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 2/27/2007
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 \/ 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 \/
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
NOT APPLICABLE
The attached material is being furnished to the Securities and Exchange
Commission pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange
Act of 1934, as amended.
This report contains Ternium S.A.'s consolidated financial statements as of
December 31, 2006.
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 27, 2007
TERNIUM S.A.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006 AND 2005 AND
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
46a, Avenue John F. Kennedy, 2nd floor
L - 1855
R.C.S. Luxembourg : B 98 668
TERNIUM S.A.
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm 1
Consolidated income statements for the years ended December 31, 2006, 2005 and 2004 2
Consolidated balance sheets as of December 31, 2006 and 2005 3
Consolidated statements of changes in shareholders' equity for the years ended December 31, 2006, 2005
and 2004 4
Consolidated cash flow statements for the years ended December 31, 2006, 2005 and 2004 5
Notes to the 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 consolidated balance sheets and the related
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, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006 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). 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.
International Financial Reporting Standards vary in certain significant respects
from the accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 34 to the consolidated financial statements.
Buenos Aires, Argentina
February 27, 2007
PRICE WATERHOUSE & CO. S.R.L.
by /s/ Marcelo D. Pfaff (Partner)
-------------------------------------------
Marcelo D. Pfaff
-1-
TERNIUM S.A.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006 AND 2005 AND
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(All amounts in USD thousands)
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
NOTES 2006 2005 2004
--------------------------------------------------------
Net sales 30 6,568,975 4,447,680 1,598,925
Cost of sales 6 & 30 (4,301,384) (2,488,980) (965,004)
--------------------------------------------------------
Gross profit 2,267,591 1,958,700 633,921
Selling, general and administrative expenses 7 (623,772) (500,590) (116,626)
Other operating expenses, net 9 (7,250) (65,949) (3,124)
--------------------------------------------------------
Operating income 1,636,569 1,392,161 514,171
Interest expense 30 &31 (112,918) (81,608) (18,257)
Interest income 30 52,554 32,324 8,911
Other financial (expenses) income, net 10 & 30 (322,417) (261,452) 211,635
Excess of fair value of net assets acquired over
cost 3 - 188,356 -
Equity in earnings of associated companies 11 4,534 21,524 209,201
--------------------------------------------------------
Income before income tax expense 1,258,322 1,291,305 925,661
Income tax expense 12 (262,356) (218,492) (177,486)
--------------------------------------------------------
Net income for the year 995,966 1,072,813 748,175
--------------------------------------------------------
Attributable to:
Equity holders of the Company 29 795,424 704,406 457,339
Minority interest 200,542 368,407 290,836
--------------------------------------------------------
995,966 1,072,813 748,175
--------------------------------------------------------
Weighted average number of shares outstanding 29 1,936,833,060 1,209,476,609 1,168,943,632
Basic earnings per share for profit attributable
to the equity holders of the Company, (expressed
in USD per share) 0.41 0.58 0.39
Diluted earnings per share for profit attributable
to the equity holders of the Company, (expressed
in USD per share) 0.41 0.54 0.39
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
TERNIUM S.A.
