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 02/28/2006
Ternium S.A.
(Translation of Registrant's name into English)
Ternium S.A.
46a, Avenue John F. Kennedy - 2nd floor
L-1855 Luxembourg
(352) 4661-11-3815
(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 X 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 X
---- ----
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
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 combined consolidated financial statements
as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004
and 2003.
1 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/ Roberto Philipps By: /s/ Daniel Novegil
--------------------- ------------------
Name: Roberto Philipps Name: Daniel Novegil
Title: Chief Financial Officer Title: Chief Executive Officer
Dated: February 28, 2006
TERNIUM S.A.
COMBINED CONSOLIDATED
FINANCIAL STATEMENTS
As of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003
46a, Avenue John F. Kennedy, 2nd floor
L - 1855
R.C.S. Luxembourg : B 98 668
TERNIUM S.A.
Index to financial statements
Combined Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm.................. 1
Combined consolidated income statements for the years ended December 31,
2005, 2004 and 2003...................................................... 2
Combined consolidated balance sheets as of December 31, 2005 and 2004.... 3
Combined consolidated statements of changes in shareholders' equity for
the years ended December 31, 2005, 2004 and 2003......................... 4
Combined consolidated cash flow statements for the years ended December
31, 2005, 2004 and 2003.................................................. 5
Notes to the combined consolidated financial statements.................. 7
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ternium S.A.
In our opinion, the accompanying combined consolidated balance sheets and the
related combined consolidated statements of income, of cash flows and of changes
in shareholders' equity present fairly, in all material respects, the financial
position of Ternium S.A. and its subsidiaries at December 31, 2005 and 2004, and
the results of their operations and their cash flows for the years ended
December 31, 2005, 2004 and 2003 in conformity with International Financial
Reporting Standards. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Buenos Aires, Argentina
February 28, 2006
PRICE WATERHOUSE & CO. S.R.L.
by (Partner)
-------------------------------------------
Marcelo D. Pfaff
1
TERNIUM S.A.
Combined consolidated financial statements
as of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003
(All amounts in USD thousands)
COMBINED CONSOLIDATED INCOME STATEMENTS
Year ended December 31,
-------------------------------------------------------------------
Notes 2005 2004 2003
-------------------------------------------------------------------
Net sales .............................................. 31 4,447,680 1,598,925 1,056,566
Cost of sales .......................................... 6 & 31 (2,470,844) (965,004) (671,720)
--------------------------------------------------------
Gross profit ........................................... 1,976,836 633,921 384,846
General and administrative expenses .................... 7 (269,231) (58,428) (51,557)
Selling expenses ....................................... 8 (251,962) (60,524) (62,786)
Other operating expenses, net .......................... 10 (63,482) (798) (5,721)
--------------------------------------------------------
Operating income ....................................... 1,392,161 514,171 264,782
Financial (expenses) income, net ....................... 11 & 31 (310,736) 202,289 75,606
Excess of fair value of net assets acquired over cost... 3 188,356 - -
Equity in earnings of associated companies ............. 12 21,524 209,201 110,250
--------------------------------------------------------
Income before income tax expense........................ 1,291,305 925,661 450,638
Income tax expense ..................................... 13 (218,492) (177,486) (94,087)
--------------------------------------------------------
Net income for the year ................................ 1,072,813 748,175 356,551
--------------------------------------------------------
Attributable to:
Equity holders of the Company .......................... 30 704,406 457,339 218,215
Minority interest ...................................... 368,407 290,836 138,336
--------------------------------------------------------
1,072,813 748,175 356,551
--------------------------------------------------------
Weighted average number of shares outstanding .......... 30 1,209,476,609 1,168,943,632 1,168,943,632
Basic earnings per share for profit attributable
to the equity holders of the Company, during the
year (expressed in USD per share) 0.58 0.39 0.19
Diluted earnings per share for profit attributable
to the equity holders of the Company, during the
year (expressed in USD per share) 0.54 0.39 0.19
The accompanying notes are an integral part of these combined consolidated financial statements.
2
TERNIUM S.A.
Combined consolidated financial statements
as of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003
(All amounts in USD thousands)
COMBINED CONSOLIDATED BALANCE SHEETS
Notes December 31, 2005 December 31, 2004
----------- ------------------------- -----------------------
ASSETS
Non-current assets
Property, plant and equipment, net ..................... 14 5,463,871 1,244,691
Intangible assets, net ................................. 15 552,882 10,049
Investments in associated companies, net ............... 16 9,122 309,318
Other investments, net ................................. 17 & 31 12,607 148,569
Deferred tax assets .................................... 25 29,126 -
Other Assets ........................................... 952 -
Receivables, net ....................................... 18 & 31 47,863 6,116,423 15,783 1,728,410
------------ -----------
Current assets
Receivables............................................. 19 & 31 291,302 208,699
Other Assets ........................................... 3,160 -
Derivative financial instruments........................ 27 5,402 -
Inventories, net ....................................... 20 1,000,119 254,286
Trade receivables, net ................................. 21 & 31 472,760 171,605
Other investments ...................................... 22 & 31 5,185 88,755
Cash and cash equivalents .............................. 22 & 31 765,630 2,543,558 194,875 918,220
------------- ----------- ----------- -----------
Total assets ........................................... 8,659,981 2,646,630
----------- -----------
EQUITY
Capital and reserves attributable to the company's
equity holders ...................................... 1,842,454 1,026,725
Minority interest ...................................... 1,733,465 745,126
----------- -----------
Total equity ........................................... 3,575,919 1,771,851
LIABILITIES
Non-current liabilities
Provisions ............................................. 23 53,479 11,925
Deferred income tax .................................... 25 1,048,188 337,473
Other liabilities ...................................... 26 187,917 9,104
Trade payables ......................................... 1,167 -
Borrowings ............................................. 28 2,399,878 3,690,629 1,008 359,510
------------- ----------- ----------- -----------
Current liabilities
Provisions ............................................. 24 659 960
Current tax liabilities ................................ 126,972 158,124
Other liabilities ...................................... 26 & 31 194,073 33,288
Trade payables ......................................... 31 555,330 194,943
Derivative financial instruments ....................... 27 - 5,956
Borrowings ............................................. 28 516,399 1,393,433 121,998 515,269
------------- ----------- ----------- -----------
Total liabilities ...................................... 5,084,062 874,779
----------- -----------
Total equity and liabilities ........................... 8,659,981 2,646,630
----------- -----------
The accompanying notes are an integral part of these combined consolidated financial statements.
3
TERNIUM S.A.
Combined consolidated financial statements
as of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003
(All amounts in USD thousands)
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Attributable to the
company's equity Minority Interest Total
holders (1) Equity
---------------------------------------------------------------
Year ended December 31, 2003
Balance at January 1, 2003 ........................ 407,144 367,355 774,499
Currency translation adjustment ................... 49,892 52,113 102,005
Net income ........................................ 218,215 138,336 356,551
---------------------------------------------------------------
Total recognized income for the year .............. 268,107 190,449 458,556
Contributions ..................................... 35,539 2,243 37,782
Dividends paid in cash ............................ (8,969) (9,783) (18,752)
---------------------------------------------------------------
Balance at December 31, 2003 ....................... 701,821 550,264 1,252,085
---------------------------------------------------------------
Year ended December 31, 2004
Balance at January 1, 2004 ........................ 701,821 550,264 1,252,085
Currency translation adjustment ................... (51,549) (25,697) (77,246)
Net income ........................................ 457,339 290,836 748,175
---------------------------------------------------------------
Total recognized income for the year .............. 405,790 265,139 670,929
Dividends paid in cash and other distributions .... (80,886) (70,277) (151,163)
---------------------------------------------------------------
Balance at December 31, 2004 ....................... 1,026,725 745,126 1,771,851
---------------------------------------------------------------
Year ended December 31, 2005
Balance at January 1, 2005 ........................ 1,026,725 745,126 1,771,851
Currency translation adjustment ................... (66,001) (54,245) (120,246)
Net income ........................................ 704,406 368,407 1,072,813
---------------------------------------------------------------
Total recognized income for the year .............. 638,405 314,162 952,567
Contributions ..................................... 54,758 - 54,758
Dividends paid in cash and other distributions .... (238,652) (130,571) (369,223)
Acquisition of business ........................... - 864,415 864,415
Usiminas exchange (see Note 1 (b)) ................ 303,791 (303,791) -
Initial public offering expenses (see Note 4 (j)) . (5,456) - (5,456)
Revaluation and other reserves .................... 62,883 244,124 307,007
---------------------------------------------------------------
Balance at December 31, 2005 ....................... 1,842,454 1,733,465 3,575,919
(1) Shareholders equity determined in accordance with accounting principles generally accepted in Luxembourg is
disclosed in Note 29 (vi).
Dividends may be paid by Ternium to the extent distributable retained earnings calculated in accordance with
Luxembourg GAAP exist. Therefore, retained earnings included in the consolidated combined financial statements may not
be wholly distributable. See Note 29 (vi).
The accompanying notes are an integral part of these combined consolidated financial statements.
4
TERNIUM S.A.
Combined consolidated financial statements
as of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003
(All amounts in USD thousands)
COMBINED CONSOLIDATED CASH FLOW STATEMENTS
Notes Year ended December 31,
------- ---------------------------------------------
2005 2004 2003
-------------- ------------- ------------
Cash flows from operating activities
Net income for the year .................................... 1,072,813 748,175 356,551
Adjustments for:
Depreciation and amortization ........................... 14&15 316,405 99,192 85,479
Income tax accruals less payments ........................ 32 (44,008) 120,210 94,087
Excess of fair value of net assets acquired over cost 3 (188,356) - -
Equity in earnings of associated companies ............... 12 (21,524) (209,201) (110,250)
Derecognition of property, plant and equipment ........... 10 (iii) 54,348 - -
Interest accruals less payments .......................... 32 21,352 9,083 5,428
Changes in provisions ..................................... 23&24 19,046 (798) 3,594
Changes in working capital ................................. 32 54,420 (204,670) (55,662)
Currency translation adjustment and others ................. (22,041) (44,426) (32,909)
-------------- ------------- ------------
Net cash provided by operating activities 1,262,455 517,565 346,318
-------------- ------------- ------------
Cash flows from investing activities
Capital expenditures ....................................... 14&15 (244,939) (92,563) (34,328)
Amazonia convertible debt instrument ....................... - - (127,576)
Changes in trust funds ..................................... 83,570 - -
Acquisition of business-Hylsamex ........................... (2,196,678) - -
Proceeds form sale of investment in associated company ..... - - 304
Proceeds from the sale of property, plant and equipment .... 6,063 862 3,804
-------------- ------------- ------------
Net cash used in investing activities (2,351,984) (91,701) (157,796)
-------------- ------------- ------------
Cash flows from financing activities
Dividends paid in cash and other distributions to company's
shareholders ............................................... (238,652) (80,886) (8,969)
Dividends paid in cash and other distributions to minority
shareholders ............................................... (130,571) (70,277) (9,783)
Contributions of minority shareholders in subsidiary
companies .................................................. - - 38,553
Contributions .............................................. 54,758 - 37,782
Proceeds from borrowings ................................... 2,135,430 52,309 95,448
Repayments of borrowings ................................... (657,597) (261,033) (324,992)
-------------- ------------- ------------
Net cash provided by (used in) financing activities 1,163,368 (359,887) (171,961)
-------------- ------------- ------------
Increase in cash and cash equivalents. 73,839 65,977 16,561
-------------- ------------- ------------
Movement in cash and cash equivalents
At January 1, .............................................. 194,875 129,020 111,198
Acquisition of business-Amazonia ........................... 3 305,342 - -
Acquisition of business-Hylsamex ........................... 3 215,411 - -
Effect of exchange rate changes ............................ (34,487) (122) 1,261
Increase in cash and cash equivalents ..................... 73,839 65,977 16,561
-------------- ------------- ------------
Cash and cash equivalents at December 31, 754,980 194,875 129,020
-------------- ------------- ------------
The accompanying notes are an integral part of these combined consolidated financial statements.
5
TERNIUM S.A.
Combined consolidated financial statements
as of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003
(All amounts in USD thousands)
INDEX TO THE NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1 Business of the Company and corporate reorganization
2 Basis of presentation
3 Acquisition of business
4 Accounting policies
5 Segment information
6 Cost of sales
7 General and administrative expenses
8 Selling expenses
9 Labor costs (included in cost of sales, selling expenses and
administrative expenses)
10 Other operating expenses, net
11 Financial (expenses) income, net
12 Equity in earnings of associated companies
13 Tax charge
14 Property, plant and equipment, net
15 Intangible assets, net
16 Investments in associated companies, net
17 Other investments, net - non current
18 Receivables, net - non current
19 Receivables - current
20 Inventories, net
21 Trade receivables, net
22 Cash and cash equivalents and other investments
23 Provisions - non current
24 Provisions - current
25 Deferred income tax
26 Other liabilities
27 Derivative financial instruments
28 Borrowings
29 Contingencies, commitments and restrictions on the distribution of profits
30 Earnings per share
31 Related party transactions
32 Cash flow disclosures
33 Recently issued accounting pronouncements
34 Financial risk management
35 Post balance sheet events
6
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
1 Business of the Company and corporate reorganization
(a) Business of the Company
Ternium S.A. (the "Company" or "Ternium"), a Luxembourg Corporation (Societe
Anonyme), was incorporated on December 22, 2003 under the name of Zoompart
Holding S.A. to hold investments in flat and long steel manufacturing and
distributing companies. The extraordinary shareholders' meeting held on August
18, 2005, changed the corporate name to Ternium S.A.
Near the end of 2004, Ternium's ultimate parent company San Faustin N.V. ("San
Faustin"), a Netherlands Antilles company, decided to restructure its
investments in the flat and long steel manufacturing and distribution business.
In connection with the restructuring, San Faustin acquired Ternium in December
2004. Until that date, Ternium was a dormant company.
In January 2006, the Company successfully completed its registration process
with the United States Securities and Exchange Commission ("SEC") and announced
the commencement of its offer to sale 24,844,720 American Depositary Shares
("ADS") representing 248,447,200 shares of common stock through Citigroup Global
Markets Inc., Deutsche Bank Securities Inc., JP Morgan Securities Inc., Morgan
Stanley & Co. Incorporated, BNP Paribas Securities Corp., Caylon Securities
(USA) Inc. and Bayerische Hypo-und Vereinsbank AG (collectively, the
"Underwriters" and the offering thereunder, the "Initial Public Offering").
