Report of Foreign Issuer (6-k)

Date : 02/20/2019 @ 11:11AM
Source : Edgar (US Regulatory)
Stock : Ternium SA (TX)
Quote : 21.6  0.28 (1.31%) @ 3:48PM

Report of Foreign Issuer (6-k)

FORM 6 - K



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934

As of 02/19/2019

Ternium S.A.
(Translation of Registrant's name into English)

Ternium S.A.
29 Avenue de la Porte-Neuve – 3rd floor
L-2227 Luxembourg
(352) 2668-3152
(Address of principal executive offices)


Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or 40-F.

Form 20-F a Form 40-F __

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12G3-2(b) under the Securities Exchange Act of 1934.

Yes __ No a


If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
Not applicable



The attached material is being furnished to the Securities and Exchange Commission pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange Act of 1934, as amended.
 
This report contains Ternium S.A.’s consolidated financial statements as of December 31, 2018.


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


TERNIUM S.A.


By: /s/ Pablo Brizzio
 
By: /s/ Máximo Vedoya
Name: Pablo Brizzio
 
Name: Máximo Vedoya
Title: Chief Financial Officer
 
Title: Chief Executive Officer
            

Dated: February 19, 2019





LOGO03.GIF
TERNIUM S.A.
Consolidated Financial Statements
as of December 31, 2018 and 2017 and
for the years ended on December 31, 2018 , 2017 and 2016
29 Avenue de la Porte-Neuve, 3 rd floor
L – 2227
R.C.S. Luxembourg: B 98 668



TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 


INDEX TO THE CONSOLIDATED FINANCIAL STAMENTS

 
Page
 
 
Consolidated Income Statements for the years ended December 31, 2018, 2017 and 2016
2
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
3
Consolidated Statements of Financial Position as of December 31, 2018 and 2017
4
Consolidated Statements of Changes in Equity for the years ended December 31, 2018, 2017 and 2016
5
Consolidated Statements of Cash Flow for the years ended December 31, 2018, 2017 and 2016
8
Index to the Notes to the Consolidated Financial Statements
9




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 USD thousands)



Consolidated Income Statements
 
 
Year ended December 31,
 
Notes
2018
 
2017
 
2016
 
 
 
 
 
 
 
Net sales
5
11,454,807

 
9,700,296

 
7,223,975

Cost of sales
6
(8,483,328
)
 
(7,403,025
)
 
(5,384,390
)
 
 
 
 
 
 
 
Gross profit
 
2,971,479

 
2,297,271

 
1,839,585

 
 
 
 
 
 
 
Selling, general and administrative expenses
7
(876,764
)
 
(824,247
)
 
(687,942
)
Other operating income (expenses), net
9
13,656

 
(16,240
)
 
(9,925
)
 
 
 
 
 
 
 
Operating income
 
2,108,371

 
1,456,784

 
1,141,718

 
 
 
 
 
 
 
Finance expense
10
(131,172
)
 
(114,583
)
 
(89,971
)
Finance income
10
21,236

 
19,408

 
14,129

Other financial income (expenses), net
10
(69,640
)
 
(69,915
)
 
37,957

Equity in earnings (losses) of non-consolidated companies
14
102,772

 
68,115

 
14,624

 
 
 
 
 
 
 
Profit before income tax expense
 
2,031,567

 
1,359,809

 
1,118,457

 
 
 
 
 
 
 
Income tax expense
11
(369,435
)
 
(336,882
)
 
(411,528
)
 
 
 
 
 
 
 
Profit for the year
 
1,662,132

 
1,022,927

 
706,929

 
 
 
 
 
 
 
Attributable to:
 
 
 
 
 
 
Owners of the parent
 
1,506,647

 
886,219

 
595,644

Non-controlling interest
 
155,485

 
136,708

 
111,285

 
 
 
 
 
 
 
Profit for the year
 
1,662,132

 
1,022,927

 
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 USD per share)
 
0.77

 
0.45

 
0.30

The accompanying notes are an integral part of these consolidated financial statements.


Page 2 of 87



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 USD thousands)



Consolidated Statements of Comprehensive Income
 
Year ended December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Profit for the year
1,662,132

 
1,022,927

 
706,929

 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss:
 
 
 
 
 
Currency translation adjustment
(376,220
)
 
(95,462
)
 
(141,665
)
Currency translation adjustment from participation in non-consolidated companies
(73,761
)
 
(8,931
)
 
53,858

Changes in the fair value of financial instruments at fair value through other comprehensive income
(1,036
)
 

 

Income tax related to financial instruments at fair value
122

 

 

Changes in the fair value of derivatives classified as cash flow hedges
(132
)
 
735

 
641

Income tax relating to cash flow hedges
(73
)
 
(107
)
 
(192
)
Other comprehensive income items
(897
)
 
(96
)
 