Consolidated financial statements
as of December 31, 2006 and 2005 and
for the years ended December 31, 2006, 2005 and 2004
(All amounts in USD thousands)
CONSOLIDATED BALANCE SHEETS
Notes December 31, 2006 December 31, 2005
---------- -------------------------- ---------------------
ASSETS
Non-current assets
Property, plant and equipment, net 13 5,420,683 5,463,871
Intangible assets, net 14 551,587 552,882
Investments in associated companies 15 16,285 9,122
Other investments, net 16 & 30 13,387 12,607
Deferred tax assets 24 36,439 29,126
Receivables, net 17 & 30 78,903 6,117,284 48,815 6,116,423
---------- --------- ---------- ---------
Current assets
Receivables 18 & 30 175,818 291,302
Derivative financial instruments 26 7,852 5,402
Inventories, net 19 1,241,325 1,000,119
Trade receivables, net 20 & 30 577,866 472,760
Other investments 21 & 30 - 5,185
Cash and cash equivalents 21 643,352 2,646,213 765,630 2,540,398
---------- --------- ---------- ---------
Non-current assets classified as held for sale 7,042 3,160
--------- ---------
Total assets 8,770,539 8,659,981
--------- ---------
EQUITY
Capital and reserves attributable
to the company's equity holders 3,757,558 1,842,454
Minority interest 1,729,583 1,733,465
--------- ---------
Total equity 5,487,141 3,575,919
--------- ---------
LIABILITIES
Non-current liabilities
Provisions 22 60,543 54,138
Deferred income tax 24 985,155 1,048,188
Other liabilities 25 274,566 187,917
Trade payables 7,229 1,167
Borrowings 27 548,401 1,875,894 2,399,878 3,691,288
---------- --------- ---------- ---------
Current liabilities
Current tax liabilities 103,195 126,972
Other liabilities 25 & 30 158,374 194,073
Trade payables 30 621,754 555,330
Derivative financial instruments 26 15,487 -
Borrowings 27 508,694 1,407,504 516,399 1,392,774
-------------- --------- ---------- ---------
Total liabilities 3,283,398 5,084,062
--------- ---------
Total equity and liabilities 8,770,539 8,659,981
--------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
-3-
TERNIUM S.A.
Consolidated financial statements
as of December 31, 2006 and 2005 and
for the years ended December 31, 2006, 2005 and 2004
(All amounts in USD thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Attributable to the Company's equity holders (1)
----------------------------------------------------------------------------------
Initial
public Revaluation Capital Currency
Capital offering and other stock issue translation Retained
stock (2) expenses reservers discount(3) adjustment earnings
----------------------------------------------------------------------------------
Balance at January 1 1,396,552 (5,456) 1,462,137 (2,298,048) (92,691) 1,379,960
Currency translation adjustment (28,917)
Net income for the year 795,424
----------------------------------------------------------------------------------
Total recognized income for the year (28,917) 795,424
Dividends paid in cash and other distributions
Dividends paid in cash and
other distributions by subsidiary companies
Acquisition of business (see Note 3) (32,429)
Contributions from shareholders
(see Note 1) 33,801 43,100 (26,818)
Conversion of Subordinated
Convertible Loans (see Note 1) 302,962 302,962
Initial Public Offering (see Note 1) 271,429 (17,839) 271,429
Other reserves (see Note 3)
----------------------------------------------------------------------------------
Balance at December 31 2,004,744 (23,295) 2,047,199 (2,324,866) (121,608) 2,175,384
----------------------------------------------------------------------------------
Total Total Total
Equity at Equity at Equity at
Minority December 31, December 31, December 31,
Total interest 2006 2005 2004
---------------------------------------------------------------
Balance at January 1 1,842,454 1,733,465 3,575,919 1,771,851 1,252,085
Currency translation adjustment (28,917) (7,990) (36,907) (120,246) (77,246)
Net income for the year 795,424 200,542 995,966 1,072,813 748,175
---------------------------------------------------------------
Total recognized income for the year 766,507 192,552 959,059 952,567 670,929
Dividends paid in cash and other distribution -- (238,652) (80,887)
Dividends paid in cash and
other distributions by subsidiary companies (27,175) (27,175) (130,571) (70,276)
Acquisition of business (see Note 3) (32,429) (122,261) (154,690) 864,415
Contributions from shareholders
(see Note 1) 50,083 (46,998) 3,085 54,758 --
Conversion of Subordinated
Convertible Loans (see Note 1) 605,924 605,924 -- --
Initial Public Offering (see Note 1) 525,019 525,019 (5,456) --
Other reserves (see Note 3) 307,007 --
---------------------------------------------------------------
Balance at December 31 3,757,558 1,729,583 5,487,141 3,575,919 1,771,851
---------------------------------------------------------------
(1) Shareholders' equity determined in accordance with accounting principles
generally accepted in Luxembourg is disclosed in Note 28 (iv).
(2) At December 31, 2006, the Capital Stock adds up to 2,004,743,442 shares at
a nominal value of USD1 each.
