile equipment or
machinery, slurry pipes and cable transportation; and may
also be subject to unexpected natural catastrophes. This
could result in environmental damage, damage to or
destruction of properties and facilities, personal injury or
death, and delays in production. For example, in January
2019, a tailings dam at Vale’s Córrego do Feijão mine in
Brumadinho, Brazil, collapsed, releasing a mudflow that
resulted in hundreds of people dead or missing. This
incident follows on from a previous incident in November
2015 when the collapse of the Samarco dam, operated by
Vale and BHP, resulted in the death of 19 people. Ternium
operates mines with tailings dams in Mexico and could
become subject to liabilities arising from similar incidents
in the future. While Ternium regularly carries out stability
assessments of its tailings dams, it cannot guarantee that
failures or breaches will not occur in the future. We may
also be subject to claims under federal and local laws and
regulations for toxic torts, natural resource damages and
other damages, as well as for the investigation and clean-
up of soil, surface water, sediments, groundwater and
other natural resources. Such claims for damages and
reclamation may arise out of current or former conditions
at sites that we own, lease or operate currently or inactive
sites that we currently own, leased land sites and third-
party waste disposal sites. We may be named as a
responsible party at other sites in the future. We also
could be subject to litigation for alleged bodily injuries
arising from claimed exposure to hazardous substances
allegedly used, released, or disposed of by us.
Environmental impacts as a result of our operations could
result in costs and liabilities that could materially and
adversely affect our margins, cash flow and profitability.
Third-party claims arising from these events may exceed
the limit of liability of the insurance policies we could
have in place.
Required governmental concessions could be subject to
changes or termination, permits and rights of use and
occupancy could be difficult to obtain or maintain and
166. Ternium
taxes or royalties applicable to the mining industry could
change, all of which could adversely affect our mining
activities and operating costs.
Our mining activities are subject to specific regulations
and depend on concessions and authorizations granted by
governmental authorities. Amendments to applicable laws
and regulations in Mexico may change the terms pursuant
to which we are required to pursue our exploration,
mining and ore processing activities. For example, on
January 1, 2014, a comprehensive tax reform became
effective in Mexico, including the enactment of new taxes
and royalties over mining activities, which in the case of
Ternium’s iron ore mining subsidiaries resulted in a 7.5%
royalty on mining profits, calculated on a special tax
basis. Additional changes to Mexican laws and
regulations may result in new taxes or royalties or require
modifications to the processes and technologies used in
our mining activities, leading to unexpected capital
expenditures and higher costs. If the relevant government
authority determines that we are not in compliance with
our obligations as concessionaires, it may terminate our
concession. Furthermore, in order to explore or exploit
mines, it is necessary to obtain the right of use and
occupancy of the land where the mines are situated. Even
though government regulations frequently establish
provisions intended to facilitate the establishment of such
rights, in some cases it may be difficult to reach and
maintain agreements with the landowners or such
agreements may be excessively onerous. If we are unable
to establish use and occupancy rights on acceptable terms,
our mining activities may be compromised. In addition,
Ternium’s iron ore mining subsidiaries need to obtain, in
the normal course of business, permits for the preparation
of new iron ore bodies at the mines and for the expansion
of tailings deposit capacity. If we are unable to obtain
such permits on a timely basis, we may need to alter our
mining and/or production plans, which could lead to
unexpected capital expenditures and higher costs.
Our reserve estimates may differ materially from
mineral quantities that we may be able to actually
recover, or our estimates of mine life may prove
inaccurate; and market price fluctuations and changes
in operating and capital costs may render certain ore
reserves uneconomical to mine in the future or cause us
to revise our reserve estimates.
Ternium’s reserves are estimated quantities of ore that it
has determined can be economically mined and processed
under present and anticipated conditions to extract their
mineral content. There are numerous uncertainties
inherent in estimating quantities of reserves and in
projecting potential future rates of mineral production,
including factors beyond our control. Reserve calculations
involve estimating deposits of minerals that cannot be
measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available
data and engineering and geological interpretation and
judgment. Reserve estimates also depend on assumptions
relating to the economic viability of extraction, which are
established through the application of a life of mine plan
for each operation or project providing a positive net
present value on a forward-looking basis, using forecasts
of operating and capital costs based on historical
performance, with forward adjustments based on planned
process improvements, changes in production volumes
and in fixed and variable proportions of costs, and
forecasted fluctuations in costs of raw material, supplies,
energy and wages. These forecasts and projections involve
assumptions and estimations that, although we believe are
reasonable at the time of estimating our reserves, may
change in the future and may fail to anticipate geological,
environmental or other factors or events that could make
it difficult or unprofitable to mine certain ore deposits.