(1,542
)
Other comprehensive income items from participation in non-consolidated companies
499

 
191

 
1,054

Items that will not be reclassified subsequently to profit or loss:
 
 
 
 
 
Remeasurement of post employment benefit obligations
(38,263
)
 
(15,068
)
 
(14,735
)
Income tax relating to remeasurement of post employment benefit obligations
9,259

 
4,916

 
2,571

Remeasurement of post employment benefit obligations from participation in non-consolidated companies
(3,780
)
 
3,954

 
(15,817
)
 
 
 
 
 
 
Other comprehensive loss for the year, net of tax
(484,282
)
 
(109,868
)
 
(115,827
)
 
 
 
 
 
 
Total comprehensive income for the year
1,177,850

 
913,059

 
591,102

 
 
 
 
 
 
Attributable to:
 
 
 
 
 
Owners of the parent
1,176,964

 
815,434

 
534,827

Non-controlling interest
886

 
97,625

 
56,275

 
 
 
 
 
 
Total comprehensive income for the year
1,177,850

 
913,059

 
591,102

The accompanying notes are an integral part of these consolidated financial statements.


Page 3 of 87



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 USD thousands)



Consolidated Statements of Financial Position
 
 
 
Balances as of
 
Notes
 
December 31, 2018
 
December 31, 2017
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-current assets
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
12
 
5,817,609

 
 
 
5,349,753

 
 
Intangible assets, net
13
 
1,012,524

 
 
 
1,092,579

 
 
Investments in non-consolidated companies
14
 
495,241

 
 
 
478,348

 
 
Other investments
18
 
7,195

 
 
 
3,380

 
 
Derivative financial instruments
22
 
818

 
 
 

 
 
Deferred tax assets
20
 
134,224

 
 
 
121,092

 
 
Receivables, net
15
 
649,447

 
 
 
677,299

 
 
Trade receivables, net
16
 
4,766

 
8,121,824

 
4,832

 
7,727,283

 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Receivables, net
15
 
309,750

 
 
 
362,173

 
 
Derivative financial instruments
22
 
770

 
 
 
2,304

 
 
Inventories, net
17
 
2,689,829

 
 
 
2,550,930

 
 
Trade receivables, net
16
 
1,128,470

 
 
 
1,006,598

 
 
Other investments
18
 
44,529

 
 
 
132,736

 
 
Cash and cash equivalents
18
 
250,541

 
4,423,889

 
337,779

 
4,392,520

Non-current assets classified as held for sale
 
 
 
 
2,149

 
 
 
2,763

 
 
 
 
 
4,426,038

 
 
 
4,395,283

 
 
 
 
 
 
 
 
 
 
Total Assets
 
 
 
 
12,547,862

 
 
 
12,122,566

 
 
 
 
 
 
 
 
 
 
EQUITY
 
 
 
 
 
 
 
 
 
Capital and reserves attributable to the owners of the parent
 
 
 
 
6,393,255

 
 
 
5,010,424

Non-controlling interest
 
 
 
 
1,091,321

 
 
 
842,347

Total Equity
 
 
 
 
7,484,576

 
 
 
5,852,771

 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-current liabilities
 
 
 
 
 
 
 
 
 
Provisions
19
 
643,950

 
 
 
768,517

 
 
Deferred tax liabilities
20
 
474,431

 
 
 
513,357

 
 
Other liabilities
21
 
414,541

 
 
 
373,046

 
 
Trade payables
 
 
935

 
 
 
2,259

 
 
Finance lease liabilities
23
 
65,798

 
 
 
69,005

 
 
Borrowings
24
 
1,637,101

 
3,236,756

 
1,716,337

 
3,442,521

 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current income tax liabilities
 
 
150,276

 
 
 
52,940

 
 
Other liabilities
21
 
351,216

 
 
 
357,001

 
 
Trade payables
 
 
904,171

 
 
 
897,732

 
 
Derivative financial instruments
22
 
12,981

 
 
 
6,001

 
 
Finance lease liabilities
23
 
8,030

 
 
 
8,030

 
 
Borrowings
24
 
399,856

 
1,826,530

 
1,505,570

 
2,827,274

 
 
 
 
 
 
 
 
 
 
Total Liabilities
 
 
 
 
5,063,286

 
 
 
6,269,795

 
 
 
 
 
 
 
 
 
 
Total Equity and Liabilities
 
 
 
 
12,547,862

 
 
 
12,122,566

The accompanying notes are an integral part of these consolidated financial statements.