(3) Represents the difference between book value of non-monetary contributions
received from shareholders under Luxembourg GAAP and IFRS.
Dividends may be paid by Ternium to the extent distributable retained earnings
calculated in accordance with Luxembourg law and regulations exist. Therefore,
retained earnings included in these consolidated condensed financial statements
may not be wholly distributable. See Note 28 (iv).The accompanying notes are an
integral part of these consolidated financial statements.
-4-
TERNIUM S.A.
Consolidated financial statements
as of December 31, 2006 and 2005 and
for the years ended December 31, 2006, 2005 and 2004
(All amounts in USD thousands)
CONSOLIDATED CASH FLOW STATEMENTS
Year ended December 31,
--------------------------------------
Notes 2006 2005 2004
-----------------------------------------------
Cash flows from operating activities
Net income for the year 995,966 1,072,813 748,175
Adjustments for:
Depreciation and amortization 13&14 424,495 316,405 99,192
Income tax accruals less payments 31 (18,075) (44,008) 120,210
Derecognition of property, plant and equipment 9 (iii) 13,323 54,348 -
Excess of fair value of net assets acquired over cost 3 - (188,356) -
Changes to pension plan 25 46,947 - -
Equity in earnings of associated companies 11 (4,534) (21,524) (209,201)
Interest accruals less payments 31 4,197 24,523 9,083
Changes in provisions 22&23 33,802 19,046 (798)
Changes in working capital 31 (276,153) 54,420 (204,670)
Others 25,005 (25,212) (44,426)
----------- --------- --------
Net cash provided by operating activities 1,244,973 1,262,455 517,565
----------- --------- --------
Cash flows from investing activities
Capital expenditures 13&14 (405,817) (244,939) (92,563)
Changes in trust funds 5,185 83,570 -
Acquisition of business (210,548) (2,196,678) -
Investments in associated companies (2,598) - -
Proceeds from the sale of property, plant and equipment 3,425 6,063 862
----------- --------- --------
Net cash (used in) investing activities (610,353) (2,351,984) (91,701)
----------- --------- --------
Cash flows from financing activities
Dividends paid in cash and other distributions to company's shareholders - (238,652) (80,887)
Dividends paid in cash and other distributions to minority shareholders (27,175) (130,571) (70,276)
Net proceeds from Initial Public Offering 525,019 - -
Contributions from shareholders 3,085 54,758 -
Proceeds from borrowings 167,283 2,135,430 52,309
Repayments of borrowings (1,424,495) (657,597) (261,033)
------------ --------- --------
Net cash (used in) provided by financing activities (756,283) 1,163,368 (359,887)
------------ --------- --------
(Decrease) Increase in cash and cash equivalents (121,663) 73,839 65,977
Movement in cash and cash equivalents
At January 1,(1) 754,980 194,875 129,020
Acquisition of business 3 - 520,753 -
Effect of exchange rate changes (315) (34,487) (122)
(Decrease) Increase in cash and cash equivalents (121,663) 73,839 65,977
------------ --------- --------
Cash and cash equivalents at December 31, 633,002 754,980 194,875
------------ --------- --------
Non-cash transactions
Conversion of debt instruments into shares 605,924 127,576 -
(1) In addition, the Company has restricted cash for USD 10,350 and USD 10,650
at December 30, 2006 and December 31, 2005, respectively. The accompanying
notes are an integral part of these consolidated financial statements.
-5-
TERNIUM S.A.