In addition, our reserve estimates are of in-place material
after adjustments for mining depletion and mining losses
and recoveries, with no adjustments made for metal losses
due to processing. As a result, no assurance can be given
that the indicated amount of ore will be recovered from
our reserves, or that it will be recovered at the anticipated
rates, or that extracted ore will be converted into saleable
production over the mine life at levels consistent with our
reserve estimates. Reserve estimates may vary from those
included in this annual report, and results of mining and
production subsequent to the date of an estimate may
lead to future revisions of estimates. Estimates of mine
life may require revisions based on actual production
figures, changes in reserve estimates and other factors. For
example, fluctuations in the market prices of minerals,
reduced recovery rates or increased operating and capital
costs due to inflation, exchange rates, mining duties or
other factors could affect our mine life projections. To the
extent that market price fluctuations or changes in our
operating and capital costs increase our costs to explore,
locate, extract and process iron ore, we may be required to
lower our reserve estimates if certain ore reserves become
uneconomical to mine in the future.
Our exploration activities are subject to uncertainties as
to the results of such exploration; even if the exploration
activities lead to the discovery of ore deposits, the
effective exploitation of such deposits remains subject to
several risks.
Exploration activities are highly speculative, involve
substantial risks and may be unproductive. We may incur
substantial costs for exploration which do not yield the
expected results. The failure to find sufficient and
adequate reserves could adversely affect our business. In
addition, even if ore deposits are discovered, our ability to
pursue exploitation activities may be delayed for a long
time during which market conditions may vary. Significant
resources and time need to be invested in order to
establish ore resources through exploration, define the
appropriate processes that shall be undertaken, obtain
environmental licenses, concessions and permits
(including water usage permits), acquire land, build the
necessary facilities and infrastructure for greenfield
projects and obtain the ore or extract the metals from the
ore. If a project does not turn out to be economically
feasible by the time we are able to exploit it, we may incur
substantial write-offs.
Our expected costs and capital expenditure requirements
for exploration or exploitation activities may vary
significantly and affect our financial condition and
expected results of operations.
We may be subject to increased costs or delays relating to
the acquisition of adequate equipment for the exploration
and exploitation of ore deposits. Moreover, we may face
increasing costs or capital expenditure requirements
related to several factors, including diminished iron ore
reserve grades, deeper pits and operational sections of our
mines, iron ore deposits within the pit area that are more
difficult to locate or extract and increased energy supply
requirements that may be difficult to obtain. Adverse
mining conditions and other situations related to the
operation of the mine, whether permanent or temporary,
may lead to a significant increase in our planned capital
expenditures and our costs, as well as affect our ability to
produce the expected quantities of mineral. If this occurs,
167. Annual Report 2018
RISK FACTORS
our financial condition and expected results of operations
may also be negatively affected.
Difficulties in relationships with local communities may
adversely affect our mining activities and results of
operations.
Communities living or owning land near areas where we
operate may take actions to oppose and interfere with our
mining activities. Although we make significant efforts to
maintain good relationships with such communities,
actions taken by them (or by interest groups within those
communities) may hamper our ability to conduct our
mining activities as planned, request the government to
revoke or cancel our concessions or environmental or
other permits, prevent us from fulfilling agreements
reached with the government in connection with our
mining activities, or significantly increase the cost of
exploring and/or exploiting the mines, thereby adversely
affecting our business and results of operations. For
example, in Aquila, Mexico, in 2011, 2012 and 2013,
members of certain native communities blocked roads
demanding higher compensation for the use of land for
mining activities (and these actions prevented Ternium
from transporting iron ore from the mines to the
pelletizing facilities for periods of time that on some
occasions ultimately resulted in a technical stoppage of
the mining activities in Aquila). In July 2015, a group of
people demanding additional benefits for the native
community entered and occupied certain Consorcio Peña
Colorada’s facilities located in Colima and Jalisco,
Mexico, blocked the principal accesses and impeded the
entrance and exit of the employees for more than eight
hours. In 2013, local communities initiated legal actions
aimed at the cancellation of certain permits granted to
Las Encinas and to Consorcio Peña Colorada. Although
those legal actions did not succeed, Mexican legislation
affords judges the power to preemptively suspend
environmental or other permits or concessions, or to take
certain other measures, in order to protect the ejidos (land
jointly owned by native communities) until a legal action
is resolved. An adverse legal decision suspending or
cancelling our permits, or the illegal occupation of our
facilities, could adversely impact our mining activities and
results of operations.
RISKS RELATING TO THE STRUCTURE OF THE COMPANY
As a holding company, the Company’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.
The Company conducts all its operations through
subsidiaries. Dividends or other intercompany transfers of
funds from those subsidiaries are the Company’s primary
source of funds to pay its expenses, debt service and
dividends and to repurchase shares or ADSs. The
Company does not and will not conduct operations at the
holding company level. The ability of the Company’s
subsidiaries to pay dividends and make other payments to
the Company will depend on their results of operations
and financial condition and could be restricted by, among
other things, applicable corporate and other laws and
regulations, including those imposing foreign exchange
controls or restrictions on the repatriation of capital or
the making of dividend payments, and agreements and
commitments of such subsidiaries. If earnings and cash
flows of the Company’s operating subsidiaries are
substantially reduced, the Company may not be in a
position to meet its operational needs or to pay dividends.