Page 4 of 87


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 USD thousands)


Consolidated Statements of Changes in Equity
 
 
Attributable to the owners of the parent (1)
 
 
 
 
 
 
Capital  
stock
(2)
Treasury  
shares
(2)
Initial
public
offering  
expenses
Reserves
(3)
Capital
stock
issue
discount
(4)
Currency  
translation  
adjustment
Retained
earnings
Total
 
Non-
controlling
interest
 
Total  
Equity
Balanace at January 1, 2018
 
2,004,743

(150,000
)
(23,295
)
1,416,121

(2,324,866
)
(2,403,664
)
6,491,385

5,010,424

 
842,347

 
5,852,771

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of adopting IFRS 9 at January 1, 2018 (see note 28)
 
 
 
 
450

 
 
(147
)
303

 
204

 
507

Impact of adopting IAS 29 at January 1, 2018 (see note 4 (cc))
 
 
 
 
 
 
 
421,502

421,502

 
268,824

 
690,326

Adjusted Balance at January 1, 2018
 
2,004,743

(150,000
)
(23,295
)
1,416,571

(2,324,866
)
(2,403,664
)
6,912,740

5,432,229

 
1,111,375

 
6,543,604

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit for the year
 
 
 
 
 
 
 
1,506,647

1,506,647

 
155,485

 
1,662,132

Other comprehensive income (loss) for the period
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
 
 
 
 
 
 
(298,813
)
 
(298,813
)
 
(151,168
)
 
(449,981
)
Remeasurement of post employment benefit obligations
 
 
 
 
(29,418
)
 
 
 
(29,418
)
 
(3,366
)
 
(32,784
)
Cash flow hedges and others, net of tax
 
 
 
 
(288
)
 
 
 
(288
)
 
83

 
(205
)
Others
 
 
 
 
(1,164
)
 
 
 
(1,164
)
 
(148
)
 
(1,312
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss) for the year
 



(30,870
)

(298,813
)
1,506,647

1,176,964

 
886

 
1,177,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid in cash (5)
 
 
 
 
 
 
 
(215,938
)
(215,938
)
 

 
(215,938
)
Dividends paid in cash to non-controlling interest (6)
 
 
 
 
 
 
 
 

 
(29,006
)
 
(5,312
)
Inflation effect on dividends paid to non-controlling interest  (note 4 (cc))
 
 
 
 
 
 
 
 

 
8,066

 
(15,628
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
2,004,743

(150,000
)
(23,295
)
1,385,701

(2,324,866
)
(2,702,477
)
8,203,449

6,393,255

 
1,091,321

 
7,484,576

(1) Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 25 (iii).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2018 , there were 2,004,743,442 shares issued. All issued shares are fully paid. Also, as of December 31, 2018 , the Company held 41,666,666 shares as treasury shares.
(3) Include mainly legal reserve under Luxembourg law for USD 200.5 million , undistributable reserves under Luxembourg law for USD 1.4 billion , hedge accounting reserve, net of tax effect, for USD 0.5 million and reserves related to the acquisition of non-controlling interest in subsidiaries for USD (88.5) million .
(4) Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.11 per share (USD 1.10 per ADS). Related to the dividends distributed on May 2, 2018, and as 41,666,666 shares are held as treasury shares by Ternium, the dividends attributable to these treasury shares amounting to USD 4.6 million were included in equity as less dividend paid.
(6) Corresponds to the dividends paid by Ternium Argentina S.A.
Dividends may be paid by Ternium to the extent distributable retained earnings calculated in accordance with Luxembourg law and regulations exist. Therefore, retained earnings included in these consolidated financial statements may not be wholly distributable. See Note 25 (iii). The accompanying notes are an integral part of these consolidated financial statements.

Page 5 of 87


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 USD thousands)


Consolidated Statements of Changes in Equity
 
 
Attributable to the owners of the parent (1)
 
 
 
 
 
 
Capital
stock
 (2)
Treasury
shares
(2)
Initial
public
offering
expenses
Reserves
(3)
Capital
stock issue
discount
(4)
Currency
translation
adjustment
Retained
earnings
Total
 
Non-
controlling
interest
 
Total
Equity
Balance at January 1, 2017
 
2,004,743

(150,000
)
(23,295
)
1,420,171

(2,324,866
)
(2,336,929
)
5,801,474

4,391,298

 
775,295

 
5,166,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
 
 
 
 
 
 
886,219

886,219

 
136,708

 
1,022,927

Other comprehensive income (loss)  for the year
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
 
 
 
 
 
 
(66,735
)
 
(66,735
)
 
(37,658
)
 
(104,393
)
Remeasurement of post employment benefit obligations
 
 
 
 
(4,642
)
 
 
 
(4,642
)
 
(1,556
)
 
(6,198
)
Cash flow hedges and others, net of tax
 
 
 
 
504

 
 
 
504

 
124

 
628

Others
 
 
 
 
88

 
 
 
88

 
7

 
95

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss) for the year
 



(4,050
)

(66,735
)
886,219

815,434

 
97,625

 
913,059

Dividends paid in cash (5)
 
 
 
 
 
 
 
(196,308
)
(196,308
)
 