Consolidated financial statements
as of December 31, 2006 and 2005 and
for the years ended December 31, 2006, 2005 and 2004
(All amounts in USD thousands)
INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Business of the Company, Initial Public Offering and corporate reorganization
2 Basis of presentation
3 Acquisition of business
4 Accounting policies
5 Segment information
6 Cost of sales
7 Selling, general and administrative expenses
8 Labor costs (included in cost of sales, selling, general and administrative expenses)
9 Other operating expenses, net
10 Other financial (expenses) income, net
11 Equity in earnings of associated companies
12 Income tax expense
13 Property, plant and equipment, net
14 Intangible assets, net
15 Investments in associated companies
16 Other investments, net - non current
17 Receivables, net - non current
18 Receivables - current
19 Inventories, net
20 Trade receivables, net
21 Cash, cash equivalents and other investments
22 Provisions - non current
23 Provisions - current
24 Deferred income tax
25 Other liabilities
26 Derivative financial instruments
27 Borrowings
28 Contingencies, commitments and restrictions on the distribution of profits
29 Earnings per share
30 Related party transactions
31 Cash flow disclosures
32 Recently issued accounting pronouncements
33 Financial risk management
34 Reconciliation of net income and shareholders' equity to US GAAP
-6-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
1 BUSINESS OF THE COMPANY, INITIAL PUBLIC OFFERING AND CORPORATE
REORGANIZATION
Ternium S.A. (the "Company" or "Ternium"), a Luxembourg Corporation (Societe
Anonyme), was incorporated on December 22, 2003 to hold investments in flat and
long steel manufacturing and distributing companies.
Near the end of 2004, Ternium was acquired by its ultimate parent company San
Faustin N.V. ("San Faustin"), a Netherlands Antilles company, to serve as a
vehicle in the restructuring of San Faustin's investments in the flat and long
steel manufacturing and distribution business. This restructuring was carried
out by means of a corporate reorganization through which Ternium was assigned
the equity interests previously held by San Faustin and its subsidiaries in
various flat and long steel manufacturing and distributing companies (the
"Corporate Reorganization"). The Corporate Reorganization took place in fiscal
year 2005. Until that date, Ternium was a dormant company.
On January 11, 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 sell 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"). The
Company's Initial Public Offering was priced at USD20 per ADS. The gross
proceeds from the Initial Public Offering totaled USD 496.9 million and have
been used to fully repay Tranche A of the Ternium Credit Facility (see Note 3
e)), after deducting related expenses.
Ternium's ADSs began trading on the New York Stock Exchange under the symbol
"TX" on February 1, 2006. The Company's Initial Public Offering was settled on
February 6, 2006.
In addition, during 2005, 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 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 on February 9, 2006.
Furthermore, in November 2005, Siderurgica del Turbio Sidetur S.A. ("Sidetur"),
a subsidiary of Siderurgica Venezolana Sivensa S.A. ("Sivensa"), exchanged with
Inversora Siderurgica Limited ("ISL", a wholly-owned subsidiary of Ternium's
majority shareholder) its 3.42% equity interest in Consorcio Siderurgia Amazonia
Ltd. ("Amazonia") and USD 3.1 million in cash for shares of the Company. On
February 9, 2006, ISL contributed all of its assets and liabilities (including
its interest in Amazonia) to the Company in exchange for 959,482,775 newly
issues shares of the Company after the settlement of the Initial Public
Offering. The increase in equity resulting from this transaction is reflected
under "Contributions from shareholders" line items in the Statement of changes
in shareholders' equity and amounts to USD 50,083.
Also, the Company granted 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. On February 23, 2006 the Underwriters exercised partially this
over-allotment option granted by the Company. In connection with this option, on
March 1, 2006, the Company issued 22,981,360 new shares. The gross proceeds from
this transaction totaled USD46.0 million.
After the completion of the Initial Public Offering, the conversion of the
Subordinated Convertible Loans, the exercise of the option granted to the
Underwriters and the consummation of the transactions contemplated in the
Corporate Reorganization agreement, 2,004,743,442 shares (including shares in
the form of ADSs) were outstanding.
2 BASIS OF PRESENTATION
These 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 2007).
The consolidated financial statements are presented in thousands of United
States dollars ("USD").
As mentioned in Note 1, Ternium was assigned the equity interests previously
held by San Faustin and its subsidiaries in various flat and long steel
manufacturing and distributing companies. As these transactions were carried out
among entities under common control, the assets and liabilities contributed to
the Company have been accounted for at the relevant predecessor's cost,
reflecting the carrying amount of such assets and liabilities. Accordingly, the
consolidated financial statements for the years ended December 31, 2005 and 2004
include the financial statements of the above-mentioned companies on a combined
basis 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.