In addition, the Company’s ability to pay dividends is
subject to legal and other requirements and restrictions in
effect at the holding company level. For example, the
Company may only pay dividends out of net profits,
retained earnings and distributable reserves and
premiums, each as defined and calculated in accordance
with Luxembourg laws and regulations.
The Company’s controlling shareholder may be able to
take actions that do not reflect the will or best interests of
other shareholders.
As of the date of this annual report, San Faustin
beneficially owned 62.02% of our outstanding voting
shares and Tenaris, which is also controlled by San
Faustin, held 11.46% of our outstanding voting shares.
Rocca & Partners Stichting Administratiekantoor
Aandelen San Faustin, or “RP STAK,” holds voting shares
in San Faustin sufficient in number to control San Faustin.
As a result, RP STAK is indirectly able to elect a
substantial majority of the members of the Company’s
board of directors and has the power to determine the
outcome of most actions requiring shareholder approval,
including, subject to the requirements of Luxembourg
law, the payment of dividends. The decisions of the
168. Ternium
controlling shareholder may not reflect the will of other
shareholders. In addition, our controlling shareholder
may cause a general meeting of shareholders to be held,
propose the agenda for such meeting, and vote at such
meeting in favor of an issuance of shares for consideration
without preemptive rights of existing shareholders,
thereby diluting the minority interest in the Company.
Non-controlling interests in our subsidiaries could
delay or impede our ability to complete our strategy.
We do not own one hundred percent of the interests in
certain of our subsidiaries. As of February 28, 2019,
26.03% of Ternium Argentina was held by
Administración Nacional de la Seguridad Social, or
ANSeS, Argentina’s governmental social security
agency, and 13.03% was publicly held. ANSeS became a
significant shareholder of Ternium Argentina in the last
quarter of 2008 as a result of the nationalization of
Argentina’s private pension system, which caused assets
under administration of Argentina’s private pension
funds-including significant interests in publicly traded
companies, such as Ternium Argentina, held by such
funds-to be transferred to ANSeS. Ternium holds a 51%
ownership interest in Tenigal, and NSSMC holds the
remaining 49%. 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.
RISKS RELATING TO THE COUNTRIES IN WHICH WE OPERATE
Negative economic, political and regulatory developments
in certain markets where Ternium has a significant
portion of its operations and assets could hurt Ternium’s
shipment volumes or prices, increase its costs or disrupt
its manufacturing operations, thereby adversely affecting
its results of operations and financial condition.
The results of Ternium’s 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.
MEXICO
Ternium has significant manufacturing operations and
assets located in Mexico and a majority of its sales are
made to customers in this country. The majority of
Ternium’s revenues from its Mexican operations,
therefore, are related to market conditions in Mexico and
to changes in its economic activity. Ternium’s business
could be materially and adversely affected by economic,
political and regulatory developments in Mexico.
Economic and social conditions and government policies
in Mexico could negatively impact Ternium’s business and
results of operations.
In the past, Mexico has experienced several periods of
slow or negative economic growth, high inflation, high
interest rates, currency devaluation and other economic
problems. Furthermore, the Mexican national economy
tends to reflect changes in the economic environment in
the United States and could be affected by changes in the
terms of trade. If problems such as deterioration in
Mexico’s economic conditions reemerge (for example, as
a result of lower revenues due to oil price decline) or there
is a future re-emergence of social instability, political
unrest, reduction in government spending or other adverse
social developments, foreign exchange and financial
169. Annual Report 2018
RISK FACTORS
markets may exhibit continued volatility, which,
depending on its severity and duration, could adversely
affect the business, results of operations, financial
condition or liquidity of Ternium. Moreover, adverse
economic conditions in Mexico could result in, among
other things, higher interest rates accompanied by reduced
opportunities for refunding or refinancing, reduced
domestic consumption of Ternium’s products, decreased
operating results and delays in the completion of ongoing
and future capital expenditures.
Regulatory changes in Mexico could adversely impact our
results of operations and net results.
In the past, Mexico went through various economic
reforms. In December 2012, new labor regulations became
effective. The most relevant aspects of those regulations
were a reassessment of the status of third-party workers,
changes in rest periods, and an increase in the amounts of
fines and penalties applicable for violations of the
regulations. In addition, in 2014 a comprehensive tax
reform became effective in Mexico. Among other things,
the reform maintained the corporate income tax at 30%
(eliminating a scheduled reduction to 28%); repealed the
tax consolidation regime, limiting Ternium’s ability to
perform fiscal consolidation among its Mexican
subsidiaries beginning as of January 1, 2014; introduced a
10% withholding tax on dividend distributions; and
created a new royalty over mining activities, which in the
case of Ternium’s iron ore mining subsidiaries resulted in
a 7.5% royalty on mining profits calculated on a special
tax basis. These measures resulted in a deferred tax loss of
$22.3 million in Ternium’s 2013 results. Any additional
new changes to Mexican regulations could adversely
impact our results of operations and net results.