Also, the Company has granted to the Underwriters an option, exercisable for 30
days from January 31, 2006, to purchase up to 3,726,708 additional ADSs at the
public offering price of USD20 per ADS less an underwriting discount of USD0.55
per ADS. Such option has been exercised on February 23, 2006 for 22,981,360
shares. 2,004,743,442 shares (including shares in the form of ADSs) will be
outstanding upon completion of the Initial Public Offering, the conversion of
the Subordinated Convertible Loans mentioned in Note 3, exercise of the option
granted to the underwriters and consummation of the transactions contemplated in
the Corporate Reorganization Agreement described in Note 1 (b).
The proceeds of the Initial Public Offering totaled USD 496.9 million and have
been used to repay Tranche A of the Ternium Credit Facility (as defined below)
after deducting related expenses. See Note 35.
(b) Corporate reorganization
On May 6, 2005 San Faustin assigned and contributed to Inversora Siderurgica
Limited ("ISL"), a wholly-owned subsidiary, a 100% interest in I.I.I.-Industrial
Investments Inc. ("III BVI"), a subsidiary of San Faustin organized under the
laws of the British Virgin Islands through which it held its investments in the
flat and long steel manufacturing and distribution business and a 100% interest
in Fasnet International S.A. ("Fasnet").
The investments then held by III BVI consisted principally of the following:
-- a 50.75% interest in Siderar S.A.I.C. ("Siderar") (which in turn owns a
11.11% equity interest in Ylopa - Servicos de Consultadoria Lda. ("Ylopa")
and a 14.40% interest in Consorcio Siderurgia Amazonia Ltd. ("Amazonia"));
-- a 25.00% interest in Amazonia;
-- a 34.27% interest in Ylopa; and
-- a 100% interest in the Techintrade Network.
On May 6, 2005, ISL acquired a 96.77% interest in Ternium, which it afterwards
increased to an interest of almost 100% of its issued and outstanding capital.
On June 29, 2005, ISL assigned and contributed to Ternium all of its assets and
liabilities, including, but not limited to, a 100% interest in III BVI and a
100% interest in Fasnet, in exchange for 959,482,775 shares of Ternium.
Also, on September 9, 2005 Tenaris S.A. ("Tenaris") agreed to exchange with ISL
its 21.17% interest (14.49% direct ownership at December 31, 2004) in Amazonia,
and its 24.40% interest in Ylopa for 209,460,856 shares of the Company.
On September 15, 2005, ISL made a second contribution of all of its assets and
liabilities including 750,021,919 shares of the Company, 21.17% in Amazonia, a
"Cuota" representing 24.40% of Ylopa and other items, in exchange for
959,482,775 new shares of the Company. Upon consummation of this second
contribution, the 750,021,919 shares contributed by ISL to the Company were
cancelled and the Company's issued share capital was increased to USD
1,168,943,632 represented by 1,168,943,632 shares of 1 USD nominal value each.
On September 22, 2005, the Company assumed all of I.I.I. BVI's rights and
obligations under the Ternium Credit Facility, dated as of August 16, 2005, for
an aggregate principal amount of USD1.0 billion entered into among I.I.I. BVI
and the lenders named therein; and several Subordinated Convertible Loan
Agreements, each among I.I.I. BVI, as borrower, the subordinated lender party
thereto, as lender, and the Company.
7
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
1 Business of the Company and corporate reorganization (continued)
(b) Corporate reorganization (continued)
On October 27, 2005, I.I.I. BVI transferred to the Company all of its shares of
Siderar, Amazonia, Inversiones Siderurgicas, Techintrade, Hylsa Latin and Ylopa
in consideration of the assumption by Ternium of I.I.I. BVI's obligations under
the Ternium Credit Facility and the Subordinated Convertible Loan Agreements.
In October 2005, Usinas Siderurgicas de Minas Gerais S.A. ("Usiminas") exchanged
its 5.32% equity interest in Siderar, its 16.58% equity interest in Amazonia and
its 19.11% equity interest in Ylopa and other items (the "Usiminas Exchange")
for 227,608,254 new shares of the Company. Upon the consummation of this
exchange the capital was increased to USD 1,396,552, represented by
1,396,551,887 shares of 1 USD nominal value each.
Furthermore, in November 2005, Siderurgica del Turbio S.A. ("Sidetur"), a
subsidiary of Siderurgica Venezolana S.A. ("Sivensa"), exchanged with ISL its
3.42% equity interest in Amazonia for shares of the Company. ISL has, under the
terms of the Corporate Reorganization Agreement (as defined below), contributed
such interest in Amazonia to the Company in exchange for shares of the Company
after the settlement of the Initial Public Offering (the "Sivensa Exchange").
ISL and the Company entered into a reorganization agreement (the "Corporate
Reorganization Agreement") pursuant to which ISL committed to deliver shares of
the Company to the Underwriters and to the Subordinated Lenders (as defined
below) in an amount sufficient to satisfy the Company's obligation to deliver
shares of the Company to the Underwriters (excluding any shares to be delivered
in connection with the Underwriters' over-allotment option) and to the
Subordinated Lenders pursuant to the terms of the Initial Public Offering and
the Subordinated Convertible Loan Agreements. As provided in the Corporate
Reorganization Agreement, after ISL's delivery of such shares, ISL will
contribute all of its assets and liabilities (including the credit against the
Company arising from such delivery of shares, its interest in Amazonia resulting
from the Sivensa Exchange and any remaining shares of the Company) to the
Company in exchange for that number of newly issued shares of the Company equal
to the number of shares of the Company held by ISL prior to the Sivensa
Exchange.
Because III BVI and Fasnet are under the common control of ISL, their
consolidated financial statements have been retroactively combined with those of
the Company and presented as one reporting entity ("Ternium") in these combined
consolidated financial statements. In addition, since Tenaris and the Company
are under common control of San Faustin, the equity interests held by Tenaris in
Amazonia and Ylopa that have been exchanged with ISL on September 9, 2005, have
also been retroactively combined in these combined consolidated financial
statements.
In addition, as mentioned in Note 3, on May 18, 2005, III BVI, Hylsamex S.A. de
C.V. ("Hylsamex") and Alfa S.A. de C.V. ("Alfa") entered into an acquisition
agreement (the "Hylsamex Acquisition Agreement"). Pursuant to the terms of the
Hylsamex Acquisition Agreement, on August 22, 2005, the acquisition by III BVI
of a controlling interest in Hylsamex and of Alfa's minority interests in
Amazonia, Ylopa and Hylsa Latin was consummated. Accordingly, Hylsamex's results
of operations have been consolidated in these financial statements as from that
date.
Detailed below are the companies whose consolidated financial statements have
been included in these combined consolidated financial statements.
----------------------------------------------------------------------------------------------------------------
Company Country of Percentage of ownership
incorporation Main activity at December 31,
-------------------------
2005 2004
------------------------------- ---------------- ------------------------------------- ------------- -----------
Ternium S.A. Luxembourg Holding of investments in flat and 100.00% 100.00%
long steel manufacturing and
distributing companies
Alvory S.A. Uruguay Rendering of procurement services 100.00% -
III Industrial Investments British Virgin Holding company 100.00% 100.00%
Inc. (B.V.I.) Islands
Inversiones Siderurgicas S.A. Panama Holding company 100.00% 100.00%
Siderar S.A.I.C. Argentina Manufacturing of flat steel products 56.07% 50.75%
Techintrade Uruguay S.A. Uruguay Holding company and marketing of 100.00% 100.00%
steel products
Ylopa - Servicos de Madeira - Free Participation in the debt 95.12% 64.31%
Consultadoria Lda. (1) zone restructuring process of
Amazonia and Sidor C.A.
Fasnet International S.A. Panama Holding company 100.00% 100.00%
----------------------------------------------------------------------------------------------------------------
(1) Directly (54.62%) and indirectly through the participation of Prosid
Investments S.C.A. (11.11%), and Inversiones Siderurgicas (34.27%).
8
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
2 Basis of presentation
These combined consolidated financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS"). The Company's transition
date for IFRS purposes was January 1, 2003 and thus, certain limited exceptions
and exemptions provided by IFRS 1, "First-time Adoption of IFRS" have been used.
These combined consolidated financial statements have been prepared in
accordance with those IFRS standards and IFRIC interpretations issued and
effective or issued and early adopted as at the time of preparing these
statements (February 2006). The combined consolidated financial statements are
presented in thousands of United States dollars ("USD")
The assets and liabilities of III BVI and Fasnet (and their respective
subsidiaries, Inversiones Siderurgicas S.A. ("IS"), Siderar, Techintrade and
Ylopa) have been accounted for at the relevant predecessor's cost, reflecting
the carrying amount of such assets and liabilities contributed to the Company.
Accordingly, the combined consolidated financial statements include the
financial statements of the above-mentioned combined companies at historical
book values on a carryover basis as though the contribution had taken place on
January 1, 2003, and no adjustment has been made to reflect fair values at the
time of the contribution.
Detailed below are the subsidiary companies whose consolidated financial
statements have been combined in these combined consolidated financial
statements.
--------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership
Organization at December 31,
---------------------------
2005 2004
---------------------------------- ----------------- ----------------------------------- ------------- -------------
Comesi San Luis S.A.I.C. (1) Argentina Production of cold or hot rold 56.07% 50.24%
prepainted, formed and skelped
steel sheets
Inversiones Basilea S.A. (1) Chile Purchase and sale of real estate 56.07% -
and other
Prosid Investments S.C.A.(1) Uruguay Holding of investments in companies 56.07% 50.75%
Techintrade Italy S.R.L. (2) Italy Marketing of steel products 100.00% 100.00%
Socominter de Guatemala S.A. (2) Guatemala Marketing of steel products 100.00% 100.00%
Socominter de Espana S.A.U.(2) Spain Marketing of steel products 100.00% 100.00%
Socotrading S.A.(2) Ecuador Marketing of steel products 100.00% 100.00%
Techintrade Corporation (2) USA Marketing of steel products 100.00% 100.00%
Ternium Internationaal B.V. Netherlands Marketing of steel products 100.00% 100.00%
(formerly Techint Engineering
Company B.V.)(2)
Techintrade del Peru S.A.C. (2) Peru Marketing of steel products 100.00% 100.00%
Consorcio Siderurgia Amazonia Cayman Islands Holding of investments in 89.07% -
Ltd.(3) Venezuelan steel companies
Sidor C.A. (4) Venezuela Manufacturing and selling of 53.20% -
steel products
Hylsamex S.A. de C.V. (5) Mexico Holding Company 86.68% -
--------------------------------------------------------------------------------------------------------------------
(1) Indirectly through Siderar S.A.I.C.
(2) Indirectly through Tecnintrade Uruguay S.A.
(3) Directly (45.24%) and indirectly through the participation of Prosid
Investments S.C.A. (14.38%), Inversiones Siderurgicas S.A. (25.00%),
Hylsa Latin LLC (11.38%) and Hylsamex S.A de CV (0.59%). Total voting
rights held 96.59%.
(4) Indirectly through the participation of Amazonia (59.73%).
(5) Indirectly through the participation of III (B.V.I.) (70.00%), and
Siderar S.A.I.C. (29.75%).
9
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
2 Basis of presentation (continued)
Detailed below are the subsidiary companies whose consolidated financial
statements have been consolidated in these combined consolidated financial
statements, and the percentage of ownership held directly or indirectly trhough
Hylsamex S.A. de C.V. in these companies at the end of each year indicated
--------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership
Organization at December 31,
---------------------------
2005 2004
---------------------------------- ----------------- ----------------------------------- ------------- -------------
Hylsa S.A. de C.V. (1) Mexico Manufacturing and selling of 86.68% -
steel products
Express Anahuac S.A. de C.V. (1) Mexico Freight services 86.68% -
Ferropak Comercial S.A. de C.V. Mexico Scrap company 86.68% -
(1)
Ferropak Servicios S.A. de C.V. Mexico Services 86.68% -
(1)
Galvacer America Corp (1) USA Distributing company 86.68% -
Galvamet America Corp (1) USA Manufacturing and selling of 86.68% -
insulates panel products
Tansamerica E. & I. Corp (1) USA Scrap company 86.68% -
Galvatubing Inc. (1) USA Manufacturing and selling of pipe 86.68% -
products
Las Encinas S.A. de C.V. (1) Mexico Exploration, explotation and 86.68% -
pelletizing of iron ore
Tecnica Industrial S.A. de C.V. Mexico Services 86.68% -
(1)
Hylsa Latin LLC (2) USA Holding company 86.68% -
Acerex S.A. de C.V. (3) Mexico Tooling services 43.34% -
Acerex Servicios S.A. de C.V. Mexico Services 43.34% -
(3)
Consorcio Minero Benito Juarez Mexico Exploration, explotation and 43,34% -
Pena Colorada S.A.de C.V. (3) palletizing of iron ore
Pena Colorada Servicios S.A. de Mexico Services 43.34% -
C.V. (3)
--------------------------------------------------------------------------------------------------------------------
(1) Indirectly through the participation of Hylsamex. Total voting rights
held: 100.00%.
(2) Indirectly through the participation of Hylsamex (73.4%) and Ternium
S.A. (26.6%). Total voting rights held: 100%.
(3) Indirectly through the participation of Hylsamex. Total voting rights
held: 50.00%.
Detailed below are the most relevant associated companies which are accounted
for by the equity method of accounting in these combined consolidated financial
statements.
------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership
Organization at December 31,
-------------------------
2005 2004
---------------------------------- ----------------- ----------------------------------- ------------- -----------
Consorcio Siderurgia Amazonia Cayman Islands Holding of investments in
Ltd.(1) Venezuelan steel companies - 31.03%
Matesi Materiales Siderurgicos Venezuela Manufacturing and marketing of
S.A.(2) briquettes 26.49% -
Compania Afianzadora de Empresas Argentina Granting of guarantees to
Siderurgicas S.G.R. (3) participating partners to
facilitate or permit access to
credits for the purchase of
national raw material 21.81% 19.74%
------------------------------------------------------------------------------------------------------------------
10
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
2 Basis of presentation (continued)
(1) Indirectly through the participation of Prosid Investments S.C.A. (21.14%),
IS (5.81%) and Tamsider (14.49%). Total voting rights held: 41.44%. The
Company acquired control over Amazonia on February 15, 2005 (see Note 3).