 
(196,308
)
Dividends paid in cash to non-controlling interest (6)
 
 
 
 
 
 
 
 

 
(30,573
)
 
(30,573
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
2,004,743

(150,000
)
(23,295
)
1,416,121

(2,324,866
)
(2,403,664
)
6,491,385

5,010,424

 
842,347

 
5,852,771

(1) Shareholders’ equity is determined in accordance with accounting principles generally accepted in Luxembourg.
(2) The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2017 , there were 2,004,743,442 shares issued. All issued shares are fully paid. Also, as of December 31, 2017 , the Company held 41,666,666 shares as treasury shares.
(3) Include mainly legal reserve under Luxembourg law for USD 200.5 million , undistributable reserves under Luxembourg law for USD 1.4 billion , hedge accounting reserve, net of tax effect, for USD 0.6 million and reserves related to the acquisition of non-controlling interest in subsidiaries for USD (88.5) million .
(4) Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.10 per share (USD 1.00 per ADS). Related to the dividends distributed on May 3, 2017, and as 41,666,666 shares are held as treasury shares by Ternium, the dividends attributable to these treasury shares amounting to USD 4.2 million were included in equity as less dividend paid.
(6) Corresponds to the dividends paid by Ternium Argentina S.A.
Dividends may be paid by Ternium to the extent distributable retained earnings calculated in accordance with Luxembourg law and regulations exist. Therefore, retained earnings included in these consolidated financial statements may not be wholly distributable. See Note 25 (iii). The accompanying notes are an integral part of these consolidated financial statements.



Page 6 of 87


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 USD thousands)


Consolidated Statements of Changes in Equity
 
 
Attributable to the owners of the parent (1)
 
 
 
 
 
 
Capital
stock
 (2)
Treasury
shares
(2)
Initial
public
offering
expenses
Reserves
(3)
Capital
stock
issue
discount
(4)
Currency
translation
adjustment
Retained
earnings
Total
 
Non-
controlling
interest
 
Total
Equity
Balance at January 1, 2016
 
2,004,743

(150,000
)
(23,295
)
1,444,394

(2,324,866
)
(2,300,335
)
5,382,507

4,033,148

 
769,849

 
4,802,997

Profit for the year
 
 
 
 
 
 
 
595,644

595,644

 
111,285

 
706,929

Other comprehensive income (loss)  for the year
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
 
 
 
 
 
 
(36,594
)
 
(36,594
)
 
(51,213
)
 
(87,807
)
Remeasurement of post employment benefit obligations
 
 
 
 
(25,749
)
 
 
 
(25,749
)
 
(2,232
)
 
(27,981
)
Cash flow hedges and others, net of tax
 
 
 
 
229

 
 
 
229

 
220

 
449

Others
 
 
 
 
1,297

 
 
 
1,297

 
(1,785
)
 
(488
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss) for the year
 



(24,223
)

(36,594
)
595,644

534,827

 
56,275

 
591,102

Dividends paid in cash (5)
 












(176,677
)
(176,677
)
 

 
(176,677
)
Dividends paid in cash to non-controlling interest (6)
 















 
(50,829
)
 
(50,829
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
2,004,743

(150,000
)
(23,295
)
1,420,171

(2,324,866
)
(2,336,929
)
5,801,474

4,391,298

 
775,295

 
5,166,593

(1) Shareholders’ equity is determined in accordance with accounting principles generally accepted in Luxembourg.
(2) The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2016 , there were 2,004,743,442 shares issued. All issued shares are fully paid. Also, as of December 31, 2016 , the Company held 41,666,666 shares as treasury shares.
(3) Include mainly legal reserve under Luxembourg law for USD 200.5 million , undistributable reserves under Luxembourg law for USD 1.4 billion , hedge accounting reserve, net of tax effect, for USD 0.1 million and reserves related to the acquisition of non-controlling interest in subsidiaries for USD (88.5) million .
(4) Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.090 per share (USD 0.90 per ADS). Related to the dividends distributed on May 4, 2016, and as 41,666,666 shares are held as treasury shares by Ternium, the dividends attributable to these treasury shares amounting to USD 3.7 million were included in equity as less dividend paid.
(6) Corresponds to the dividends paid by Ternium Argentina S.A.

Dividends may be paid by Ternium to the extent distributable retained earnings calculated in accordance with Luxembourg law and regulations exist. Therefore, retained earnings included in these consolidated financial statements may not be wholly distributable. See Note 25 (iii). The accompanying notes are an integral part of these consolidated financial statements.