Violence and crime in Mexico could negatively impact
Ternium’s business and operations.
In recent years, there have been high incidences of
violence and crime related to drug trafficking in Mexico,
including the Monterrey area in Nuevo León, where our
main facilities are located, and Michoacán, where some of
our mining facilities are located. Security issues could
affect our day-to-day operations and could also result in
an economic slowdown, reducing domestic demand for
our products and thereby having an adverse effect on our
business. A deterioration of the security situation could
result in significant obstacles or additional costs to the
implementation of our growth plans in Mexico, including
delays in the completion of capital expenditures.
Unexpected changes in trade rules with the U.S. could
adversely impact our results of operations and net results.
Mexico, the U.S. and Canada are in the process of
ratifying the USMCA, a new trade agreement that when
ratified is expected to replace the current NAFTA. In
addition, Mexico and the U.S. have been negotiating
changes to the imposition of a 25% tariff on steel
products exported to the U.S., under Section 232 of the
Trade Expansion Act of 1962. Uncertainties about the
possible outcome of current negotiations or the
possibility of new trade conflicts in the future could
adversely affect the investment climate and economic
activity in Mexico, even though a significant period may
elapse until any potential changes become effective.
Moreover, amendments to, or the termination of current
terms of trade could adversely and materially affect
Ternium’s shipments, results of operations and net worth.
BRAZIL
Ternium has significant manufacturing operations and
assets located in Rio de Janeiro, Brazil, and some of its
sales are made in Brazil. Ternium Brasil’s profitability
could be materially and adversely affected by economic,
political, social, fiscal and regulatory developments in
Brazil.
Changing economic and political conditions in Brazil,
which on several occasions in the past resulted in
economic uncertainties and recession, may occur in the
future, thereby adversely affecting our business, financial
condition and results.
The Brazilian economy has been characterized by
frequent and occasionally extensive intervention by the
Brazilian government. The Brazilian government has often
changed monetary, taxation, credit, tariff and other
policies to influence the course of the country’s economy.
The Brazilian government’s actions to control inflation
and implement other policies have involved hikes in
interest rates, wage and price controls, foreign exchange
controls and devaluation, freezing of bank accounts,
capital controls and restrictions on imports. If repeated in
the future, such governmental policies may adversely
affect our results of operations. The Brazilian
government’s policies may also result in increases in our
tax payments or tariffs, which could adversely affect
170. Ternium
industry profitability. We may be unable to maintain our
projected cash flow and profitability following any
increases in Brazilian taxes or tariffs applicable to us and
our operations. The Brazilian economy has been affected
by inflation, energy shortages, illiquid lending markets
and other political, diplomatic, social and economic
developments. Uncertainty over whether the Brazilian
government will change policies or regulations affecting
these or other factors may contribute to economic
instability in Brazil. Our business and results of
operations in Brazil could be adversely affected by rapidly
changing economic conditions in Brazil or by the
Brazilian government’s policy response to such conditions.
Political instability could adversely affect our business,
financial condition and results.
Brazil’s political environment has historically influenced,
and continues to influence, the performance of the
country’s economy. Political crises have affected and
continue to affect public and investor confidence, which
resulted in economic deceleration.
Brazil has experienced heightened economic and political
instability derived from various ongoing investigations
into allegations of money laundering and corruption
being conducted by the Office of the Brazilian Federal
Prosecutor, including the ongoing Lava Jato investigation,
which has had a negative impact on the Brazilian
economy and political environment and contributed to a
decline in market confidence in Brazil. The potential
outcome of these investigations is uncertain, but they have
already had an adverse impact on the image and
reputation of the implicated companies, and on the
general market perception of the Brazilian economy,
which experienced negative gross domestic product, or
GDP, growth rates of 3.8% in 2015 and 3.6% in 2016 and
a public debt rating downgrade by Moody’s, Standard &
Poor’s and Fitch Ratings to below investment grade in
2015. We cannot predict whether the Lava Jato
investigation will lead to further political and economic
instability or whether new allegations against government
officials will arise in the future. In addition, we cannot
predict the outcome of such investigation nor its effect on
the Brazilian economy and, consequently, on the results of
operations and financial conditions of Ternium's
businesses in Brazil.
Inflation may undermine economic growth in Brazil and
impact our costs, thereby adversely affecting our results of
operations and financial position.
High levels of inflation have in the past undermined the
Brazilian economy and the government’s ability to
stimulate economic growth. Consumer price inflation in
Brazil, as reported by IBGE, the Brazilian geography and
statistics bureau, amounted to 3.4% in 2018, 2.1% in 2017
and 6.6% in 2016. If inflation were to increase again in
the future, our results of operations and financial position
could be negatively impacted, as BRL-denominated costs
(mainly labor-related costs) at Ternium Brasil increase,
thereby affecting our cost-competitiveness. Inflationary
pressures may also lead to the imposition of additional
government policies to combat inflation and hinder our
access to Brazilian capital markets, which could adversely
affect our business and our ability to finance our
operations and capital expenditures, making it impossible
to estimate with reasonable certainty future results of
operations of Ternium Brasil.