(2) Indirectly through the participation of Sidor (49.8%).
(3) Indirectly through the participation of Siderar (38.89%). Total voting
rights held: 38.89%.
Eliminations of all material intercompany transactions and balances between the
Company and the other combined companies and their respective subsidiaries have
been made in consolidation.
The 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.
The preparation of financial statements requires management to make estimates
and assumptions that might affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the balance sheet
dates, and the reported amounts of revenues and expenses during the reporting
periods. Actual results may differ from these estimates.
These combined consolidated financial statements have been approved for issue by
the board of directors on February 28, 2006.
3 Acquisition of business
(a) Hylsamex
On May 18, 2005, III BVI, Hylsamex S.A. de C.V. and Alfa entered into the
Hylsamex Acquisition Agreement. Pursuant to the terms of the Hylsamex
Acquisition Agreement, on July 26, 2005, III BVI launched a cash tender offer in
Mexico for the acquisition of all the outstanding shares of Hylsamex. On August
22, 2005, the acquisition by III BVI of a controlling interest in Hylsamex and
of Alfa's minority interests in Amazonia, Ylopa and Hylsa Latin was consummated.
The Company acquired an indirect controlling interest in Hylsamex and its
subsidiaries, and the indirect equity stakes owned by Hylsamex's former
controlling shareholder, Alfa, in Amazonia and Ylopa. III BVI and Siderar
acquired 70.0% and 29.3% of the shares of Hylsamex, respectively by a total
amount of USD 2,095 million. III BVI also acquired an additional 10.5% direct
and indirect interest in Amazonia and an additional 11.1% interest in Ylopa by
USD 91.9 million. Subsequently, Siderar purchased additional shares of Hylsamex
in the open market for a total amount of USD 9.7 million, thus reaching a 29.8%
equity interest in that company.
Hylsamex's main business is the production of flat and long steel products, with
manufacturing plants located in the cities of Monterrey and Puebla, Mexico, and
is a leader in the production of coated steel.
The acquired business contributed revenues of USD 723.8 million and net income
of USD 25.4 million to the Company in the year ended December 31, 2005. The book
value of net assets acquired totals USD1,492 million. The fair value of assets
and liabilities arising from acquisition are as follows:
Fair value of assets
and liabilities at the date
of acquisition
USD Thousand
-------------------------------
Property, plant and equipment 2,129,325
Inventories 345,053
Cash and cash equivalents 215,411
Deferred tax liabilities (449,537)
Pension benefits (116,860)
Borrowings (751,730)
Others assets and liabilities, net 488,297
Minority interest (156,651)
-------------------------------
Net 1,703,308
-------------------------------
Goodwill, representing the excess of the purchase price paid over the fair value
of identifiable assets, liabilities and contingent liabilities acquired, totaled
USD 399.7 million.
11
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
3 Acquisition of business (continued)
As part of the financing for the acquisition, the Company and its affiliates
entered into the following loan agreements:
i) an amended and restated credit agreement, dated as of August 16, 2005 among
I.I.I. BVI and lenders for an aggregate principal amount of USD1,000
million (the "Ternium Credit Facility"). The Ternium Credit Facility is
comprised of two equal tranches:
- Tranche A with a maturity of three years and bearing interest at the
annual rate of LIBOR plus an applicable margin that ranges from 75 to
400 basis points. This tranche has been fully repaid in February 2006
(see Note 35).
- Tranche B with a maturity of five years and bearing interest at the
annual rate of LIBOR plus an applicable margin that ranges from 137.5
to 300 basis points.
ii) an amended and restated credit agreement, dated as of August 16, 2005, for
an aggregate principal amount of USD380 million among Siderar, as borrower,
and the lenders (the "Siderar Credit Facility"). The Siderar Credit
Facility is payable in five equal and consecutive semi-annual installments
with a grace period of 12 months and bears interest at LIBOR plus 200 basis
points; and
iii) several convertible and subordinated loan agreements, dated as of various
dates, for an aggregate principal amount of USD594 million, each among the
Company, I.I.I. BVI, as borrowers, and Usiminas, Tenaris, or other Techint
Group companies (collectively, the "Subordinated Lenders", the agreements,
the "Subordinated Convertible Loan Agreements" and the loans thereunder,
the "Subordinated Convertible Loans"). Pursuant to the terms of the
Subordinated Convertible Loan Agreements, on February 6, 2006 the Company
delivered the ADSs to the Underwriters upon consummation of the Initial
Public Offering, the Subordinated Convertible Loans have been converted
into shares of the Company at a price per share equal to the price per
share paid by the investors in the offering (see Note 35).
Under the credit agreements mentioned in i) and ii) above, the Company and
its affiliates are subject to certain covenants that limit their ability
to, among other things: pay dividends in excess of certain amounts to their
shareholders or make other restricted payments; make capital expenditures
in excess of certain amounts; grant certain liens, borrow additional money
or prepay principal or interest on subordinated debt over certain limits,
change their business or amend certain significant agreements, effect a
change of control, and merge, acquire or consolidate with another company,
make additional investments or dispose of their assets.
These contracts also require Ternium and its subsidiaries to meet certain
financial covenants, ratios and other tests, which could limit their operational
flexibility and could prevent Ternium from taking advantage of business
opportunities as they arise, growing its business or competing effectively.
Moreover, a failure by Ternium and its subsidiaries to comply with applicable
financial measures could result in defaults under those agreements or
instruments. Ternium and its subsidiaries are in compliance with all of their
financial covenants, ratios and tests.
(b) Amazonia
On February 3, 2005, Ylopa exercised its option to convert the outstanding
balance of the Amazonia convertible debt instrument into newly issued shares of
that company. On February 15, 2005 new shares of Amazonia were issued in
exchange for the convertible instrument. As a result, Ternium's indirect
participation in Amazonia increased from 31.03% to 53.47%, thereby increasing
its indirect participation in Sidor from 18.53% to 31.94%. This acquisition has
been accounted for following the provisions contained in IFRS 3 "Business
Combinations" ("IFRS 3") and, accordingly, assets acquired and liabilities
assumed have been valued at fair value. Total purchase consideration,
representing the carrying amount of the convertible debt instrument at the date
of conversion, accounted for USD127.6 million, of which USD82.0 correspond to
the majority shareholders. The excess of Ternium's interest in the net fair
value of Amazonia's identifiable assets, liabilities and contingent liabilities
over the purchase price (amounting to USD 188.4 million) has been recognized in
income for the year. The main factor that contributed to a purchase price
significantly below the fair value of net assets acquired is the downturn
experienced by steel prices until 2003. Thus, the convertible debt instrument
was issued at a time when Amazonia was undergoing a severe crisis affecting its
business and financial condition, this situation being opposite to the current
business condition on the date the conversion feature was exercised and the
business combination was effected. In addition, as also required by IFRS 3, the
Company recorded in equity the excess of the fair value of its pre-acquisition
interest in Amazonia's net assets over their corresponding carrying amounts.
With the increase in equity ownership of Amazonia to 53.47%, the Company has
effective control.
12
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
3 Acquisition of business (continued)
The acquired business contributed revenues of USD 1,863.5 million to the Company
in the year ended December 31, 2005. The book value of net assets acquired
totals USD 928 million. The fair value of assets and liabilities arising from
acquisition are as follows:
Fair value of assets
and liabilities at the date
of acquisition
USD Thousand
-------------------------------
Property, plant and equipment 2,444,289
Inventories 284,676
Cash and cash equivalents 305,342
Deferred Tax Liabilities (284,242)
Pension Benefits (78,425)
Provisions (37,163)
Borrowings (656,658)
Others assets and liabilities, net (13,459)
Minority Interest (795,178)
-------------------------------
Net 1,169,182
-------------------------------
(c) Impeco S.A.
On November 18 2005, Ternium's Argentine subsidiary, Siderar, agreed to acquire,
for USD 55.2 million, assets and facilities of Acindar Industria Argentina de
Aceros S.A. ("Acindar") related to the production of welded steel pipes in the
province of San Luis in Argentina, as well as 100% of the issued and outstanding
shares of Impeco S.A., which in turn owns a plant located in the province of
Santa Fe in Argentina. These two plants have a production capacity of 140
thousand tons per year of tubes to be used in the construction, agricultural and
manufacturing industries. The acquisition has been approved by the Argentine
competition authorities and was completed on January 31, 2006.
4 Accounting policies
The following is a summary of the principal accounting policies followed in the
preparation of these combined consolidated financial statements:
(a) Group accounting
(1) Subsidiary companies
Subsidiary companies are those entities in which the Company has an interest of
more than 50% of the voting rights or otherwise has the power to exercise
control over the operating decisions. Subsidiaries are consolidated from the
date on which control is transferred to the Company and are no longer
consolidated from the date that control ceases. The purchase method of
accounting is used to account for the acquisition of subsidiaries. The cost of
an acquisition is measured as the fair value of assets given up, shares issued
or liabilities undertaken at the date of acquisition, plus costs directly
attributable to the acquisition. The excess of the acquisition cost over the
Company's share of the fair value of net assets acquired is recorded as
goodwill. Acquisition of minority interests in subsidiaries is accounted for
following the economic entity model and, accordingly, assets acquired and
liabilities assumed are valued at book value and the difference arising on
purchase price allocation is recorded in equity under "Revaluation and other
reserves" line item. Intercompany transactions, balances and unrealized gains on
transactions among the Company and its subsidiaries are eliminated; unrealized
losses are also eliminated unless cost cannot be recovered.
13
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(a) Group accounting (continued)
(2) Associated companies
Associated companies are entities in which Ternium generally has between 20% and
50% of the voting rights, or over which Ternium has significant influence, but
which it does not control (see Note 2). Investments in associated companies are
accounted for using the equity method of accounting. Under this method the
Company's share of the post-acquisition profits or losses of an associated
company is recognized in the income statement and its share of post-acquisition
changes in reserves is recognized in reserves. The cumulative post-acquisition
changes are adjusted against the cost of the investment. Unrealized gains on
transactions among the Company and its associated companies are eliminated to
the extent of the Company's interest in such associated company; 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 an
associated company equals or exceeds its interest in such associate, the Company
does not recognize further losses unless it has incurred obligations or made
payments on behalf of such associated company.
(3) First-time application of IFRS
The Company's transition date is January 1, 2003. Ternium prepared its opening
IFRS balance sheet at that date.
In preparing these combined consolidated financial statements in accordance with
IFRS 1, the Company has applied the mandatory exceptions and certain of the
optional exemptions from full retrospective application of IFRS, as detailed
below:
3.1. Exemptions from full retrospective application - elected by the Company
The Company has elected to apply the following optional exemptions from full
retrospective application.
(a) Fair value as deemed cost exemption
Ternium has elected to measure its property, plant and equipment at fair value
as of January 1, 2003.
(b) Cumulative translation differences exemption
Ternium has elected to set the previously accumulated cumulative translation to
zero at January 1, 2003. This exemption has been applied to all subsidiaries in
accordance with IFRS 1.
3.2 Exceptions from full retrospective application followed by the Company
Ternium has applied the following mandatory exceptions from retrospective
application.
(a) Derecognition of financial assets and liabilities exception
Financial assets and liabilities derecognized before January 1, 2003 are not
re-recognized under IFRS. However, this exception had no impact on these
financial statements as it was not applicable since the Company did not
derecognize any financial assets or liabilities before the transition date that
qualified for recognition.
(b) Hedge accounting exception
The Company has no derivatives that qualify for hedge accounting. This exception
is therefore not applicable.
(c) Estimates exception
Estimates under IFRS at January 1, 2003 should be consistent with estimates made
for the same date under previous GAAP.
(d) Assets held for sale and discontinued operations exception
Ternium did not have assets that met the held-for-sale criteria (as defined by
IFRS 5) during the period presented.
14
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(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"). The
functional currency of the Company is the U.S. dollar ("USD"). 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. The
combined consolidated financial statements are presented in thousands of U.S.
dollars.
(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 balance
sheet;
(ii) income and expenses for each income statement are translated at average
exchange rates; and
(iii) all resulting translation differences are recognized as a separate
component of equity.
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 accounted for
at the exchange rates prevailing at the date of the transactions. Gains and
losses resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in currencies other
than the functional currency are recognized in the income statement, including
the foreign exchange gains and losses from intercompany transactions.
(c) 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 impairment (if applicable).
Nevertheless, as mentioned in Note 4(a), property, plant and equipment has been
valued at its deemed cost at the transition date to IFRS.
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.
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.
15
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(c) Property, plant and equipment (continued)
Depreciation method is reviewed at each balance sheet date. Depreciation is
calculated using the straight-line method to amortize the cost of each asset to
its residual value over its estimated useful life as follows:
Land No Depreciation
Buildings and improvements 20-40 years
Plant and production equipment 15-25 years
Vehicles, furniture and fixtures and other equipment 5-15 years
The assets' useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.
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 (d)
"Impairment").
(d) Impairment
Assets that have an indefinite useful life are not subject to amortization and
are tested annually for impairment. 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 present value of estimated
future cash flows. For purposes of assessing impairment, assets are grouped at
the lowest levels for which there are separately identifiable cash flows
(cash-generating units). For these purposes, each associate has been considered
a cash generating unit.
At December 31, 2005 and 2004, no impairment provisions were recorded. The
impairment provision recorded in previous years on the investment in Amazonia
was reversed in 2004 and included in equity in earnings of associated companies,
as explained in Note 12.
(e) Intangible assets
(1) Information systems 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.
Information systems 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 expenses and general
and administrative expenses.
(2) Mining concessions
Mining license was recognized as a separate intangible asset upon the
acquisition of Hylsamex and comprises the right to exploit or explore the mines
and is recognized at its fair value less accumulated amortization. Amortization
charge is calculated according to the mineral extracted in each period and is
included in cost of sales.
(3) 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.
(4) 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, 2005, 2004 and 2003 totaled USD
2.1 million, USD 0.3 million and USD 0.5 million, respectively.
16
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(f) Other investments
Under IAS 39 "Financial Instruments: Recognition and Measurement", investments
have to be classified into the following categories: financial assets at fair
value through profit or loss; held-to-maturity investments; loans and
receivables and available-for-sale financial assets. The classification depends
on the purpose for which the investments were acquired. Management determines
the classification of its investments at initial recognition.