-7-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
2 Basis of presentation (continued)
Detailed below are the companies whose consolidated financial statements have
been included in these consolidated financial statements.
----------------------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership at
Organization December 31,
----------------------------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------------------------------------------------------------
Ternium S.A. Luxembourg Holding of investments in flat 100.00% 100.00%
and long steel manufacturing
and distributing companies
Hylsamex S.A. de C.V. (1) Mexico Holding company 88.22% 86.68%
Siderar S.A.I.C. Argentina Manufacturing of flat steel 60.93% 56.07%
products
Sidor C.A. (2) Venezuela Manufacturing and selling of 56.38% 53.20%
steel products
Ternium Internacional S.A. Uruguay Holding company and marketing 100.00% 100.00%
(formerly Techintrade Uruguay S.A.) of steel products
III Industrial Investments Inc. (B.V.I.) British Virgin Holding company 100.00% 100.00%
Islands
Inversiones Siderurgicas S.A. Panama Holding company 100.00% 100.00%
Ylopa - Servicios de Consultadoria Lda. (3) Madeira - Free Participation in the debt 95.66% 95.12%
zone restructuring process of
Amazonia and Sidor C.A.
Consorcio Siderurgia Amazonia Ltd.(4) Cayman Islands Holding of investments in 94.39% 89.07%
Venezuelan steel companies
Fasnet International S.A. Panama Holding company 100.00% 100.00%
Alvory S.A. Uruguay Holding of investment in 100.00% 100.00%
procurement services companies
Comesi San Luis S.A.I.C. (5) Argentina Production of cold or hot rold 61.32% 56.07%
prepainted, formed and skelped
steel sheets
Inversiones Basilea S.A. (6) Chile Purchase and sale of real 60.93% 56.07%
estate and other
Prosid Investments S.C.A.(6) Uruguay Holding company 60.93% 56.07%
Impeco S.A. (6) Argentina Manufacturing of pipe products 60.93% 60.93%
Socominter de Guatemala S.A. (7) Guatemala Marketing of steel products 100.00% 100.00%
Ternium Internacional Espana S.A. (formerly Spain Marketing of steel products 100.00% 100.00%
Socominter de Espana S.A.U.) (7)
Ternium Internacional Ecuador S.A. (formerly Ecuador Marketing of steel products 100.00% 100.00%
Socotrading S.A.) (7)
Ternium International USA Corporation (formerly USA Marketing of steel products 100.00% 100.00%
Techintrade Corporation) (7)
Ternium Internationaal B.V. (formerly Techint Netherlands Marketing of steel products 100.00% 100.00%
Engineering Company B.V.)(7)
------------------------------------------------------------------------------------------------------------------ ---------------
-8-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
2 Basis of presentation (continued)
-------------------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership at
Organization December 31,
-------------- ---------------
2006 2005
--------------------------------------------------------------------------------------------------------------- ---------------
Ternium Internacional Peru S.A.C. (formerly Peru Marketing of steel products 100.00% 100.00%
Techintrade del Peru S.A.C.) (7)
Ternium International Inc.(7) Panama Marketing of steel products 100.00% -
Hylsa S.A. de C.V. (8) Mexico Manufacturing and selling of steel 88.22% 86.68%
products
Express Anahuac S.A. de C.V. (8) Mexico Freight services 88.22% 86.68%
Ferropak Comercial S.A. de C.V. (8) Mexico Scrap company 88.22% 86.68%
Ferropak Servicios S.A. de C.V. (8) Mexico Services 88.22% 86.68%
Galvacer America Inc (8) USA Distributing company 88.22% 86.68%
Galvamet America Corp (8) USA Manufacturing and selling of 88.22% 86.68%
insulates panel products
Transamerica E. & I. Trading Corp (8) USA Scrap company 88.22% 86.68%
Galvatubing Inc. (8) USA Manufacturing and selling of pipe 88.22% 86.68%
products
Las Encinas S.A. de C.V. (8) Mexico Exploration, explotation and 88.22% 86.68%
pelletizing of iron ore
Tecnica Industrial S.A. de C.V. (8) Mexico Services 88.22% 86.68%
Acerex S.A. de C.V. (9) Mexico Tooling services - 43.34%
Acerex Servicios S.A. de C.V. (9) Mexico Services - 43.34%
Consorcio Minero Benito Juarez Pena Colorada Mexico Exploration, explotation and 44.11% 43.34%
S.A.de C.V. (9) pelletizing of iron ore
Pena Colorada Servicios S.A. de C.V. (9) Mexico Services 44.11% 43.34%
--------------------------------------------------------------------------------------------------------------- ---------------
(1) Indirectly through the participation of III BVI (70.00%) and Siderar
S.A.I.C. (29.91%). Total voting rights held: 99.91%.