ARGENTINA
Most of Ternium Argentina’s sales revenue is affected by
market conditions in Argentina and changes in
Argentina’s GDP, and per capita disposable income.
Accordingly, Ternium Argentina’s business could be
materially and adversely affected by economic, political,
social, fiscal and regulatory developments in Argentina.
For more information on Ternium’s sales in Argentina, see
the chapter "Management's Report" in this annual report.
Economic and political instability in Argentina, which on
several occasions resulted in economic uncertainties and
recession, may occur in the future, thereby adversely
affecting our business, financial condition and results.
Our business and results of operations in Argentina
depend on macroeconomic conditions, among other
factors. Steel shipments to the Argentine domestic market
were affected as a result of the 2008-2009 downturn in the
global economy. Steel shipments to the Argentine
domestic market also decreased in 2016, as the country
faced a significant rebalancing of the economy’s relative
prices in a year of macroeconomic policy changes, and in
2018, as the economy was affected by a severe downturn
as a result of multiple factors, including a deep decline in
grain production due to adverse weather conditions,
financial market volatility and high interest rates. The
171. Annual Report 2018
RISK FACTORS
Argentine economy is currently facing significant
challenges. High and unpredictable inflation makes
renegotiation of collective bargaining agreements
difficult. In addition, in the last decade, the Argentine
economy was affected by supply constraints and capital
investment declined significantly due to, among other
factors, political, economic and financial uncertainties
and government actions, which included price and foreign
exchange controls, import restrictions, export taxes, an
increased level of government intervention in, or
limitations to, the conduct of business in the private
sector and other measures affecting investor confidence.
Although some of these restrictions have been lifted, there
can be no assurance that they will not be reestablished in
the future or that the Argentine government will not take
additional similar measures in the future. Economic
conditions in Argentina have deteriorated rapidly in the
past and may deteriorate rapidly in the future. The
Argentine economy may not grow and economic
instability may increase. Our business and results of
operations in Argentina could be adversely affected by
rapidly changing economic conditions in Argentina or by
the Argentine government’s policy response to such
conditions.
Inflation may undermine economic growth in Argentina
and impact our costs, thereby adversely affecting our
results of operations and financial position.
In the past, inflation has undermined the Argentine
economy and the government’s ability to stimulate
economic growth. Consumer price inflation in Argentina,
as reported by INDEC, the Argentine statistics and census
bureau, amounted to 47.6% in 2018 and 24.8% in 2017.
Sustained high inflation in Argentina negatively impact
our results of operations and financial position, as ARS-
denominated costs (mainly labor-related costs) at
Ternium Argentina increase, thereby affecting its cost-
competitiveness and adversely affecting its margins. In
addition, a high inflation economy could undermine
Argentina’s foreign competitiveness in international
markets and negatively affect the economy’s activity and
employment levels. Argentine inflation rate volatility
makes it impossible to estimate with reasonable certainty
the extent to which activity levels and results of
operations of Ternium Argentina could be affected by
inflation in the future.
The Argentine government has increased taxes on
Argentine companies and could further increase the fiscal
burden in the future, which could adversely affect our
results of operations, net results and financial condition.
Between 1992 and 2017, the Argentine government did not
permit the application of an inflation adjustment on the
value of fixed assets for tax purposes. As a result of the
substantial devaluation of the Argentine peso against the
U.S. dollar and significant inflation over the last decade,
the amounts that the Argentine tax authorities permitted
Ternium Argentina to deduct as depreciation for its past
investments in plant, property and equipment have been
substantially reduced in real terms, thus creating artificial
gains for tax purposes which resulted in effective tax rates
that are higher than statutory tax rates. In addition,
provincial taxes on Ternium Argentina’s sales have
increased over the last few years. In September 2013,
Argentine Congress approved a new 10% withholding tax
on dividend distributions in Argentina. This measure
resulted in a deferred tax loss of $24.0 million in
Ternium’s 2013 results, which was recovered after the
elimination of such tax in July 2016. By year-end 2017,
Congress passed a new tax law which seeks to gradually
decrease the tax burden on Argentine corporations over a
five-year period. During September 2018, the government
suspended tax rebates and imposed a new tax on exports,
consisting in Ternium Argentina’s case in ARS3
(approximately $7 cents) per each U.S. dollar worth of
exports. If the tax burden on Ternium Argentina’s
operations or its shareholders were increased in the
future, Ternium’s results of operations, net results and
financial condition could be adversely affected.
Argentine exchange controls could prevent Ternium from
paying dividends or other amounts from cash generated
by Ternium Argentina’s operations.
In the past, the Argentine government and the Argentine
Central Bank introduced several rules and regulations to
reduce volatility in the ARS/$ exchange rate, and
implemented formal and informal restrictions on capital
inflows into Argentina and capital outflows from
Argentina. Although such restrictions were lifted by the
current administration, such controls may be
reestablished, or additional restrictions of that kind may
be imposed in the future, and could expose Ternium to
the risk of losses arising from fluctuations in the exchange
rate or affect Ternium’s ability to finance its investments
172. Ternium
and operations in Argentina or impair Ternium’s ability
to convert and transfer outside Argentina funds generated
by Ternium Argentina.