Deposits in trusts are classified as financial assets at fair value through
profit or loss. Subsequent to their acquisition, these investments are carried
at fair value through profit and loss. Realized and unrealized gains and losses
arising from changes in the fair value in those investments are included in the
income statement for the period in which they arise. The Amazonia Convertible
Debt Instrument was carried at cost until it was capitalized in February 2005.
In order to mitigate any potential impact of Argentine regulations restricting
payments outside of Argentina, Siderar has placed financial resources in a trust
outside Argentina. The objective of the trust is solely to ensure that the
financial needs for the normal development of Siderar's operations are met. The
fund mainly comprises time deposits and commercial paper. No liabilities or
debts have been offset within the trust fund. The financial resources that were
placed in the trust up to December 31, 2004 have been contributed to a
subsidiary (Inversiones Basilea S.A.) as of January 1, 2005.
All purchases and sales of investments are recognized on the trade date, not
significantly different from the settlement date, which is the date that Ternium
commits to purchase or sell the investment.
(g) Inventories
Inventories are stated at the lower of cost (calculated using principally the
first-in-first-out "FIFO" method) or net realizable value. The cost of finished
goods and work in progress comprises raw materials, direct labor, depreciation,
other direct costs and related production overhead costs. It excludes borrowing
costs. Net realizable value is the estimated selling price in the ordinary
course of business, less the costs of completion and selling expenses. Goods
acquired in transit at period end are valued at supplier invoice cost.
A provision for obsolescence or slow-moving inventory is recorded in connection
with supplies and spare parts and 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 the potential obsolescence due to technological change. The
provision for slow-moving inventory is recognized for finished goods and goods
in progress based on management's analysis of their aging.
(h) Trade receivables
Trade and other receivables are carried at face value less a provision for
impairment, if applicable. This amount does not differ significantly from fair
value.
A provision for impairment is established when there is objective evidence that
a financial asset or group of assets is impaired. Objective evidence that a
financial asset or group of assets is impaired includes observable data that
comes to the attention of the Company about a loss event, such as a significant
financial difficulty of the obligor or a breach of contract. The amount of the
impairment is determined as the difference between the asset's carrying amount
and the present value of estimated future cash flows discounted at the asset's
original effective interest rate. The amount of the loss is recognized in the
income statement.
(i) Cash and cash equivalents
Cash and cash equivalents and highly liquid short-term securities are carried at
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 less than 90 days).
In the combined consolidated balance sheet, bank overdrafts are included in
borrowings within current liabilities.
(j) Shareholders' equity
Basis of combination
The combined consolidated statement of changes in shareholders' equity for the
years 2005, 2004 and 2003 was prepared based on the following:
17
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(j) Shareholders' equity (continued)
-- Currency translation differences arising from the translation of financial
statements expressed in currencies other than the U.S. dollar are shown in
a separate line;
-- Dividends include the dividends paid by III (BVI) to San Faustin, and
dividends paid by Ylopa to Tenaris, as if they had been paid by Ternium to
San Faustin or Tenaris.
-- Other distributions comprise loans granted by Ylopa and Amazonia to its
shareholders that are in substance capital nature transactions. These loans
are non-interest bearing facilities granted by Ylopa to its shareholders
based on their respective stockholdings. These loans mature in one year,
although debtors are allowed to make partial or full prepayments at any
time. However Ylopa's intention is to offset the outstanding balance of
such facilities against future dividend distributions. Accordingly, these
credits have been shown as a reduction to equity.
-- Expenses incurred in connection with the Initial Public Offering at
year-end, totaling USD5.5 million approximately, have been deducted from
equity, since they directly relate to a transaction which itself is to be
recorded in equity, although at December 31, 2005, the equity transaction
had not yet been completed.
(k) Borrowings
Borrowings are recognized initially for an amount equal to the proceeds
received. In subsequent periods, borrowings are stated at amortized cost; any
difference between proceeds and the redemption value is recognized in the income
statement over the period of the borrowings.
A debt restructuring is accounted for in accordance with the guidelines set
forth by IAS No. 39 which states that a substantial modification of the terms of
an existing debt instrument (whether or not due to the financial difficulty of
the debtor) should be accounted for as an extinguishment of the old debt. For
purposes of IAS No. 39, the terms are substantially different if the discounted
present value of the cash flows under the new terms, including any fees paid net
of any fees received, is at least 10 per cent different from the discounted
present value of the remaining cash flows of the original debt instrument.
Borrowing costs are expensed as incurred.
(l) Income taxes - current and deferred
Under present Luxembourg law, so long as the Company maintains its status as a
holding company, no income tax, withholding tax (including with respect to
dividends), or capital gain tax is payable in Luxembourg by the Company.
The current income tax charge is calculated on the basis of the tax laws
existing in the countries in which Ternium's subsidiaries operate. Management
evaluates positions taken in tax returns with respect to situations in which
applicable tax regulation could be subject to interpretation. A liability is
recorded for tax benefits that were taken in the applicable tax return but have
not been recognized for financial reporting.
Deferred income taxes are calculated, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the financial statements. The principal temporary
differences arise on fixed assets, originated in different valuation and useful
lives considered by accounting standards and tax regulations, tax loss
carry-forwards, 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 by the
balance sheet date. 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.
(m) Employee liabilities
(1) Pension obligations
The Company has defined benefit 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.
18
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(m) Employee liabilities (continued)
The liability recognized in the balance sheet in respect of defined benefit
pension plans is the present value of the defined benefit obligation at the
balance sheet date, together with adjustments for unrecognized actuarial gains
or losses and past service costs. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit method.
Actuarial gains and losses arising from experience adjustments and changes in
actuarial assumptions are charged or credited to income over the employees'
expected average remaining working lives.
Past-service costs are recognized immediately in income, unless the changes to
the pension plan are conditional on the employees remaining in service for a
specified period of time (the vesting period). In this case, the past-service
costs are amortized on a straight-line basis over the vesting period.
Siderar
-------
Siderar implemented an unfunded defined benefit employee retirement plan for
Siderar's and certain other officers throughout the world on August 1, 1995. The
plan is designed to provide retirement, termination and other benefits to those
officers.
For its main plan, Siderar is accumulating assets for the ultimate payment of
those benefits in the form of investments that carry time limitations for their
redemption. The investments are not part of a particular plan, nor are they
segregated from Siderar's other assets, and therefore this plan is classified as
"unfunded" under IFRS definitions. Benefits provided by the plan are in U.S.
Dollars and are calculated based on a three-year or seven-year salary average
(whichever is more favorable to the beneficiary) for those executives who have
retired or were terminated before December 31, 2003. After this date, the
benefits of the plan are calculated based on a seven-year salary average.
Sidor
-----
In compliance with the requirements established by the share purchase agreement
subscribed in connection with the acquisition of Sidor, and as provided by the
agreement entered into with the Union representing Sidor's employees, on July 6,
1998, Sidor has established a plan providing for certain pension and other
post-retirement benefits for qualifying employees. This plan is financed through
contributions made by that company and active employees. Although the plan does
not provide for the amounts to be paid to employees upon retirement, for
purposes of International Accounting Standard No. 19 ("Employee Benefits"),
Sidor's obligations have been calculated based on actuarial calculations
prepared assuming this plan qualifies as a defined benefit plan.
Hylsamex
--------
The valuation of the liabilities for employee retirement plans (pensions and
seniority premiums) covers all employees and is based primarily on their years
of service, their present age and their remuneration at the date of retirement.
The cost of the employee retirement plans (pension, health-care expenses and
seniority premiums) is recognized as an expense in the year in which services
are rendered in accordance with actuarial studies made by independent actuaries.
The formal retirement plans are congruent with and complementary to the
retirement benefits established by the Mexican Institute of Social Security.
Additionally, the Company has established a plan to cover health-care expenses
of retired employees.
The Company has established irrevocable trust funds for the payment of pensions
and seniority premiums, as well as for health-care expenses.
(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.
19
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
4 Accounting policies (continued)
(m) Employee liabilities (continued)
(3) Other compensation obligations
Employee entitlements to annual leave and long-service leave are accrued as
earned.
(4) Social security contributions
Social security laws in force in Argentina, Mexico and Venezuela provide for
pension benefits to be paid to retired employees from government pension plans
and/or private fund managed plans to which employees may elect to contribute. As
stipulated by the respective laws, Siderar, Hylsamex and Sidor 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.
(n) 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.
(o) Revenue recognition
Revenues are recognized as sales when revenue is earned and is realized or
realizable. This includes satisfying all of the following criteria: the
arrangement with the customer is evident, usually through the receipt of a
purchase order; the sales price is fixed or determinable; delivery as defined by
the risk transfer provision of the sales contracts has occurred, and
collectibility is reasonably assured.
Interest income is recognized on an effective yield basis.
Income from participation account is recognized when earned according to its
contractual terms (see Note 29).
(p) Cost of sales, selling expenses and general and administrative expenses
Cost of sales and expenses are recognized in the income statement on the accrual
basis of accounting.
(q) 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. At December 31, 2005, there were 297,010,812 potential shares
outstanding (see Note 30; actual shares are described in Note 35 (a)).
(r) Derivative financial instruments
Information about accounting for derivative financial instruments and hedging
activities is included in Note 34 "Financial risk management".
(s) Segment information
Business segments: for management purposes, the Company is organized on a
worldwide basis into the following segments: flat steel products, long steel
products and others. The flat steel products segment comprises the manufacturing
and marketing of flat steel products and the long steel products segment
comprises the manufacturing and marketing of long steel products.
The secondary reporting format is based on a geographical location. Ternium
sells its products to four main geographical areas: South and Central America,
North America, Europe and Other.
20
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
5 Segment information
Primary reporting format - business segments
Flat steel Long steel
products products Other Unallocated Total
---------------------------------------------------------------
Year ended December 31, 2005
Net sales 3,570,414 625,368 251,898 - 4,447,680
Cost of sales (1,925,163) (382,325) (163,356) - (2,470,844)
------------ ------------ ------------ ----------- -------------
Gross profit 1,645,251 243,043 88,542 - 1,976,836
Capital expenditures - PP&E 208,772 14,587 - - 223,359
Depreciation - PP&E 267,975 32,604 1,387 - 301,966
Segment assets
Inventories, net 859,270 126,536 14,313 - 1,000,119
Trade receivables, net 363,573 74,925 34,262 - 472,760
PP&E, net 4,653,192 749,305 61,374 - 5,463,871
Other assets - - - 1,723,231 1,723,231
Segment liabilities 1,566,451 193,247 31,117 3,293,247 5,084,062
Flat steel
products Trading Other Unallocated Total
------------ ------------ ------------ ----------- -------------
Year ended December 31, 2004
Net sales 1,266,197 325,227 7,501 - 1,598,925
Cost of sales (647,815) (312,447) (4,742) - (965,004)
------------ ------------ ------------ ----------- -------------
Gross profit 618,382 12,780 2,759 - 633,921
Capital expenditures - PP&E 83,763 - - - 83,763
Depreciation - PP&E 92,596 86 - - 92,682
Segment assets
Inventories, net 233,624 20,100 562 - 254,286
Trade receivables, net 111,945 58,877 783 - 171,605
PP&E, net 1,244,294 397 - - 1,244,691
Investment in Amazonia 309,195 - - - 309,195
Other assets 468,673 95,047 - 103,133 666,853
Segment liabilities 635,461 143,629 - 95,689 874,779
21
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
5 Segment information (continued)
Flat steel
products Trading Other (ii) Unallocated Total
------------ ------------ ------------ ----------- -------------
Year ended December 31, 2003
Net sales 955,591 98,261 2,714 - 1,056,566
Cost of sales (576,368) (93,276) (2,076) - (671,720)
------------ ------------ ------------ ----------- -------------
Gross profit 379,223 4,985 638 - 384,846
Capital expenditures - PP&E 26,014 - - - 26,014
Depreciation - PP&E 81,720 29 - - 81,749
Segment assets
Inventories, net 140,754 3,167 386 - 144,307
Trade receivables, net 81,504 26,922 30 - 108,456
PP&E, net 1,275,477 222 - - 1,275,699
Investment in Amazonia 151,543 - - - 151,543
Other assets 360,492 37,888 - 108,503 506,883
Segment liabilities 795,102 52,982 - 86,719 934,803
(ii) Includes sales of pig iron made by Siderar
Secondary reporting format - geographical segments
Allocation of net sales is based on the customers' location. Allocation of
assets and capital expenditures is based on the assets' location.
Ternium's subsidiaries operate for four main geographical areas. The North
American segment comprises principally United States, Canada and Mexico. The
South and Central American segment comprises principally Argentina, Brazil,
Colombia, Venezuela and Ecuador.
South and
Central North
America America Europe Other Total
------------ ----------- ------------ ----------- ------------
Year ended December 31, 2005
Net sales 2,805,214 1,290,353 270,496 81,617 4,447,680
Segment assets.
Trade receivables 64,837 335,795 68,050 4,078 472,760
Property, plant and equipment 3,409,045 2,054,687 139 - 5,463,871
Depreciation - PP&E. 249,808 52,132 26 - 301,966
Capital expenditures - PP&E 180,867 42,473 19 - 223,359
Year ended December 31, 2004
Net sales 1,123,692 230,829 212,373 32,031 1,598,925
Segment assets.