Page 7 of 87



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 USD thousands)



Consolidated Statements of Cash Flows
 
 
 
Year ended December 31,
 
Notes
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
 
 
Profit for the year
 
 
1,662,132

 
1,022,927

 
706,929

Adjustments for:
 
 
 
 
 
 
 
Depreciation and amortization
12 & 13
 
589,299

 
474,299

 
406,890

Income tax accruals less payments
27 (b)
 
(154,366
)
 
(273,443
)
 
182,332

Equity in earnings of non-consolidated companies
14
 
(102,772
)
 
(68,115
)
 
(14,624
)
Interest accruals less payments
27 (b)
 
(13,014
)
 
19,484

 
12,699

Changes in provisions
19
 
(7,659
)
 
2,783

 
1,678

Changes in working capital  (1)
27 (b)
 
(228,577
)
 
(864,970
)
 
(162,373
)
Net foreign exchange results and others
 
 
(5,778
)
 
70,894

 
(33,936
)
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 
1,739,265

 
383,859

 
1,099,595

 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
Capital expenditures
12 & 13
 
(520,250
)
 
(409,402
)
 
(435,460
)
Loans to non-consolidated companies
14
 
(24,480
)
 
(23,904
)
 
(92,496
)
Decrease in other investments
18
 
86,857

 
14,986

 
86,340

Proceeds from the sale of property, plant and equipment
 
 
861

 
1,124

 
1,212

Dividends received from non-consolidated companies
 
 

 
65

 
183

Acquisition of business
 
 
 
 
 
 
 
Purchase consideration
3
 

 
(1,890,989
)
 

Cash acquired
3
 

 
278,162

 

Investment in non-consolidated companies
14
 

 

 
(114,449
)
 
 
 
 
 
 
 
 
Net cash used in investing activities
 
 
(457,012
)
 
(2,029,958
)
 
(554,670
)
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
Dividends paid in cash to company’s shareholders
 
 
(215,938
)
 
(196,308
)
 
(176,677
)
Dividends paid in cash to non-controlling interests
 
 
(20,940
)
 
(30,573
)
 
(50,829
)
Finance Lease payments
 
 
(7,565
)
 
(4,157
)
 

Proceeds from borrowings
 
 
1,188,731

 
3,239,121

 
910,577

Repayments of borrowings
 
 
(2,266,560
)
 
(1,205,827
)
 
(1,191,770
)
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
 
 
(1,322,272
)
 
1,802,256

 
(508,699
)
 
 
 
 
 
 
 
 
(Decrease) Increase in cash and cash equivalents
 
 
(40,019
)
 
156,157

 
36,226

 
 
 
 
 
 
 
 
Movement in cash and cash equivalents
 
 
 
 
 
 
 
At January 1,
 
 
337,779

 
183,463

 
151,491

Effect of exchange rate changes and inflation adjustment
 4 (cc)
 
(47,219
)
 
(1,841
)
 
(4,254
)
(Decrease) Increase in cash and cash equivalents
 
 
(40,019
)
 
156,157

 
36,226

 
 
 
 
 
 
 
 
Cash and cash equivalents at December 31, (2)
 
 
250,541

 
337,779

 
183,463

 
 
 
 
 
 
 
 
Non- Cash transactions:
 
 
 
 
 
 
 
Acquisition of PP&E under lease contract agreements
 
 

 
77,035

 


(1) The working capital is impacted by non-cash movement of USD (216.6) million as of December 31, 2018 (USD (70.0) million and USD (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 US dollar.
(2) It includes restricted cash of USD 2,216 , USD 50 and USD 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 USD 44,521 , USD 135,864 and USD 150,851 as of December 31, 2018 , 2017 and 2016 , respectively.
The accompanying notes are an integral part of these consolidated financial statements.

Page 8 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 


INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STAMENTS
 
Page
1

General information
10
2

Basis of presentation
11
3

Acquisition of business
14
4

Accounting policies
18
5

Segment information
42
6

Cost of sales
45
7

Selling, general and administrative expenses
46
8

Labor costs (included in cost of sales and selling, general and administrative expenses)
46
9

Other operating income (expenses), net
47
10

Other financial income (expenses), net
47
11

Income tax expense
48
12

Property, plant and equipment, net
49
13

Intangible assets, net
50
14

Investments in non-consolidated companies
51
15

Receivables, net - non-current and current
55
16

Trade receivables, net - non-current and current
56
17

Inventories, net
56
18

Cash, cash equivalents and other investments
57
19

Allowances and provisions - non-current and current
57
20

Deferred income tax
58
21

Other liabilities - non-current and current
60
22

Derivative financial instruments
62
23

Finance leases
64
24

Borrowings
65
25

Contingencies, commitments and restrictions on the distribution of profits
67
26

Related party transactions
73
27

Other required disclosures
75
28

Recently issued accounting pronouncements
76
29

Financial risk management
79
30

Subsequent events - Techgen refinancing
86



Page 9 of 87


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 to the Consolidated Financial Statements

1.
GENERAL INFORMATION
Ternium S.A. (the “Company” or “Ternium”), was incorporated on December 22, 2003 to hold investments in flat and long steel manufacturing and distributing companies. The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 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”.