Restrictions on the imports of key steelmaking inputs for
Ternium Argentina’s operations could adversely affect
Ternium Argentina’s production and revenues and
negatively impact Ternium’s results of operations.
Some of Ternium Argentina’s key steelmaking inputs,
including iron ore and metallurgical coal, are imported
into Argentina. In the past, different government
administrations implemented significant import
restrictions; for instance, all payments on imports of
goods and services were required to be approved by the
Argentine federal tax authority and other authorities,
such as the Secretary of Commerce. Although most
restrictions were lifted by the current administration, such
import restrictions, if reinstated, could delay imports and
adversely affect our business, operations and growth
projects in Argentina. In addition, they could affect
Ternium Argentina’s exports from Argentina, considering
that foreign countries could adopt and implement
counter-trade measures.
Restrictions on supply or an increase in the cost of energy
to Ternium Argentina’s operations in Argentina could
curtail Ternium Argentina’s production and negatively
impact Ternium’s results of operations.
For over a decade, Argentina has suffered from an
insufficient level of investment in natural gas and
electricity supply and transport capacity, coupled with a
substantial increase in demand for natural gas and
electricity. This, in turn, resulted in shortages of natural
gas and electricity to residential users and, in particular,
to industrial users, including Ternium Argentina, during
periods of high demand. Ternium Argentina’s operations
experienced constraints in their natural gas supply
requirements and interruptions in their electricity supply
at peak hours on many occasions. Although the Argentine
government is making efforts to increase availability of
energy supply in the country, if demand for natural gas
and electricity increases and a matching increase in
natural gas and electricity supply and transport capacity
fails to materialize on a timely basis, Ternium Argentina’s
local production (or that of its main customers and
suppliers) could be curtailed, and Ternium Argentina’s
sales and revenues could decline. In addition, since 2016
the current administration has been gradually reducing
the government’s subsidies for natural gas and electricity.
This could result in an increase in Ternium Argentina’s
energy costs, which may adversely affect Ternium
Argentina’s results of operations. See “-Risks Relating to
the Steel Industry-Price fluctuations or shortages in the
supply of raw materials, slabs and energy could adversely
affect Ternium’s profitability” above.
CERTAIN REGULATORY RISKS AND LITIGATION RISKS
International trade actions or regulations and trade-
related legal proceedings could adversely affect Ternium’s
sales, revenues and overall business.
International trade-related legal actions and restrictions
pose a constant risk for Ternium’s international
operations and sales throughout the world. We purchase
steel products, including significant quantities of steel
slabs, for our operations in Mexico (which we obtain from
various suppliers in Mexico and overseas), and we also
purchase steel products for our operations in Colombia
(which we obtain from our subsidiaries overseas and from
various suppliers in Colombia and overseas) and for our
operations in Argentina (which we obtain from various
suppliers mainly in Brazil). Subject to certain conditions,
steel products are imported into Mexico, Argentina and
Colombia under zero or low import duties. In the future,
the Mexican, Argentine or Colombian governments may
impose new duties, increase applicable duties or impose
import quotas. Increased trade liberalization has reduced
certain of Ternium’s imported input costs and increased
Ternium’s access to many foreign markets. However,
greater trade liberalization in its domestic markets is
increasing competition for Ternium in such markets. In
recent years, as a consequence of a global downturn and
an economic slowdown in China, the number of
antidumping, countervailing and other actions limiting
trade has increased substantially. Accordingly, producers
from certain countries find themselves excluded from
certain markets and in need of finding alternatives for
their products. As a result, Ternium’s domestic market
share could be eroded in the face of foreign imports, and
Ternium’s increased exports to foreign markets where
import barriers have been reduced may not completely
offset domestic market share losses resulting from
increased foreign competition. Countries can impose
restrictive import duties and other restrictions on imports
under various national trade laws. The timing and nature
173. Annual Report 2018
RISK FACTORS
of the imposition of trade-related restrictions potentially
affecting Ternium’s exports are unpredictable. Trade
restrictions on Ternium’s exports could adversely affect
Ternium’s ability to sell products abroad and, as a result,
Ternium’s profit margins, financial condition and overall
business could suffer. One significant source of trade
restrictions results from countries’ imposition of so-called
“antidumping” and “countervailing” duties, as well as
“safeguard measures.” These duties can severely limit or
altogether impede an exporter’s ability to export to
relevant markets. In several of Ternium’s export
destinations, such as the United States or Europe,
safeguard duties and other protective measures have been
imposed against a broad array of steel imports in certain
periods of excess global production capacity, as is
currently the case. For example, during 2018, under
Section 232 of the Trade Expansion Act of 1962, the U.S.
imposed a 25% tariff on steel imports; Australia was
exempted from the tariff and although Argentina, Brazil
and South Korea were also exempted, they were subjected
to quota system agreements covering steel imports from
those countries. There is considerable uncertainty
surrounding the eventual scope and impact of these
measures and its corresponding exemptions. Furthermore,
certain domestic producers have filed antidumping and/or
countervailing duty actions against particular steel
imports. Some of these actions have led to restrictions on
Ternium’s exports of certain types of steel products to
certain steel markets. As domestic producers’ filing of
such actions is largely unpredictable, additional
antidumping duties, countervailing duties or other such
import restrictions could be imposed in the future,
limiting Ternium’s export sales to and potential growth in
those markets.