(2) Indirectly through the participation in Amazonia (59.73%). Total voting
rights held: 59.73%.
(3) Directly (54.62%), indirectly through Inversiones Siderurgicas S.A (34.27%)
and Prosid Investments S.C.A. (11.11%). Total voting rights held: 100.00%.
(4) Directly (60.63%) and indirectly through the participation in Prosid
Investments S.C.A. (14.38%) and Inversiones Siderurgicas S.A. (25.00%).
Total voting rights held: 100.00%.
(5) Indirectly through Siderar S.A.I.C. (99.00%) and Ternium Internacional
Uruguay S.A. (1.00%). Total voting rights held: 100.00%.
(6) Indirectly through Siderar S.A.I.C. Total voting rights held 100.00%.
(7) Indirectly through Ternium Internacional S.A. Uruguay.
(8) Indirectly through the participation in Hylsamex. Total voting rights held:
99.91%. See Note 3 e).
(9) Indirectly through the participation in Hylsamex. Total voting rights held:
50.00%.
At December 31, 2006, Hylsa Latin LLC (disolved on January 9, 2006), Ternium
Internazionale Italia S.R.L., Galvacer Chile S.A. and Galvacer Costa Rica were
in process of liquidation.
Eliminations of all material intercompany transactions and balances between the
Company 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.
-9-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
2 BASIS OF PRESENTATION (CONTINUED)
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 consolidated financial statements have been approved for issue by the
board of directors on February 27, 2007.
3 ACQUISITION OF BUSINESS
(a) Impeco S.A.
On November 18, 2005, Ternium's Argentine subsidiary, Siderar, agreed to acquire
assets and facilities of Acindar Industria Argentina de Aceros S.A. related to
the production of welded steel pipes in the province of Santa Fe 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 San Luis in Argentina. Purchase
price paid totaled USD 55.2 million, subject to subsequent adjustments. 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. This acquisition did not give rise to goodwill.
The acquired business contributed revenues of USD 73.3 million in the year ended
December 31, 2006. The fair value of assets and liabilities arising from
acquisition are as follows:
USD THOUSANDS
----------------
Property, plant and equipment 47,825
Inventories 8,180
Deferred tax liabilities (875)
Others assets and liabilities, net 53
----------------
NET 55,183
----------------
(b) Acerex S.A. de C.V.
In April 2006, the Company acquired a 50% equity interest in Acerex S.A. de C.V.
("Acerex") through its subsidiary Hylsa S.A. de C.V. for a total purchase price
of USD 44.6 million. Upon completion of this transaction Hylsa S.A. de C.V. owns
100% of Acerex. Acerex is a service center dedicated to processing steel to
produce short-length and steel sheets in various widths. Acerex operates as a
cutting and processing plant for Ternium's Mexican operations and as an
independent processor for other steel companies. On August 31, 2006 Acerex S.A.
de C.V. was merged into Hylsa S.A. de C.V.
As permitted by IFRS 3 "Business Combinations" ("IFRS 3"), the Company accounted
for this acquisition under the economic entity model, which requires that the
acquisition of an additional equity interest in a controlled subsidiary be
accounted for at its carrying amount, with the difference arising on purchase
price allocation (amounting to USD 24.3 million) being recorded directly in
equity.