The Company was initially established as a public limited liability company (société anonyme) under Luxembourg’s 1929 holding company regime. Until termination of such regime on December 31, 2010, holding companies incorporated under the 1929 regime (including the Company) were exempt from Luxembourg corporate and withholding tax over dividends distributed to shareholders.

On January 1, 2011, the Company became an ordinary public limited liability company (société anonyme) and, effective as from that date, the Company is subject to all applicable Luxembourg taxes (including, among others, corporate income tax on its worldwide income) and its dividend distributions will generally be subject to Luxembourg withholding tax. However, dividends received by the Company from subsidiaries in high income tax jurisdictions, as defined under Luxembourg law, will continue to be exempt from corporate income tax in Luxembourg under Luxembourg’s participation exemption.

As part of the Company’s corporate reorganization in connection with the termination of Luxembourg’s 1929 holding company regime, on December 6, 2010, the Company contributed its equity holdings in all its subsidiaries and all its financial assets to its Luxembourg wholly-owned subsidiary Ternium Investments S.à r.l., or Ternium Investments, in exchange for newly issued corporate units of Ternium Investments. As the assets contributed were recorded at their historical carrying amount in accordance with Luxembourg GAAP, the Company’s December 2010 contribution of such assets to Ternium Investments resulted in a non-taxable revaluation of the accounting value of the Company’s assets under Luxembourg GAAP. The amount of the December 2010 revaluation was equal to the difference between the historical carrying amounts of the assets contributed and the value at which such assets were contributed and amounted to USD 4.0 billion. However, for the purpose of these consolidated financial statements, the assets contributed by Ternium to its wholly-owned subsidiary Ternium Investments were recorded based on their historical carrying amounts in accordance with IFRS, with no impact on the financial statements.




Page 10 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016

1.
GENERAL INFORMATION (continued)

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 USD 6.7 billion and USD 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 (“USD”), 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 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.


Page 11 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016

2.
BASIS OF PRESENTATION (continued)

 
 
Country of
 
 
 
Percentage of ownership
at December 31,
Company
 
Organization
 
Main activity
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Ternium S.A.
 
Luxembourg
 
Holding
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Investments S.à.r.l.
 
Luxembourg
 
Holding
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Solutions A.G. (1)
 
Switzerland
 
Services
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Participaçoes S.A. (1)
 
Brazil
 
Holding
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Investments Switzerland AG (1)
 
Switzerland
 
Holding
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Internacional España S.L.U. (1)
 
Spain
 
Marketing of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium USA Inc. (1)
 
USA
 
Manufacturing and selling of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Argentina S.A. (2)
 
Argentina
 
Manufacturing and selling of steel products
 
60.94
%
 
60.94
%
 
60.94
%
Impeco S.A. (3)
 
Argentina
 
Manufacturing of pipe products
 
60.97
%
 
60.97
%
 
60.97
%
Prosid Investments S.A. (4)
 
Uruguay
 
Holding
 
60.94
%
 
60.94
%
 
60.94
%
Ternium Mexico S.A. de C.V. (5)
 
Mexico
 
Manufacturing and selling of steel products
 
88.78
%
 
88.78
%
 
88.78
%
Hylsa S.A. de C.V. (6)
 
Mexico
 
Manufacturing and selling of steel products
 
88.78
%
 
88.78
%
 
88.78
%
Las Encinas S.A. de C.V. (6)
 
Mexico
 
Exploration, exploitation and pelletizing of iron ore
 
88.78
%
 
88.78
%
 
88.78
%
Ferropak Comercial S.A. de C.V. (6)
 
Mexico
 
Scrap services company
 
88.78
%
 
88.78
%
 
88.78
%
Transamerica E. & I. Trading Corp. (6)
 
USA
 
Scrap services company
 
88.78
%
 
88.78
%
 
88.78
%
Técnica Industrial S.A. de C.V. (6)
 
Mexico
 
Services
 
88.78
%
 
88.78
%
 
88.78
%
Galvacer Chile SA (6)
 
Chile
 
Distributing company
 
88.78
%
 
88.78
%
 
88.78
%
Imsamex Ecuador, S.A. (6)
 
Ecuador
 
Distributing company
 
88.78
%
 
88.78
%
 
88.78
%
Ternium Gas México S.A. de C.V. (7)
 
Mexico
 
Energy services company
 
88.78
%
 
88.78
%
 
88.78
%
Consorcio Minero Benito Juarez Peña Colorada S.A.de C.V. (8)
 
Mexico
 
Exploration, exploitation and pelletizing of iron ore
 
44.39
%
 
44.39
%
 
44.39
%
Peña Colorada Servicios S.A. de C.V. (8)
 
Mexico
 
Services
 
44.39
%
 
44.39
%
 
44.39
%
Exiros B.V. (8)
 
Netherlands
 
Procurement and trading services
 
50.00
%
 
50.00
%
 
50.00
%
Servicios Integrales Nova de Monterrey S.A. de C.V. (9)
 
Mexico
 
Medical and Social Services
 
66.14
%
 
66.14
%
 
66.14
%
Ternium Internacional Nicaragua S.A.
 