Trade receivables 50,956 42,563 77,581 505 171,605
Property, plant and equipment 1,244,428 93 170 - 1,244,691
Depreciation - PP&E. 92,626 25 31 - 92,682
Capital expenditures - PP&E 83,763 83,763
Year ended December 31, 2003
Net sales 713,265 86,618 184,033 72,650 1,056,566
Segment assets
Trade receivables 35,529 7,744 63,930 1,253 108,456
Property, plant and equipment 1,275,542 29 128 1,275,699
Depreciation - PP&E 81,720 7 22 - 81,749
Capital expenditures - PP&E 26,014 26,014
22
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
6 Cost of sales
Year ended December 31,
---------------------------------------------------
2005 2004 2003
---------------------------------------------------
Inventories at the beginning of the year 254,286 144,307 109,966
Acquisition of business - Amazonia 284,676 - -
Acquisition of business - Hylsamex 345,053 - -
Plus: Charges for the year
Raw materials and consumables used and other movements 1,607,002 781,337 453,590
Services and fees 114,115 42,277 37,782
Labor cost 283,775 89,362 68,053
Depreciation of property, plant and equipment 279,480 89,836 78,996
Amortization of intangible assets 10,488 5,400 2,871
Maintenance expenses 207,242 62,488 57,888
Office expenses 5,174 1,145 1,214
Freight and transportation 41,457 18,746 14,574
Insurance 814 815 607
Provision for obsolescence 7,927 - -
Recovery from sales of scrap and by-products (35,266) (23,315) (13,714)
Others 64,740 6,892 4,200
Less: Inventories at the end of the year (1,000,119) (254,286) (144,307)
-------------------- ------------- ----------------
2,470,844 965,004 671,720
-------------------- ------------- ----------------
7 General and administrative expenses
Year ended December 31,
---------------------------------------------------
2005 2004 2003
-------------------- ------------- ----------------
Services and fees 40,471 12,479 9,117
Labor cost 119,822 15,105 17,159
Depreciation of property plant and equipment 22,486 2,846 2,753
Amortization of intangible assets 3,308 440 438
Maintenance and expenses 7,564 2,162 1,452
Taxes 35,787 17,977 13,665
Office expenses 21,147 1,346 1,155
Donations 3,242 1,061 1,767
Insurance 4,410 529 685
Others 10,994 4,483 3,366
---------------- ---------------------------------
269,231 58,428 51,557
---------------- ---------------------------------
8 Selling expenses
Year ended December 31,
---------------------------------------------------
2005 2004 2003
---------------------------------------------------
Services and fees 13,237 3,249 3,582
Labor cost 22,578 9,144 9,271
Amortization of intangible assets 643 670 421
Office expenses 6,229 194 240
Freight and transportation 198,657 42,354 46,257
Taxes 9,321 3,934 2,251
Others 1,297 979 764
-------------------- ------------- ----------------
251,962 60,524 62,786
-------------------- ------------- ----------------
23
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
9 Labor costs (included in cost of sales, selling expenses and general and administrative expenses)
Year ended December 31,
---------------------------------------------------
2005 2004 2003
-------------------- ------------- ----------------
Wages, salaries and social security costs 361,250 104,268 83,087
Termination benefits 40,364 7,969 10,419
Pension benefits - defined benefit plans (Note 26 (i)) 24,561 1,374 977
-------------------- ------------- ----------------
426,175 113,611 94,483
-------------------- ------------- ----------------
10 Other operating expenses, net
Year ended December 31,
---------------------------------------------------
2005 2004 2003
-------------------- ------------- ----------------
(i) Other operating income
Others 6,543 502 75
-------------------- ------------- ----------------
Total other operating income 6,543 502 75
-------------------- ------------- ----------------
(ii) Other operating expenses
Provision for impairment- trade receivables (1,853) (1,093) (6,025)
Recovery of provision for impairment- trade
receivables 4,320 3,419 4,701
Provision for legal claims and other matters (13,586) (2,714) (3,975)
Others (4,558) (912) (497)
-------------------- ------------- ----------------
Total other operating expenses (15,677) (1,300) (5,796)
-------------------- ------------- ----------------
(iii)Derecognition of property, plant & equipment (a) (54,348) - -
---------------- ---------------------------------
Total other operating expenses, net (63,482) (798) (5,721)
-------------------- ------------- ----------------
(a) After the acquisition of Hylsamex described in Note 3, the Company's management decided to abandon
one of Hylsamex's mills and, accordingly, the net carrying amount of such mill has been charged to
income for the year.
11 Financial (expenses) income, net
Year ended December 31
--------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
Interest expense (81,608) (18,257) (39,980)
Interest income 32,324 8,911 6,036
Net foreign exchange transaction gains and change in fair
value of derivative instruments (28,828) 9,845 37,787
Bank commissions and other bank charges (10,015) (1,506) (1,719)
Income from Participation Account (i) 44,050 203,429 73,913
Loss from Participation Account (i) (265,207) - -
Others (1,452) (133) (431)
---------------- ---------------- ----------------
Financial (expenses) income, net (310,736) 202,289 75,606
---------------- ---------------- ----------------
(i) Until February 15, 2005, the Company accounted for its investment in Amazonia under the equity method
of accounting. Thus, income arising from the Participation Account Agreement described in Note 29 has
been recorded under Income from Participation Account within Financial income, net. Upon conversion
of the Amazonia Convertible Debt Instrument on February 15, 2005, the Company acquired control over
Amazonia and began accounting for such investment on a consolidated basis. Accordingly, income resulting
from Ternium's share of the Participation Account has been offset against Amazonia's loss for the same
concept and shown net under Loss from Participation Account line item.
12 Equity in earnings of associated companies
Year ended December 31,
----------------------------------------------
2005 2004 2003
------------- ------------ -------------
Equity in earnings of associated companies (Note 16) 21,524 60,908 148,162
Impairments (i) (Note 16) - 148,293 (37,912)
------------- ------------ -------------
Equity in earnings of associated companies 21,524 209,201 110,250
------------- ------------ -------------
(i) The accumulated impairment loss over the Company's investment in Amazonia at December 31, 2003 (totaling
USD 148,293) was fully reversed in fiscal year 2004.
24
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
13 Tax charge
Income tax
Income tax expense for each of the years presented is as follows
Year ended December 31,
---------------------------------------------
2005 2004 2003
-------------- -------------- ---------------
Current tax (243,482) (209,147) (60,625)
Deferred tax (Note 25) 24,990 31,661 (33,462)
-------------- -------------- ---------------
(218,492) (177,486) (94,087)
-------------- -------------- ---------------
Income tax expense for the years ended December 31, 2004 and 2003 differed
from the amount computed by applying the statutory incometax 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,
---------------------------------------------
2005 2004 2003
-------------- -------------- ---------------
Income before income tax 1,291,305 925,661 450,638
Income tax expense at statutory tax rate 271,953 179,827 94,727
Non taxable income (70,115) (2,341) (1,289)
Non deductible expenses 19,196 - 649
Utilization of previously unrecognized tax losses (2,542) - -
-------------- -------------- ---------------
Income tax expense 218,492 177,486 94,087
-------------- -------------- ---------------
14 Property, plant and equipment, net
Vehicles,
Year ended December 31, 2005 Building and roduction furniture Work in Spare
Land improvements Pequipment and fixtures progress parts Total
------------ -------------- ----------- ------------ ------------ ---------- -------------
Cost
Value at the beginning of the
year 23,427 682,576 2,217,688 141,212 36,865 16,331 3,118,099
Translation differences (6,243) (98,975) (266,065) (6,484) (10,094) (382) (388,243)
Acquisition of business -
Amazonia 55,815 959,849 2,473,696 42,231 94,370 - 3,625,961
Acquisition of business -
Hylsamex 235,479 547,183 2,881,273 68,959 49,872 - 3,782,766
Additions 266 7,539 42,747 2,633 165,966 4,208 223,359
Disposals / Consumptions - (29,029) (83,352) (3,396) - (1,538) (117,315)
Transfers 6,252 59,808 115,457 5,379 (186,896) - -
------------ -------------- ----------- ------------ ------------ ---------- -------------
Values at the end of the year 314,996 2,128,951 7,381,444 250,534 150,083 18,619 10,244,627
------------ -------------- ----------- ------------ ------------ ---------- -------------
Depreciation
Accumulated at the beginning of
the year - (392,996)(1,368,813) (109,797) - (1,802) (1,873,408)
Translation differences - 61,210 107,768 3,773 - (2) 172,749
Acquisition of business -
Amazonia - (480,581) (688,188) (12,903) - - (1,181,672)
Acquisition of business -
Hylsamex - (274,824)(1,330,310) (48,307) - - (1,653,441)
Depreciation Charge - (68,442) (221,566) (11,801) - (157) (301,966)
Disposals / Consumptions - 14,207 39,929 1,806 - 1,040 56,982
Accumulated at the end of the
year - (1,141,426)(3,461,180) (177,229) - (921) (4,780,756)
------------ -------------- ----------- ------------ ------------ ---------- -------------
At December 31, 2005 314,996 987,525 3,920,264 73,305 150,083 17,698 5,463,871
------------ -------------- ----------- ------------ ------------ ---------- -------------
25
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
14 Property, plant and equipment, net (continued)
Vehicles,
Building and Production furniture Work in Spare
Year ended December 31, 2004 Land improvements equipment and fixtures progress parts Total
------------ -------------- ----------- ------------ ------------ ---------- -------------
Cost
Values at the beginning of the
year 23,856 644,233 2,233,218 141,874 29,797 14,187 3,087,165
Translation differences (392) (11,212) (36,999) (2,346) (585) (263) (51,797)
Additions - - - 970 80,386 2,407 83,763
Disposals / Consumptions (37) - - (187) (808) - (1,032)
Transfers - 49,555 21,469 901 (71,925) - -
------------ -------------- ----------- ------------ ------------ ---------- -------------
Values at the end of the year 23,427 682,576 2,217,688 141,212 36,865 16,331 3,118,099
------------ -------------- ----------- ------------ ------------ ---------- -------------
Depreciation
Accumulated at the beginning of
the year - (374,761) (1,329,670) (105,504) - (1,531) (1,811,466)
Translation differences - 6,439 22,525 1,576 - 30 30,570
Depreciation charge - (24,674) (61,668) (6,039) - (301) (92,682)
Disposals / Consumptions - - - 170 - - 170
------------ -------------- ----------- ------------ ------------ ---------- -------------
Accumulated at the end of the year - (392,996) (1,368,813) (109,797) - (1,802) (1,873,408)
------------ -------------- ----------- ------------ ------------ ---------- -------------
At December 31, 2004 23,427 289,580 848,875 31,415 36,865 14,529 1,244,691
------------------------------------------------------------------------------------------
15 Intangible assets, net
Year ended December 31, 2005 Information Mining Goodwill Total
System Projects Concessions
---------------- --------------- ------------- -----------------
Cost
Values at the beginning of the year 20,547 - - 20,547
Translation differences (1,767) (603) (5,694) (8,064)
Acquisition of business - Amazonia 7,465 - - 7,465
Acquisition of business - Hylsamex 11,172 127,101 - 138,273
Additions 21,144 436 405,388 426,968
Disposals (77) - - (77)
---------------- --------------- ------------- -----------------
Values at the end of the year 58,484 126,934 399,694 585,112
---------------- --------------- ------------- -----------------
Amortization
Accumulated at the beginning of the year (10,498) - - (10,498)
Translation differences 806 - - 806
Acquisition of business - Amazonia (2,906) - - (2,906)
Acquisition of business - Hylsamex (5,193) - - (5,193)
Amortization charge (10,115) (4,324) - (14,439)
---------------- --------------- ------------- -----------------
Accumulated at the end of the year (27,906) (4,324) - (32,230)
---------------- --------------- ------------- -----------------
At December 31, 2005 30,578 122,610 399,694 552,882
---------------- --------------- ------------- -----------------
26
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
15 Intangible assets, net (continued)
Year ended December 31, 2004 Information
System Projects
------------------
Cost
Values at the beginning of the year 12,055
Translation differences (308)
Additions 8,800
------------------
Values at the end of the year 20,547
------------------
Amortization
Accumulated at the beginning of the year (4,074)
Translation differences 86
Amortization charge (6,510)
------------------
Accumulated at the end of the year (10,498)
------------------
At December 31, 2004 10,049
------------------
16 Investments in associated companies, net
Year ended December 31,
---------------------------
2005 2004
---------------------------
At the beginning of the year 309,318 151,672
Translation adjustment (3,554) (51,555)
Equity in earnings of associated companies 21,524 60,908
Consolidation of Amazonia (see Note 3) (318,166) -
Impairments (Note 12) - 148,293
------------- -------------
At the end of the year 9,122 309,318
------------- -------------
The principal associated companies, all of which are unlisted, are:
Percentage of ownership
Country of at December 31, Value at December 31,
Company incorporation 2005 2004 2005 2004
-------------------------------------- ----------------- --------- ------------- -------------- -------------
Matesi Materiales Siderurgicos S.A.(1) Venezuela 26.49% - 9,002 -
Consorcio Siderurgia Amazonia Ltd.(2) Cayman Islands - 31.03% - 309,195
Compania Afianzadora de Empresas
Siderurgicas S.G.R (3) Argentina 21.81% 19.74% 120 123
-------------- -------------
9,122 309,318
-------------- -------------
(1) Indirectly through the participation of Sidor (49.8%).
(2) Indirectly through the participation of Prosid Investments S.C.A. (21.14%), IS (5.81%) and Tamsider
(14.49%). Total voting rights held: 41.44%.
(3) Indirectly through the participation of Siderar (38.89%). Total voting rights held: 38.89%.
27
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
16 Investments in associated companies, net (continued)
The equity investment in Amazonia at December 31, 2004 has been valued using the financial statements of that company at
that date. The accompanying table shows summarized financial information of Amazonia at December 31, 2004.
------------------
As of December
31, 2004
------------------
Non-current assets 1,775,801
Current assets 881,875
------------------
Total assets 2,657,676
------------------
Shareholders' equity 746,157
Minority interest 595,912
------------------
Total shareholders' equity 1,342,069
------------------
Non-current liabilities 693,640
Current liabilities 621,967
------------------
Total liabilities 1,315,607
------------------
----------------
Year ended
December 31,
2004
----------------
Net sales 1,914,308
Income tax and asset tax expense (8,342)
Net income for the year attributable to equity holders 146,324
Net income for the year attributable to minority interest 116,999
17 Other investments, net - non-current
As of December 31,
--------------------------
2005 2004
--------------------------
Amazonia convertible debt instrument (Note 29) - 127,576
Time deposits with related parties (i) 10,450 11,171
Guarantee fund Compania Afianzadora de Empresas Siderugicas S.G.R. (ii) 3,402 3,949
Other 243 7,874
Provision for impairment of other investments (Note 23 (i)) (1,488) (2,001)
--------------------------
Total 12,607 148,569
--------------------------
(i) Time deposits with related parties
The Company holds a savings fund denominated in U.S. dollars. Withdrawal of investments before certain dates is
subject to penalties on amounts invested.
(ii) Guarantee fund Compania de Empresas Siderurgicas S.G.R.