The cost of complying with environmental regulations
and potential environmental and product liabilities may
increase our operating costs and negatively impact our
business, financial condition, results of operations and
prospects.
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.
Currently, there are ongoing negotiations for new
commitments on greenhouse gas, or GHG, emissions
related to the second phase of the Kyoto protocol, which
expires in 2020, and the Paris Agreement, an agreement
within the United Nations Framework Convention on
Climate Change dealing with GHG emissions mitigation.
The Paris Agreement consists of two elements: a legally
binding commitment by each participating country to set
an emissions reduction target, referred to as “Nationally
Determined Contributions,” or “NDCs,” with a review of
the NDCs that could lead to updates and enhancements
every five years beginning in 2023; and a transparency
commitment requiring participating countries to disclose
in full their progress. New environmental regulations
could result from such agreements and ongoing
negotiations, including a carbon pricing cap and trade
systems, carbon taxes, mandated emission controls
and reporting requirements. If such new regulations are
issued and become applicable to Ternium, they could have
a negative effect on Ternium’s business and results of
operations. Furthermore, 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. Compliance with applicable requirements and
the adoption of new requirements could have a material
adverse effect on our consolidated statement of financial
position, results of operations or cash flows. The ultimate
impact of complying with environmental laws and
regulations is not always clearly known or determinable
since regulations under some of these laws have not yet
been promulgated or are undergoing revision. The
expenditures necessary to remain in compliance with
these laws and regulations, including site or other
remediation costs, or costs incurred from potential
environmental liabilities, could have a material adverse
174. Ternium
effect on our financial condition and profitability. While
we incur and 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 production of food cans,
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.
15, 2014, but then fell to a low closing price of $10.56
on January 15, 2016. Since then, the price of our
ADSs has recovered and traded in a range of $25.57 to
$42.19 in the last twelve months up to February 2019.
Furthermore, the trading price of our ADSs could
suffer as a result of developments in emerging
markets. Although the Company is organized as a
Luxembourg corporation, almost all of its assets and
operations are located in Latin America. Financial
and securities markets for companies with a
substantial portion of their assets and operations in
Latin America are, to varying degrees, influenced by
political, economic and market conditions in
emerging market countries. Although market
conditions are different in each country, investor
reaction to developments in one country can have
significant effects on the securities of issuers with
assets or operations in other emerging markets,
including Mexico, Brazil, Argentina and Colombia.
See “-Risks Relating to the Countries in Which We
Operate.”
RISKS RELATING TO OUR ADSs
The market price for our ADSs could be highly volatile.
Volatility in the price of our ADSs may be caused by
factors within or outside of our control and may be
unrelated or disproportionate to Ternium’s operating
results. In particular, announcements of potentially
adverse developments, such as proposed regulatory
changes, new government investigations or the
commencement or threat of litigation against
Ternium, as well as announcements of transactions,
investments, or changes in strategies or business plans
of Ternium or its competitors, could adversely affect
the trading price of our ADSs, regardless of the likely
outcome of those developments. Broad market and
industry factors could adversely affect the market
price of our ADSs, regardless of their actual effect in
operating performance. As an example of this
volatility, the price of our ADSs closed at $45.18 on
June 2, 2008, and fell to a low of $4.55 on November
20, 2008. In the 2009-2010 period, the price of our
ADSs recovered and reached a high closing price of
$43.26 on January 5, 2011, but then fell to a low
closing price of $15.54 on November 29, 2011. In the
2012-2013 period, the price of our ADSs recovered
and reached a high closing price of $32.24 on January
In deciding whether to purchase, hold or sell our ADSs,
you may not be able to access as much information about
us as you would in the case of a U.S. company.
There may be less publicly available information about us
than is regularly published by or about U.S. issuers. Also,
corporate and securities regulations governing
Luxembourg companies may not be as extensive as those
in effect in the United States. Furthermore, IFRS, the
accounting standards in accordance with which we
prepare our consolidated financial statements, differ in
certain material aspects from the accounting standards
used in the United States.
Holders of our ADSs may not be able to exercise, or may
encounter difficulties in the exercise of, certain rights
afforded to shareholders.