Nicaragua
 
Manufacturing and selling of steel products
 
99.38
%
 
99.38
%
 
99.38
%
Ternium Internacional Honduras S.A. de C.V.
 
Honduras
 
Manufacturing and selling of steel products
 
99.18
%
 
99.18
%
 
99.18
%
Ternium Internacional El Salvador S.A. de C.V.
 
El Salvador
 
Manufacturing and selling of steel products
 
99.92
%
 
99.92
%
 
99.92
%
Ternium Internacional Costa Rica S.A.
 
Costa Rica
 
Manufacturing and selling of steel products
 
99.98
%
 
99.98
%
 
99.98
%
Ternium Internacional Guatemala S.A. (10)
 
Guatemala
 
Selling of steel products
 
99.98
%
 
99.98
%
 
99.98
%
Ternium Colombia S.A.S. (formerly Ferrasa S.A.S.) (10)
 
Colombia
 
Manufacturing and selling of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium del Cauca S.A.S. (formerly Perfilamos del Cauca S.A.S.) (10)
 
Colombia
 
Manufacturing and selling of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Siderúrgica de Caldas S.A.S. (formerly Siderúrgica de Caldas S.A.S.) (10)
 
Colombia
 
Manufacturing and selling of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Tenigal S. de R.L. de C.V. (11)
 
Mexico
 
Manufacturing and selling of steel products
 
51.00
%
 
51.00
%
 
51.00
%
Ternium Internacional S.A. (12)
 
Uruguay
 
Holding and marketing of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Treasury Services S.A. (12)
 
Uruguay
 
Financial Services
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Internationaal B.V. (13)
 
Netherlands
 
Marketing of steel products
 
100.00
%
 
100.00
%
 
100.00
%

Page 12 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

2.
BASIS OF PRESENTATION (continued)
 
 
Country of
 
 
 
Percentage of ownership
at December 31,
Company
 
Organization
 
Main activity
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Ternium International Inc. (13)
 
Panama
 
Marketing of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Procurement S.A. (14)
 
Uruguay
 
Procurement services
 
100.00
%
 
100.00
%
 
100.00
%
Technology & Engineering Services S.A. (14)
 
Uruguay
 
Engineering and other services
 
100.00
%
 
100.00
%
 
100.00
%
Ternium International USA Corporation (15)
 
USA
 
Marketing of steel products
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Ingeniería y Servicios de México S.A. de C.V. (16)
 
Mexico
 
Engineering and other services
 
99.89
%
 
99.89
%
 
99.89
%
Soluciones Integrales de Gestión S.A. (17)
 
Argentina
 
Other services
 
100.00
%
 
100.00
%
 
100.00
%
Ternium Staal B.V. (18)
 
Netherlands
 
Holding and marketing of steel products
 
100.00
%
 
100.00
%
 

Ternium Brasil Ltda. (18)
 
Brazil
 
Manufacturing and selling of steel products
 
100.00
%
 
100.00
%
 

Ternium del Atlántico S.A.S (19)
 
Colombia
 
Manufacturing and selling of steel products
 
100.00
%
 
100.00
%
 

Ternium Solutions S.A. (formerly Tericer Trading S.A.) (20)
 
Uruguay
 
Other services
 
100.00
%
 

 

Acedor, S.A. de C.V. (21)
 
Mexico
 
Holding
 

 
88.78
%
 
88.78
%
Ecosteel Gestao de Efuentes Industriais S.A. (22)
 
Brazil
 
Other services
 

 
100.00
%
 

Galvatubing Inc (23)
 
USA
 
Manufacturing and selling of pipe Products
 

 
88.78
%
 
88.78
%
Galvamet America Corp (24)
 
USA
 
Manufacturing and selling of insulated panel products
 

 
88.78
%
 
88.78
%
Ternium Internacional de Colombia S.A.S. (25)
 
Colombia
 
Marketing of steel products
 

 
100.00
%
 
100.00
%
Ecosteel Gestao de Águas Industriais S.A. (26)
 
Brazil
 
Other services
 

 
100.00
%
 

Galvacer America Inc (27)
 
USA
 
Distributing company
 

 

 
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.
(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.

Page 13 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

2.
BASIS OF PRESENTATION (continued)
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 USD 1,959 million (2017: USD 2,301 million), net profit from continuing operations to USD 254 million (2017: USD 337 million), total assets to USD 3,184 million (2017: USD 2,820 million), total liabilities to USD 606 million (2017: USD 874 million) and shareholders’ equity to USD 2,578 million (2017: USD 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 USD 1,891 million.