Corresponds to the Company's portion of the risk funds sponsored by Compania Afianzadora de Empresas Siderurgicas
SGR, which acts as guarantor of third parties' debts.
28
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
18 Receivables, net - non-current
As of December 31,
---------------------------
2005 2004
---------------------------
Related parties 39,285 12,293
Employee advances and loans 6,323 1,516
Trade receivables 3,474 3,404
Employee receivables from sale of fixed assets 1,729 1,861
Others 76 113
Provision for impairment - receivables (Note 23 (i)) (3,024) (3,404)
------------- -------------
47,863 15,783
------------- -------------
19 Receivables - current
As of December 31,
---------------------------
2005 2004
------------- -------------
Value added tax 55,326 -
Asset tax 60,312 -
Prepaid taxes 2,894 2,534
Employee advances and loans 5,943 1,919
Advances to suppliers 58,839 11,815
Expenses paid in advance 15,172 688
Government tax refunds on exports 36,425 6,534
Receivables with related parties 35,548 160,230
Other 20,843 24,979
------------- -------------
291,302 208,699
------------- -------------
20 Inventories, net
As of December 31,
---------------------------
2005 2004
---------------------------
Raw materials, materials and spare parts 578,088 125,711
Goods in process 282,358 71,228
Finished goods 192,492 69,871
Provision for obsolescence (Note 24 (i)) (52,819) (12,524)
---------------------------
1,000,119 254,286
---------------------------
21 Trade receivables, net
As of December 31,
--------------------------
2005 2004
------------- -------------
Current accounts 487,952 169,180
Trade receivables with related parties 14,659 13,179
Provision for impairment - trade receivables (Note 24 (i)) (29,851) (10,754)
------------- -------------
472,760 171,605
------------- -------------
29
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
22 Cash, cash equivalents and other investments
As of December 31,
-------------------------------
2005 2004
--------------- ---------------
(i) Other investments
Trust funds with specific objective 5,185 88,755
--------------- ---------------
5,185 88,755
--------------- ---------------
(ii) Cash and cash equivalents
Cash at banks and in hand 117,737 32,825
Deposits and foreign private sector bonds 637,243 162,050
Restricted cash 10,650 -
--------------- ---------------
765,630 194,875
--------------- ---------------
23 Provisions - non current
(i) Deducted from assets
Provision
for impairment
Provision for Other
Impairment- investments -
Receivables non current
---------------------------------
Year ended December 31, 2005
Values at the beginning of the year 3,404 2,001
Translation differences (47) (17)
Reversals (333) -
Uses - (496)
---------------------------------
At December 31, 2005 3,024 1,488
---------------------------------
Year ended December 31, 2004
Values at the beginning of the year 6,894 2,035
Translation differences (71) (34)
Reversals (3,419) -
---------------------------------
At December 31, 2004 3,404 2,001
---------------------------------
(ii) Liabilities
Legal claims
and
other matters
-------------------
Year ended December 31, 2005
Values at the beginning of the year 11,925
Translation differences (4,349)
Acquisition of business - Amazonia 37,163
Additional provisions 9,240
Used (500)
-------------------
At December 31, 2005 53,479
-------------------
Year ended December 31, 2004
Values at the beginning of the year 9,859
Translation differences (173)
Additional provisions 2,239
-------------------
At December 31, 2004 11,925
-------------------
30
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
24 Provisions - current
(i) Deducted from assets
Provision for
impairment - trade Provision for
receivables obsolescence
----------------------------------------
Year ended December 31, 2005
Values at the beginning of the year 10,754 12,524
Translation differences (418) (1,802)
Reversals (3,987) -
Acquisition of business - Amazonia 6,108 13,184
Acquisition of business - Hylsamex 24,509 24,713
Additional provisions 1,853 7,927
Uses (8,968) (3,727)
------------------- -----------------
At December 31, 2005 29,851 52,819
------------------- -----------------
Year ended December 31, 2004
Values at the beginning of the year 9,877 13,925
Translation differences (216) (215)
Reversals - (3,234)
Additional provisions 1,093 2,048
------------------- -----------------
At December 31, 2004 10,754 12,524
------------------- -----------------
(ii) Liabilities
Legal claims and
other matters
--------------------
Year ended December 31, 2005
Values at the beginning of the year 960
Translation differences (6)
Additional provisions 4,346
Uses (4,641)
--------------------
At December 31, 2005 659
--------------------
Year ended December 31, 2004
Values at the beginning of the year 1,584
Translation differences (19)
Additional provisions 475
Uses (1,080)
--------------------
At December 31, 2004 960
--------------------
25 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.
The movement on the deferred income tax account is as follows:
Year ended December 31,
--------------------------------
2005 2004
----------------------------------
At beginning of year (337,473) (374,907)
Acquisition of business - Amazonia (284,242) -
Acquisition of business - Hylsamex (426,786) -
Translation differences 4,449 5,773
Income statement credit 24,990 31,661
--------------- ----------------
At end of year (1,019,062) (337,473)
--------------- ----------------
31
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
25 Deferred income taxes (continued)
The tax effects of temporary differences that give rise to significant portions of the group's deferred tax assets
and liabilities are presented below:
As of December 31,
--------------------------------
2005 2004
---------------- ---------------
Deferred tax assets:
Receivables 23,217 -
Inventories 12,708 -
Other assets 7,941 1,638
Tax loss carryforwards 18,188 12,879
Tax assets 79,983 -
Provisions 9,918 4,504
Other liabilities 124,298 9,480
---------------- ---------------
Total gross deferred tax assets 276,253 28,501
Deferred tax liabilities:
Property, plant and equipment & Intangible Assets (1,115,262) (363,605)
Inventories (39,353) (75)
Provision (67,915) -
Other (72,785) (2,294)
---------------- ---------------
Total gross deferred tax liabilities (1,295,315) (365,974)
---------------- ---------------
Net deferred tax liability (1,019,062) (337,473)
---------------- ---------------
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. As of December 31, 2005 and 2004, USD
29,126 and USD nil, respectively, have been classified as non-current assets
and USD 1,048,188 and 337,473, respectively, have been classified as
non-current liabilities.
26 Other liabilities
As of December 31,
--------------------------------
2005 2004
---------------- ---------------
(i) Other liabilities - non-current
Termination benefits 3,118 2,987
Pension benefits 177,899 6,117
Other 6,900 -
---------------- ---------------
187,917 9,104
---------------- ---------------
Pension benefits
The amounts recognized in the combined consolidated balance sheet are
determined as follows:
Year ended December 31,
-------------------------
2005 2004
------------ ------------
Present value of unfunded obligations 172,394 8,558
Unrecognized actuarial losses 8,594 1,086
Unrecognized prior service costs (3,089) (3,527)
------------ ------------
Liability in the balance sheet 177,899 6,117
------------ ------------
32
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
26 Other liabilities (continued)
The amounts recognized in the combined consolidated income statement are as follows:
Year ended December 31,
--------------------------
2005 2004
------------- ------------
Current service cost 7,227 317
Interest cost 17,785 636
Amortization of prior service costs 443 420
Net actuarial losses (gains) recognized in the year (894) 1
------------- ------------
Total included in labor costs 24,561 1,374
------------- ------------
Movement in the liability recognized in the combined consolidated balance sheet
is as follows:
Year ended December 31,
--------------------------
2005 2004
-------------- -----------
At the beginning of the year 6,117 5,479
Acquisition of business - Amazonia 78,425 -
Acquisition of business - Hylsamex 116,860 -
Transfers and new participants of the plan (25,153) 122
Total expense 24,560 1,374
Translation differences (9,549) -
Contributions paid (13,361) (858)
-------------- -----------
At the end of year 177,899 6,117
-------------- -----------
The principal actuarial assumptions used were as follows:
Siderar Year ended December 31,
--------------------------
2005 2004
--------------------------
Discount rate 7.00 % 7.00 %
Rate of compensation increase 2.00 % 2.00 %
Sidor Year ended December 31,
--------------------------
2005 2004
--------------------------
Discount rate 23.32 % -
Rate of compensation increase 16.34 % -
Hylsamex Year ended December 31,
--------------------------
2005 2004
--------------------------
Discount rate 8.67 % -
Rate of compensation increase 4.54 % -
As of December 31,
--------------------------
2005 2004
--------------------------
(ii) Other liabilities - current
Payroll and social security payable 67,639 23,135
Termination benefits 18,966 2,163
Participation account 90,186 -
Related Parties 17 -
Others 17,265 7,990
------------- -------------
194,073 33,288
------------- -------------
33
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
27 Derivative financial instruments
Net fair values of derivative financial instruments
The net fair values of derivative financial instruments at December 31, 2005 and 2004 were as follows:
Year ended December 31,
----------------------------
2005 2004
------------- --------------
Contracts with positive fair values:
Forward foreign exchange contracts 86 -
Interest rate Swap contracts 5,316 -
------------- --------------
5,402 -
------------- --------------
Year ended December 31,
----------------------------
2005 2004
------------- --------------
Contracts with negative fair values:
Forward foreign exchange contracts - (5,956)
------------- --------------
- (5,956)
------------- --------------
Derivative financial instruments breakdown are as follows:
Exchange rate derivatives
Fair value at December 31,
--------------------------------
Notional amount
at December 31, 2005
Currencies Contract (in USD thousands) 2005 2004
------------------- ----------------------------- ------------------------ ------------------- ---------------
USD/EUR Euro forward sales 1,400 86 (5,622)
USD/GBP Pound Sterling forward sales - - (334)
--------------- ---------------
86 (5,956)
--------------- ---------------
Interest rate swaps
On September 1, 2005, III BVI entered into a USD 250 million interest rate swap
agreement with Citibank N.A., New York to manage the impact of the floating
interest rate changes on the Ternium Credit Facility by setting the interest
rate to 4.235% per annum. This interest rate swap is due on August 22, 2010 and
provides for semi-annual payments on February 22 and August 22 of each year,
commencing on August 22, 2006 through and including the termination date. The
notional amount and schedule of payments provided by this agreement are as
follows:
Calculation period
--------------------------------------------------------- Notional amount
From and including To but excluding (USD thousands)
----------------------------- ------------------------- -------------------
February 22, 2006 August 22, 2006 250,000
August 22, 2006 February 22, 2007 226,250
February 22, 2007 August 22, 2007 201,250
August 22, 2007 February 22, 2008 176,250
February 22, 2008 August 22, 2008 148,750
August 22, 2008 February 22, 2009 121,250
February 22, 2009 August 22, 2009 93,750
August 22, 2009 February 22, 2010 66,250
February 22, 2010 August 22, 2010 33,750
34
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
27 Derivative financial instruments (continued)
In addition, on September 1, 2005, Siderar entered into two interest rate swap agreements with JP Morgan Chase Bank N.A. and
Deutsche Bank AG with a notional amount of USD 100 million each to manage its exposure to changes in market rates associated
with the Siderar Credit Facility by setting the interest rate to 4.18% and 4.20% per annum, respectively. These interest rate
swaps are due on August 22, 2008 and provide for semi-annual payments on February 22 and August 22 of each year, commencing
on August 22, 2006 through and including the termination date. The notional amount and schedule of payments provided by these
agreements are as follows:
Calculation period
-------------------------------------------------------- Notional amount
From and including To but excluding (USD thousands)
----------------------------- ------------------------- -------------------
February 22, 2006 August 22, 2006 100,000
August 22, 2006 February 22, 2007 80,000
February 22, 2007 August 22, 2007 60,000
August 22, 2007 February 22, 2008 40,000
February 22, 2008 August 22, 2008 20,000
28 Borrowings
Year ended
December 31,
---------------------------
2005 2004
------------ -------------
(i) Non-current
Bank borrowings 1,810,910 1,008
Borrowings with related parties 603,683 -
------------ -------------
2,414,593 1,008
Less: debt issue costs (14,715) -
------------ -------------
2,399,878 1,008
------------ -------------
(ii) Current
Bank borrowings 518,629 45,628
Others - 443
Borrowings with related parties 3,789 75,927
------------ -------------
522,418 121,998
Less: debt issue costs (6,019) -
------------ -------------
516,399 121,998
------------ -------------
------------ -------------
Total Borrowings 2,916,277 123,006
------------ -------------
The maturity of borrowings is as follows:
Expected maturity date
----------------------------------------------------------------------
At December 31, 2005 2006 2007 2008 2009 2010 Thereafter Total((1))
------- --------- ---------- --------- ------- ------------ ----------
Non-Current Debt
Fixed Rate - 83,594 21,947 1,811 1,811 35,495 144,658
Floating Rate - 463,349 713,693 265,844 208,651 603,683 2,255,220
Current Debt
Fixed Rate 121,829 - - - - - 121,829
Floating Rate 394,570 - - - - - 394,570
------- --------- ---------- --------- ------- ------------ ----------
Total 516,399 546,943 735,640 267,655 210,462 639,178 2,916,277
------- --------- ---------- --------- ------- ------------ ----------
35
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
28 Borrowings (continued)
Expected maturity date
----------------------------------------------------------------------
At December 31, 2004 2005 2006 2007 2008 2009 Thereafter Total((1))
------- --------- ---------- --------- ------- ------------ ----------
Non-Current Debt
Fixed Rate - - - - - - -
Floating Rate - 783 225 - - - 1,008
Current Debt
Fixed Rate 102,583 - - - - - 102,583
Floating Rate 19,415 - - - - - 19,415
--------- --------- --------- ------- -------- --------------------
Total 121,998 783 225 - - - 123,006
--------- --------- --------- ------- -------- --------------------
(1) As most borrowings incorporate floating rates that approximate market rates
and the contractual repricing occurs every 3 to 6 months, the fair value of the
borrowings approximates its carrying amount and is not disclosed separately.
During March 2003, Siderar signed an agreement with its creditors which allowed
Siderar to modify certain conditions of its financial debt (principally the
extension of the original loans terms) for a total of USD 473.6 million. As a
result of this agreement, Siderar made an initial payment of USD 85.0 million
corresponding to 17.95% of the restructured debt. The remaining debt balance
(New Bank Debt) at March 18, 2003 consisted of "New Trade Facility" for a total
of USD 309.3 million and a "New FRN Facility" for a total of USD 79.0 million.
During 2004, the Company settled all the outstanding balances of the New Trade
Facility and the New FRN Facility, and at the same time the guarantees and
restrictions imposed by the financing contracts were released.