Certain shareholders’ rights under Luxembourg law,
including the right to participate and vote at general
meetings of shareholders, to include items on the agenda
for the general meetings of shareholders, to receive
dividends and distributions, to bring actions, to examine
books and records and to exercise appraisal rights may
not be available to holders of ADSs, or may be subject to
restrictions and special procedures for their exercise, as
holders of ADSs only have those rights that are expressly
175. Annual Report 2018
RISK FACTORS
granted to them in the deposit agreement. The Bank of
New York Mellon, or BNY Mellon, as depositary, through
its custodian agent, is the registered shareholder of the
deposited shares underlying the ADSs and therefore only
the depositary can exercise the shareholders’ rights in
connection with the deposited shares. For example, if we
make a distribution in the form of securities, the
depositary is allowed, at its discretion, to sell that right to
acquire those securities on your behalf and to instead
distribute the net proceeds to you. Also, under certain
circumstances, such as our failure to provide the
depositary with voting materials on a timely basis, you
may not be able to vote by giving instructions to the
depositary. If the depositary does not receive voting
instructions from the holder of ADSs or the instructions
are not in proper form, then the depositary shall deem
such holder of ADSs to have instructed the depositary to
vote the underlying shares represented by ADSs in favour
of any proposals or recommendations of the Company
(including any recommendation by the Company to vote
such underlying shares on any given issue in accordance
with the majority shareholder vote on that issue) for
which purposes the depositary shall issue a proxy to a
person appointed by the Company to vote such
underlying shares represented by ADSs. Under the deposit
agreement, no instruction shall be deemed given and no
proxy shall be given with respect to any matter as to
which the Company informs the depositary that (x) it
does not wish such proxy given, (y) substantial opposition
exists, or (z) the matter materially and adversely affects
the rights of the holders of ADSs.
Holders of our shares and ADSs in the United States may
not be able to exercise preemptive rights in certain cases.
Pursuant to the Luxembourg Company Law, existing
shareholders of the Company are generally entitled to
preemptive subscription rights in the event of capital
increases and issues of shares against cash contributions.
Under the Company’s articles of association, the board of
directors is authorized to waive, limit or suppress such
preemptive subscription rights. The validity period of
such authorization will expire (unless renewed) on May 6,
2020. The Company, however, may issue shares without
preemptive rights only if the newly issued shares are
issued: (i) for, within, in conjunction with or related to, an
initial public offering of the shares of the Company on
one or more regulated markets (in one or more instances);
(ii) for consideration other than cash; (iii) upon
conversion of convertible bonds or other instruments
convertible into shares of the Company; provided,
however, that the preemptive subscription rights of the
then-existing shareholders shall apply in connection with
any issuance of convertible bonds or other instruments
convertible into shares of the Company for cash; or (iv)
subject to a certain maximum percentage, as
compensation to directors, officers, agents or employees
of the Company, its direct or indirect subsidiaries or its
affiliates, including without limitation the direct issuance
of shares or the issuance of shares upon exercise of
options, rights convertible into shares or similar
instruments convertible or exchangeable into shares issued
or created to provide compensation or incentives to
directors, officers, agents or employees of the Company,
its direct or indirect subsidiaries or its affiliates.
Furthermore, holders of our shares and ADSs in the
United States may, in any event, not be able to exercise any
preemptive rights, if granted, for shares unless those
shares are registered under the U.S. Securities Act of 1933,
as amended, or the “Securities Act,” with respect to those
rights or an exemption from registration is available. We
intend to evaluate, at the time of any rights offering, the
costs and potential liabilities associated with the exercise
by holders of shares and ADSs of the preemptive rights
for shares, and any other factors we consider appropriate
at the time, and then to decide as to whether to register
additional shares. We may decide not to register any
additional shares, requiring a sale by the depositary of the
holders’ rights and a distribution of the proceeds thereof.
Should the depositary not be permitted or otherwise be
unable to sell preemptive rights, the rights may be allowed
to lapse with no consideration to be received by the
holders of the ADSs.
It may be difficult to obtain or enforce judgments against
the Company in U.S. courts or courts outside of the
United States.
The Company is a public limited liability company
(société anonyme) organized under the laws of
Luxembourg, and most of its assets are located outside of
the United States. Furthermore, most of the Company’s
directors and officers named in this annual report reside
outside the United States. As a result, investors may not be
able to effect service of process within the United States
upon the Company or its directors or officers or to
176. Ternium
enforce against the Company or them in U.S. courts
judgments predicated upon the civil liability provisions of
U.S. federal securities law. Likewise, it may be difficult for
a U.S. investor to bring an original action in a
Luxembourg court predicated upon the civil liability
provisions of the U.S. federal securities laws against the
Company, its directors or its officers. There is also
uncertainty with regard to the enforceability of original
actions in courts outside the United States of civil
liabilities predicated upon the civil liability provisions of
U.S. federal securities laws. Furthermore, the
enforceability in courts outside the United States of
judgments entered by U.S. courts predicated upon the civil
liability provisions of U.S. federal securities law will be
subject to compliance with procedural requirements
under applicable local law, including the condition that
the judgment does not violate the public policy of the
applicable jurisdiction.
177. Annual Report 2018
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