Ternium began consolidating the balance sheets and results of operations of tkSI and CSA as from September 7, 2017, and CSA changed its name to Ternium Brasil Ltda. and tkSI was renamed Ternium Staal B.V.

(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.













Page 14 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016

3.
ACQUISITION OF BUSINESS (continued)


The allocation of the fair values determined for the assets and liabilities arising from the acquisition was as follows:

Fair value of acquired assets and liabilities:
 
 
 
 
 
Property, plant and equipment and Intangible assets
 
1,573,946

Inventories
 
400,047

Cash and cash equivalents
 
278,162

Trade receivables
 
63,710

Other receivables
 
705,058

Deferred tax assets
 
13,686

Provisions
 
(799,938
)
Trade payables
 
(219,604
)
Other assets and liabilities, net
 
(124,078
)
Net assets acquired
 
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 USD 75.9 million. Such value was deducted from the purchase consideration.

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 USD 24.5 million was recorded at the acquisition date in connection with this matter (USD 19.7 million as of December 31, 2018).



Page 15 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

3.
ACQUISITION OF BUSINESS (continued)

(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 “goods for consumption” and, accordingly, ICMS tax credits generated in connection with their purchase are not available and may not be used to offset ICMS payment obligations generated in connection with Ternium Brasil’s domestic sales of carbon steel slabs. Ternium Brasil has appealed against the Rio de Janeiro State Treasury Office tax assessments and fines. A provision in the amount of USD 57.7 million was recorded as of the acquisition date in connection with this matter (USD 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 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.







Page 16 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

3.
ACQUISITION OF BUSINESS (continued)
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 USD 1,089 million. In accordance with the guidance in IFRS 3, the Company recorded as of the acquisition date a provision of USD 651.8 million (including estimated penalties and interest) in connection with this matter, together with an asset of USD 325.9 million arising from its right to recover part of the contingency amount from Thyssenkrup Veerhaven B.V. (USD 529.4 million and USD 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 USD 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 USD 1.5 billion granted to the Company’s subsidiary, Ternium Investments S.àr.l., by a syndicate of banks.

The facility will be repaid in eight consecutive and equal semi-annual installments, commencing on March 5, 2019, and has been guaranteed by the Company’s subsidiary, Ternium México, S.A. de C.V. The borrower and the guarantor are subject to certain covenants customary for transactions of this type, including limitations on liens and encumbrances, transactions with affiliates, consolidations and mergers and restrictions on investments. The guarantor is additionally subject to limitations on the sale of certain assets and compliance with a leverage ratio. There are no limitations to the payment of dividends applicable to the borrower or the guarantor, except, with respect to the borrower, upon an event of default under the facility. During 2018, the Company made prepayments of principal for USD 375 million. As of December 31, 2018, the outstanding value of this syndicated facility was USD 1.125 million and both the borrower and the guarantor were in compliance with all of its covenants.



Page 17 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

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 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.













Page 18 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 


4.
ACCOUNTING POLICIES (continued)

The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of

the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

When the Company ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.

Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. However, the fact that the functional currency of some subsidiaries is their 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.









Page 19 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

4.
ACCOUNTING POLICIES (continued)

The Company’s investment in associates and joint ventures includes notional goodwill identified on acquisition.

The Company determines at each reporting date whether there is any objective evidence that the investment is impaired. If this is the case, the group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognizes the amount within “Equity on earnings (losses) of non-consolidated companies”.

(b) Foreign currency translation

(1)
Functional and presentation currency
 
Items included in the financial statements of each of the Company's subsidiaries and associated companies are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). Except for the Argentine and the non-consolidated companies whose functional currencies are their local currencies, Ternium determined that the functional currency of its subsidiaries is the U.S. dollar. Although Ternium is located in Luxembourg, it operates in several countries with different currencies. The USD is the currency that best reflects the economic substance of the underlying events and circumstances relevant to Ternium as a whole.

(2) Subsidiary companies

The results and financial position of all the group entities (none of which operates in a hyperinflationary economy) that have a functional currency different from the presentation currency, are translated into the presentation currency as follows:

(i) assets and liabilities are translated at the closing rate of each statement of financial position;
(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
(iii) all resulting translation differences are recognized within other comprehensive income.

In the case of a sale or other disposition of any such subsidiary, any accumulated translation differences would be recognized in the income statement as part of the gain or loss on sale.

(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.













Page 20 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 

4.
ACCOUNTING POLICIES (continued)

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 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.


Page 21 of 87


TERNIUM S.A.
Consolidated Financial Statements as of December 31, 2018 and 2017
and for the years ended December 31, 2018, 2017 and 2016
 


4.
ACCOUNTING POLICIES (continued)

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.

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.

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 cost using the effective interest method less impairment losses. As of December 31, 2017, there were USD 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.

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.