The weighted average interest rates - which incorporate instruments denominated
in various currencies - at the balance sheet date were as follows:
December 31,
-----------------------
2005 2004
----------- -----------
Bank borrowings 6.08% 2.25%
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
2005 and 2004, respectively.
Breakdown of long-term borrowings by currency is as follows:
Bank borrowings
Currency Interest rates December 31,
------------- ------------------------------------------------------------------------ ------------------------
2005 2004
------------ ----------
USD Variable 2,200,543 18,091
USD Fixed 609,293 102,583
EUR Variable - 2,332
EUR Fixed 404 -
ARS Fixed 55 -
MXN Variable 64,822 -
VEB Fixed 41,160 -
------------ ----------
Total bank borrowings 2,916,277 123,006
------------ ----------
EUR: Euro; ARS: Argentine pesos; MXN: Mexican pesos; VEB: Venezuelan Bolivar
36
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
29 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. Based on management's assessment and the advice of legal
counsel, it is not anticipated that the ultimate resolution of existing
litigation will result in amounts in excess of recorded provisions that would be
material to Ternium's combined consolidated financial position or results of
operations.
(i) Consorcio Siderurgia Amazonia, Ltd.- Debt restructuring process
The financial restructuring of Sidor and Amazonia, which concluded during 2003
(the "2003 Restructuring"), entailed the termination of certain guarantees and
commitments to further finance Amazonia and Sidor that Ternium had entered into
as a result of the privatization of Sidor and previous restructuring agreements.
The restructuring agreements contemplate, however, certain continuing
obligations and restrictions to protect the claims held by the financial
creditors of Sidor. These obligations and restrictions include pledges over all
of Amazonia's existing shares and shares of Sidor held in its possession, which
were released in July 2005.
During 2003, as part of the 2003 Restructuring, Ternium acquired a 64.31% equity
stake in Ylopa, a special purpose vehicle incorporated in Madeira, created to
support Sidor and Amazonia in their financial restructuring. The acquisition was
made by means of an aggregate cash contribution of USD 135 million (USD 94
million contributed by the majority shareholders of the Company and USD 41
million contributed by the minority shareholders), primarily in the form of
debt. As a result of the consummation of the 2003 Restructuring, Ylopa: (a)
became Sidor's creditor (in a "Participation Account Agreement") of a loan
bearing interest at an annual rate of 8%, payable if and when Sidor reaches
certain financial goals, and (b) received debt instruments of Amazonia,
convertible into 67.4% of the common stock of Amazonia at Ylopa's option ("the
Amazonia convertible debt instrument"). Such convertible debt instrument was
accounted for at cost.
The Amazonia convertible debt instrument was convertible into Amazonia's common
stock as from February 2005, but the option had to be exercised in a specific
15-day period during that month. Otherwise, the holders of the Amazonia
convertible debt instrument would not be able to exercise the conversion option
until February 2006. This conversion scheme was applicable every year until
maturity. On February 3, 2005 Ylopa exercised its option to convert its
convertible debt instrument into Amazonia's common stock. As a result of this
conversion, Ternium's indirect participation in Amazonia increased from 31.03%
to 53.47%, thereby increasing its indirect participation in Sidor from 18.53% to
31.94%. With the increase in equity ownership of Amazonia to 53.47%, the Company
has effective control.
As a result of the Participation Account Agreement described above, Ternium
recognized a gain of USD 203.4 million and USD 73.9 million during the years
ended December 31, 2004 and 2003, respectively, representing the amounts of the
rights to receive the compensation payable for its participation in Sidor's 2003
restructuring according to the terms of the agreement. Such compensation in the
form of cash payments has been distributed on a semi-annual basis since October
2003. As from January 2005, Sidor began making those cash payments on a
quarterly basis. This agreement has a term of 14 years, or until the fiscal year
prior to the date of the settlement in full of certain bank borrowings (BANDES)
due by Sidor. Also, it was agreed that any such compensation collected by Ylopa
in excess of the accumulated amount of USD 324 million, must be transferred to
Amazonia., while Corporacion Venezolana de Guayana ("CVG") is not subject to any
limitation to its entitlement. During the three-month period ended March 31,
2005, the accumulated compensation payable for the participation in Sidor's 2003
restructuring reached the cap.
As of December 31, 2005, the Participation Agreement provides that 40.27% of the
compensation payable by Sidor goes to the Venezuelan Government and the
remaining goes to Amazonia. These percentages are equal to the equity
participation of the Venezuelan Government and Amazonia in Sidor.
(ii) Consorcio Siderurgia Amazonia Ltd .- PDVSA-Gas C.A. claim
In June 2004, the arbitration proceedings brought by Sidor against PDVSA Gas,
C.A. (on the basis that PDVSA Gas had charged Sidor higher than agreed-upon
prices in its supplies of gas against the application of the most favored client
clause) were resolved in Sidor's favor. Accordingly, in its financial statements
at December 31, 2004, Sidor reversed the USD41.4 million provision it had
recorded at December 31, 2003. In July 2004, PDVSA Gas, C.A. filed an appeal
with the Venezuelan courts seeking to void the arbitral award. Sidor believes
that applicable Venezuelan law does not allow the courts to void an arbitral
award under the circumstances and that the likelihood of loss thereunder is
remote. Accordingly, Sidor did not record any liabilities in connection with the
appeal. At December 31, 2005, Sidor's potential exposure under this litigation
amounted to USD94.3 million.
37
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
29 Contingencies, commitments and restrictions on the distribution of profits
(continued)
(iii) Consorcio Siderurgia Amazonia Ltd .- Pension plan
The Venezuelan Supreme Court of Justice has recently ruled in favor of
increasing the benefits payable to retired employees of a Venezuelan company.
This ruling is only binding on the parties to the litigation and Sidor has not
received any claims in this regard. The Company analyzed the ruling's legal
grounds and the case's facts and circumstances, and concluded that it is not
probable that Sidor be subject to additional obligations in this respect. In the
event that a potential claim by the participants of Sidor's pension plan be
successful, the Company estimates that the maximum loss would be approximately
USD 56 million.
(iv) Tax claims
(a) Siderar. AFIP - Income tax claim for fiscal years 1995 to 1999
The Administracion Federal de Ingresos Publicos ("AFIP" - the Argentine tax
authority) has challenged the charge to income of certain disbursements that
Siderar has treated as expenses necessary to maintain industrial installations,
which as such should be deducted in the year in which they take place. The AFIP
asserts that these are investments or improvements that must be capitalized and,
therefore, it made a jeopardy assessment of income tax due on a nominal tax
basis plus fines and interest in fiscal years 1995 to 1999 amounting to
approximately USD 20.4 million.
The Company appealed these assessments before the National Tax Court, as in the
view of its legal and tax advisors, based on existing evidence and the work
performed by the Tax Authorities, the Company would likely obtain a favorable
ruling.
On April 13, 2005 the Company was notified of a ruling issued by the National
Tax Court reducing the assessments made by the AFIP for fiscal years 1995 and
1996 from USD 16.6 million to USD 3.1 million and instructing the recalculation
of taxes in accordance with this ruling. Based on the above, the Company
recognized a provision amounting to USD 4.6 million as of December 31, 2005 as
management considers there is a probable outflow of benefits.
(b) Amazonia
At December 31, 2004, Sidor recorded a provision for a total amount of USD 23.2
million in connection with tax matters. Among these claims, the most significant
is the tax assessment brought by SENIAT, the Venezuelan tax and customs
authority, in the third quarter of 2001, questioning the application of VAT
credits arising from exports totaling USD5.2 million to offset tax liabilities.
While the validity of such tax credits was not under discussion, the SENIAT
questioned the application of such tax credits as payment on account of Sidor's
asset tax and other tax obligations. The Group recorded a provision in an amount
of USD17.5 million in connection with this claim, representing the aggregate
amount that SENIAT could claim as accrued interest under the Venezuelan tax
code.
(v) Commitments
The following are the Company's main off-balance sheet commitments:
(a) In March 2003, Siderar entered into an agreement with Tecpetrol under which
Siderar paid USD17.3 million for the advance purchase of a total of 725 million
cubic meters (up to 400 thousand daily cubic meters) of natural gas to be
delivered over a period of 5 years on pricing terms that will enable it to share
through discounts the impact of any increase in natural gas prices over that
period with Tecpetrol. Under the terms of the agreement, Siderar will have a
minimum guaranteed return on this advance payment equal to LIBOR plus 3.5%.
(b) Siderar entered into a contract with Tenaris, for the supply of steam
generated at the power generation facility that Tenaris owns in the compound of
the Ramallo facility of Siderar. Under this contract, Tenaris has to provide 250
tn/hour of steam, and Siderar has the obligation to take or pay this volume.
Tenaris detected technical problems at this facility that impeded the delivery
of certain steam volume. This outsourcing contract is due to terminate in 2018.
(c) On August 20, 2004, Sidor entered into a contract with MATESI Materiales
Siderurgicos S.A., for the supply of hot briquetted iron (HBI). Sidor commits to
purchase 29.9% of MATESI's HBI production volume for the term of ten years. In
addition, Sidor has the right to increase its proportion on MATESI's production
by an extra 19.9 % until reaching a 49.8 % of MATESI's HBI production. Under the
contract, the sale price is determined on a cost-plus basis. The contract is
renewable for additional three year periods unless Sidor or MATESI object to its
renewal more than a year prior to its termination.
38
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
29 Contingencies, commitments and restrictions on the distribution of profits
(continued)
(d) Siderar entered into a contract with Transportadora de Gas del Norte (TGN)
for gas transportation service. TGN charges Siderar a price that is equivalent a
comparable basis to prices paid by other industrial users, and the Argentine
government regulates the general framework under which TGN operates. Siderar
pays a monthly fee for reserved cubic meter (1,070 thousands m3/day), either it
uses it or not.
(e) Sidor's production process requires a large amount of electricity. On August
21, 1997, that company entered into a twenty-year contract with EDELCA, a
Venezuelan state-owned company, for the supply of all of Sidor's electricity
needs. This contract will terminate in 2018.
(f) Sidor's production process is heavily reliant upon supplies of natural gas.
Sidor buys 100% of its natural gas from PDVSA-Gas, a Venezuelan state-owned
natural gas supply company. In 1997, Sidor signed a twenty-year contract with
PDVSA-Gas for the supply of natural gas.
(g) In 1998, Sidor signed a contract with TAVSA Tubos de Acero de Venezuela S.A.
(a Venezuelan seamless steel pipe producer subsidiary of Tenaris), under which
it committed to sell up to 90,000 tons of blooms or 130,000 tons of liquid steel
per year, until 2013. Purchase price varies in relation to changes in the costs
of production.
(h) In 1997 Sidor entered into a twenty-year sales contract with Ferrominera del
Orinoco ("FMO") under which it committed to sell, at buyer's requirements, up to
2 million tons per year of pellets to FMO. The price is based on the sale price
of FMO's iron ore to Sidor plus and applicable margin. Sidor and FMO entered
into an amendment of the 1997 contract on November 11, 2005. The revised
contract sets the iron ore price at the lower of the price charged by FMO to its
customers (other than certain newly-created state-owned steel producers) in the
Venezuelan domestic market, and 80% of a market reference price (which
percentage may drop to 70%). In connection with the iron ore contract, in 1997
Sidor and FMO entered into another agreement under which Sidor committed to
sell, upon the request of FMO, up to 2.0 million tons per year of pellets to
FMO, at a price based on the sale price at which FMO sells iron ore to Sidor
plus an applicable margin paid to Sidor for the production of pellets, which is
determined using market references.
(i) Hylsa's production process requires a large amount of electricity. On
December 20, 2000, Hylsa entered into a 25-year contract with Iberdrola Energa
Monterrey, S.A. de C.V. ("Iberdrola"), a Mexican subsidiary of the Spanish
Company Iberdrola Energia, S.A., for the supply of a contracted electrical
demand of 143.2 MW. This contract currently supplies approximately 42% of
Hylsa's electricity needs with the remainder supplied by CFE, the Mexican
State-owned utility. The contract with Iberdrola will terminate in 2027.
(j) Hylsamex S.A. de C.V. and subsidiaries enter into 21 long term operational
leasing agreements for the rental of machinery, materials handling equipment,
earth moving equipment, computers and assorted vehicles. Total amounts due, from
2006 to 2010, include USD39.1 million in leasing payments. Total loss for lease
payments recorded in the year ended December 31, 2005 accounts for USD 10.2
million.
Future minimum lease payments under non-cancellable operating leases are as
follows:
Year USD Thousands
2006 14,506
2007-2010 24,552
----------------
Total 39,058
----------------
(k) On October 24, 2003, Ternium's subsidiary Siderar, together with Tenaris,
entered into a joint gas purchase agreement with Repsol-YPF. Under the
agreement, which incorporate certain take-or-pay conditions, Siderar committed
to purchase up to 400 million cubic meters of gas during the life of the four
year contract, expiring at the end of 2006 at a price to be negociated by the
parties on an annual basis. At December 31, 2004, the parties to the joint
agreement fulfilled the purchase commitments originated therein, as a result of
which all outstanding obligations resulting from the take-or-pay provisions have
ceased to exist.
39
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
29 Contingencies, commitments and restrictions on the distribution of profits
(continued)
(vi) 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.
Ternium may pay dividends to the extent that it has distributable retained
earnings and distributable reserves calculated in accordance with Luxembourg law
and regulations. Therefore, retained earnings included in the consolidated
combined financial statements may not be wholly distributable.
Shareholders' equity under Luxembourg law and regulations comprises the
following captions (amounts in USD thousands):
At December
31,2005
----------------
Share capital 1,396,552
Legal reserve 139,655
Distributable reserves 279,581
Non distributable reserves 980,018
Accumulated deficit at January 1, 2005 (12)
Profit for the year 107,624
----------------
Total shareholders equity under Luxembourg GAAP 2,903,418
----------------
30 Earnings per share
On December 30, 2004, the Company converted the currency in which its share
capital is expressed from EUR to USD. The share capital of EUR 31,000,
represented by 31 shares of EUR 1,000 nominal value each, was converted into USD
41,471.80, represented by 31 shares of no nominal value. On June 17, 2005, the
share capital of the Company was restructured by setting the nominal value per
share at USD 1 and dividing the 31 issued shares into 41,471 shares of USD 1
nominal value each, and further transferring USD 0.80 to the share premium
account of the Company.
On June 29, 2005, ISL contributed all of its assets (including 41,470 shares of
the Company) and liabilities to the Company, in exchange for 959,482,775 new
shares of the Company.
Upon consummation of this contribution, the 41,470 shares contributed by ISL to
the Company were cancelled and the Company's issued share capital was increased
to USD 959,482,776 represented by 959,482,776 shares of 1 USD nominal value
each.
On September 15, 2005, ISL made a second contribution of all of its assets
(including 750,021,919 shares of the Company) and liabilities to the Company, in
exchange for 959,482,775 new shares of the Company.
Upon consummation of this second contribution, the 750,021,919 shares
contributed by ISL to the Company were cancelled and the Company's issued share
capital was increased to USD 1,168,943,632 represented by 1,168,943,632 shares
of 1 USD nominal value each.
As mentioned in Note 1, in October 2005, Usiminas exchanged its 5.32% equity
interest in Siderar, its 16.58% equity interest in Amazonia and its 19.11%
equity interest in Ylopa and other items for 227,608,254 new shares of the
Company. Upon the consummation of this exchange the capital was increased to USD
1,396,552, represented by 1,396,551,887 shares of 1 USD nominal value each.
The Company's combined earnings per share for the years ended December 31, 2004
and 2003 have been calculated based on the assumption that 1,168,943,632 shares
were issued and outstanding in each period. For fiscal year 2005, the weighted
average of shares outstanding totaled 1,209,476,609 shares.
Earnings per share are calculated by dividing the net income attributable to
equity holders of the Company by the daily weighted average number of ordinary
shares outstanding during the year. The weighted average number of ordinary
shares assumes that 1,168,943,632 shares were issued and outstanding as of
January 1, 2003. Diluted earnings per share have been calculated giving effect
to the conversion of the Subordinated Convertible Loans on the date each one was
entered into.
40
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
30 Earnings per share (continued)
2005 2004 2003
-----------------------------------------------------
Profit attributable to equity holders of the Company 704,406 457,339 218,215
Weighted average number of ordinary shares in issue 1,209,476,609 1,168,943,632 1,168,943,632
Basic earnings per share (USD per share) 0.58 0.39 0.19
Diluted earnings per share (USD per share) 0.54 0.39 0.19
31 Related party transactions
The Company is controlled by San Faustin, which at December 31, 2004 indirectly
owned 100% of Ternium's shares and voting rights. The ultimate controlling
entity of the Company is Rocca & Partners S.A., a British Virgin Island
Corporation. For commitments with Related Parties see Note 29.
The following transactions were carried out with related parties:
Year ended December 31,
------------------------------------
2005 2004
--------------- ---------------
(i) Transactions
(a) Sales of goods and services
Sales of goods to other related parties 36,978 23,665
Sales of services to associated parties 2,905 12,751
Sales of services to other related parties 5,636 1,399
--------------- ---------------
45,519 37,815
--------------- ---------------
(b) Purchases of goods and services
Purchases of goods from associated parties 85,636 293,353
Purchases of goods from other related parties 71,205 68,826
Purchases of services from other related parties 21,792 28,662
--------------- ---------------
178,633 390,841
--------------- ---------------
(c) Financial results
Income with associated parties 44,697 208,575
Income with other related parties 89 1,745
Expenses with other related parties (10,043) (7,843)
--------------- ---------------
34,743 202,477
--------------- ---------------
At December 31,
------------------------------------
2005 2004
--------------- ---------------
(ii) Year-end balances
(a) Arising from sales/purchases of goods/services
Receivables from associated parties 71,317 94,401
Receivables from other related parties 18,175 91,301
Payables to associated parties (13,644) (78,325)
Payables to other related parties (17,914) (40,359)
--------------- ---------------
(57,934) 67,018
--------------- ---------------
(b) Other investments
--------------- ---------------
Time deposit 10,450 11,171
--------------- ---------------
(c) Other balances
Trust fund with other related parties (Note 22) 5,185 88,755
Amazonia convertible debt instrument (Note 17) - 127,576
Other - 7,874
--------------- ---------------
5,185 224,205
--------------- ---------------
(d) Financial debt
--------------- ---------------
Borrowings with other related parties (Note 28) (607,472) (75,927)
--------------- ---------------
41
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
(iii) Officers and Directors' compensation
The aggregate compensation of Officers and Directors earned during the years ended December 31, 2005 and 2004 amounts to USD 4,485
thousand and 3,050 thousand, respectively. No compensation has been determined or paid to any of its directors during 2003.
32 Cash flow disclosures
Year ended December 31,
2005 2004 2003
------------ ------------- ------------
(i) Changes in working capital (i)
Inventories (133,995) (114,686) (19,416)
Receivables and prepayments 3,103 (138,248) (73,631)
Trade receivables 97,814 (55,273) 22,341
Other liabilities 46,117 10,233 12,163
Trade payables 41,381 93,304 2,881
------------ ------------- ------------
54,420 (204,670) (55,662)
------------ ------------- ------------
(ii Income tax accruals less payments
Tax accrued 218,492 177,486 94,087
Taxes paid (262,500) (57,276) -
------------ ------------- ------------
(44,008) 120,210 94,087
------------ ------------- ------------
(ii Interest accruals less payments, net
Interest accrued 81,608 18,257 39,980
Interest paid (60,256) (9,174) (34,552)
------------ ------------- ------------
21,352 9,083 5,428
------------ ------------- ------------
(i) Changes in working capital are shown net of the effect of exchange rate
changes.
33 Recently issued accounting pronouncements
1. IFRIC Interpretation No. 8, Scope of IFRS 2
In January 2005, IFRIC issued IFRIC Interpretation No. 8, Scope of IFRS 2
("IFRIC 8"). The issue addressed in IFRIC 8 is whether IFRS 2 applies to
transactions in which the entity cannot identify specifically some or all of the
goods or services received. An entity shall apply this Interpretation for annual
periods beginning on or after 1 May 2006. Earlier application is encouraged. If
an entity applies this Interpretation to a period beginning before 1 May 2006,
it shall disclose that fact. The Company's management estimates that the
application of this Interpretation will not have a material effect on the
Company's financial condition or results of operations.
2. Amendment to IAS 21, The Effects of Changes in Foreign Exchange Rates Net
Investment in a Foreign Operation
In December 2005, the International Accounting Standards Board ("IASB") issued
an amendment to International Accounting Standard No. 21, "The Effects of
Changes in Foreign Exchange Rates Net Investment in a Foreign Operation" ("IAS
21"). The amendment finalizes proposals that were contained in Draft Technical
Correction 1 Proposed Amendments to IAS 21 Net Investment in a Foreign Operation
published in September 2005 and is applicable for annual periods beginning on or
after January 1, 2006. Earlier application is encouraged. The Company's
management estimates that the application of this Amendment will not have a
material effect on the Company's financial condition or results of operations.
3. IFRIC Interpretation No. 7, Applying the Restatement Approach under IAS 29
Financial Reporting in Hyperinflationary Economies
In November 2005, IFRIC issued IFRIC Interpretation No. 7, Applying the
Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary
Economies ("IFRC 7"), which provides guidance on how to apply the requirements
of International Accounting Standard No. 29 ("IAS 29") in a reporting period in
which an entity identifies the existence of hyperinflation in the economy of its
functional currency, when that economy was not hyperinflationary in the prior
period, and the entity therefore restates its financial statements in accordance
with IAS 29. An entity shall apply this Interpretation for annual periods
beginning on or after 1 March 2006. Earlier application is encouraged. If an
entity applies this Interpretation to financial statements for a period
beginning before 1 March 2006, it shall disclose that fact. The Company's
management estimates that the application of this Intepretation will not have a
material effect on the Company's financial condition or results of operations.
42
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
33 Recently issued accounting pronouncements (continued)
4. Amendment to IAS 1, Presentation of Financial Statements
In August 2005, the IASB issued an amendment to International Accounting
Standard No. 1 "Presentation of Financial Statements". This amendment requires
companies to disclose certain information about (a) the entity's objectives,
policies and processes for managing capital; (b) quantitative data about what
the entity regards as capital; (c) whether the entity has complied with any
capital requirements; and (d) if it has not complied, the consequences of such
non-compliance. This document finalizes some of the proposals that were
contained in Exposure Draft 7 Financial Instruments: Disclosures (ED 7)
published in July 2004. The remaining proposals in ED 7 were finalized in IFRS 7
Financial Instruments: Disclosures. Entities shall apply the amendments in this
document for annual periods beginning on or after 1 January 2007. Earlier
application is encouraged. The Company's management estimates that the
application of this Amendment will not have a material effect on the Company's
financial condition or results of operations.
5. International Financial Reporting Standard No. 7, Financial Instruments:
Disclosures
In August, 2005, the IASB issued International Financial Reporting Standard No.
7, Financial Instruments: Disclosures ("IFRS 7"). The objective of IFRS 7 is to
require entities to provide disclosures in their financial statements that
enable users to evaluate: (a) the significance of financial instruments for the
entity's financial position and performance; and (b) the nature and extent of
risks arising from financial instruments to which the entity is exposed during
the period and at the reporting date, and how the entity manages those risks.
The principles in IFRS 7 complement the principles for recognizing measuring and
presenting financial assets and financial liabilities in International
Accounting Standard No. 32 "Financial Instruments: Presentation and IAS 39
Financial Instruments: Recognition and Measurement". An entity shall apply this
IFRS for annual periods beginning on or after 1 January 2007. Earlier
application is encouraged. If an entity applies this IFRS for an earlier period,
it shall disclose that fact. The Company's management estimates that the
application of IFRS 7 will not have a material effect on the Company's financial
condition or results of operations.
34 Financial risk management
(1) Financial risk factors
Ternium's activities expose it to a variety of financial risks, including the
effects of changes in foreign currency exchange rates. Ternium's subsidiaries
use derivative financial instruments to minimize potential adverse effects on
Ternium's financial performance, by hedging certain risk exposures.
(i) Foreign exchange rate risk
Ternium operates in export markets and is exposed to foreign exchange rate risk
arising from some currency exposures. Ternium's relevant subsidiaries use
forward contracts in order to hedge their exposure to exchange rate risk
primarily derived from their exports.
Ternium aims to neutralize the negative impact of fluctuations in the value of
these exports currencies with respect to the U.S. dollar. However, the fact that
some subsidiaries have measurement currencies other than the U.S. dollar may, at
times, distort the result of these efforts as reported under IFRS.
(ii) Interest rate risk
Ternium's income and operating cash flows are substantially independent from
changes in market interest rates. The Group's interest-rate risk arises from
long-term borrowings. Borrowings issued at variable rates expose the Group to
cash flow interest-rate risk. Borrowings issued at fixed rates expose the Group
to fair value interest-rate risk.
(iii) Concentration of credit risk
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 of products
and services are made to customers with an appropriate credit history, or use
credit insurance, letters of credit and other instruments to reduce credit risk
whenever deemed necessary. These subsidiaries maintain allowances for potential
credit losses.
Derivative counterparties and cash transactions are limited to high quality
financial institutions.
43
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
34 Financial risk management (continued)
(1) Financial risk factors
(iv) Liquidity risk
Management maintains sufficient cash and marketable securities, availability of
funding through an adequate amount of committed credit facilities and the
ability to close out market positions.
(v) Gas and electricity supply
Sidor relies heavily upon two Venezuelan state-owned companies for the provision
of gas and electricity, which are critical for the operation of its plant and
equipment. A major disruption in the gas and electricity supply process, such as
strikes, lockouts and other problems, would impact Sidor significantly. However,
the risk of such a disruption at the current time appears to be low.
(vi) Iron ore supply
Expenditures for iron ore constitute one of the company's largest individual raw
material costs. While Sidor purchases all of its iron ore from a Venezuelan
state-owned company, a number of other sources are available. Although
management believes that Sidor will be able to continue to purchase iron ore on
favorable terms, there can be no assurance that Sidor could timely purchase
sufficient quantities of that raw material from alternative suppliers at prices
comparable to those offered by its current supplier.
(2) Accounting for derivative financial instruments and hedging activities
Derivative financial instruments are initially recognized in the balance sheet
at cost and subsequently remeasured at fair value. Changes in fair value are
disclosed under Financial income, net line item in the income statement .Ternium
does not hedge its net investments in foreign entities.
Derivative transactions and other financial instruments, while providing
economic hedges under risk management policies, do not qualify for hedge
accounting under the specific rules in IAS 39. 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. The fair value of derivative
instruments is disclosed in Note 27.
(3) 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, including the trust
fund, the Company uses quoted market prices.
As most borrowings include variable rates or fixed rates that approximate market
rates and the contractual re-pricing occurs every 3 to 6 months, the fair value
of the borrowings approximates its carrying amount and is not disclosed
separately.
In assessing the fair value of derivatives and other financial instruments,
Ternium uses a variety of methods, including, but not limited to, estimated
discounted value of future cash flows using assumptions based on market
conditions existing at each balance sheet date.
44
TERNIUM S.A.
Notes to the Combined Consolidated Financial Statements (Contd.)
35 Post balance sheet events
The following are the main post balance sheet events:
(a) As mentioned in Note 3, the Company entered into the Subordinated
Convertible Loan Agreements for a total aggregate amount of USD594 million
to fund the acquisition of Hylsamex. As per the provisions contained in the
Subordinated Convertible Loan Agreements, the Subordinated Convertible
Loans would be converted into shares of the Company upon delivery of
Ternium's ADSs to the Underwriters. On February 6, 2006 the Company
delivered the above mentioned ADSs and, accordingly, the Subordinated
Convertible Loans (including interest accrued through January 31, 2006)
were converted into shares at a conversion price of USD2 per share,
resulting in the issuance of 302,962,261 new shares.
(b) As mentioned in Note 1, the Company's management used the proceeds from the
Initial Public Offering to repay Tranche A of the Ternium Credit Facility.
On February 6, 2006, the Company delivered the ADSs to the Underwriters and
collected the amount that were used to fully repay Tranche A of the Ternium
Credit Facility and to provide for Initial Public Offering related
expenses.
(c) On February 23, 2006 the underwriter exercised the option to purchase
2,298,136 ADSs at the public offering price of USD20 per ADS less an
underwriting discount of USD0.55 per ADS.
Roberto Philipps
Chief Financial Officer
45