(c) Additional shares of Hylsamex bought by Siderar
On June 19, 2006, Siderar completed the acquisition of 940,745 additional shares
of Hylsamex, representing 0.2% of that company's issued and outstanding common
stock, for a total consideration of USD 3.3 million. This acquisition was
effected through a trust fund established by Siderar in 2005 in connection with
the initial acquisition of Hylsamex (see note 3(e)). Goodwill resulting from
this acquisition totaled USD 0.7 million.
(d) Additional shares of Siderar bought by Ternium S.A.
On December 28, 2006, Ternium S.A. acquired from CVRD International S.A.
16,860,000 shares of Siderar S.A.I.C, representing 4.85% of that company, for an
aggregate purchase price of USD 107.5 million. After this acquisition Ternium
has increased its ownership in Siderar to 60.93%.
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TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
3 ACQUISITION OF BUSINESS (CONTINUED)
As permitted by IFRS 3, the Company accounted for this acquisition under the
economic entity model, which requires that the acquisition of an additional
equity interest in a controlled subsidiary be accounted for at its carrying
amount, with the difference arising on purchase price allocation (amounting to
USD 8.1 million) being recorded directly in equity.
(e) 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 29.9%
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 USD 1,492 million. The fair value of assets
and liabilities arising from acquisition are as follows:
USD THOUSANDS
----------------
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.
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.
- 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. The outstanding debt amount is USD 233 million as of
December 31, 2006.
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
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TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
3 ACQUISITION OF BUSINESS (CONTINUED)
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 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.
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 thing, pay dividends to their shareholders in excess of certain amounts 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, 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.
(f) 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 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 million 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.
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:
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
-----------------
-12-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES
The following is a summary of the principal accounting policies followed in the
preparation of these consolidated financial statements:
(A) GROUP ACCOUNTING
(1) SUBSIDIARY COMPANIES
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. Material 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. However,
the fact that the functional currency of some subsidiaries is their respective
local currency, generates some financial gains (losses) arising from
intercompany transactions, that are included in the consolidated income
statement under Financial (expenses) income, net.
(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. 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 its 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.
-13-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(A) GROUP ACCOUNTING (CONTINUED)
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) at the transition date (January 1, 2003).
(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. Although Ternium is
located in Luxembourg, it operates in several countries with different
currencies. The USD is the currency that best reflects the economic substance of
the underlying events and circumstances relevant to Ternium as a whole.
(2) SUBSIDIARY COMPANIES
The results and financial position of all the group entities (none of which
operates in a hyperinflationary economy) that have a functional currency
different from the presentation currency, are translated into the presentation
currency as follows:
(i) assets and liabilities are translated at the closing rate of each 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.
-14-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(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 accumulated impairment (if
applicable). Nevertheless, as mentioned in Note 4(a), property, plant and
equipment have 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.
In accordance with IAS 23, borrowing costs that are attributable to the
acquisition or construction of certain capital assets could be capitalized as
part of the cost of the assets. Capital assets for which borrowing costs may be
capitalized are those that require a substantial period of time to prepare for
their intended use. At December 31, 2006, no borrowing costs recorded have been
capitalized.
Where a tangible fixed asset comprises major components having different useful
lives, these components are accounted for as separate items.
Leases where the lessor retains a significant portion of the risks and rewards
of ownership are classified as operating leases. Payments made under operating
leases (net of any incentives received from the lessor) are charged to the
income statement on a straight-line basis over the period of the lease.
Depreciation method is reviewed at each 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
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 (e)
"Impairment").
(D) 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, general and
administrative expenses.
(2) MINING CONCESSIONS AND EXPLORATION COSTS
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.
-15-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(D) INTANGIBLE ASSETS (CONTINUED)
Exploration costs are classified as intangible assets until the production
begins. Exploration costs are tested for impairment annually.
(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, 2006, 2005 and 2004 totaled USD
1.8 million, USD 2.1 million and USD 0.3 million, respectively.
(E) 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, 2006 and 2005, 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 11.
(F) OTHER INVESTMENTS
Other investments consist primarily of investments in financial debt instruments
and equity investments where the Company holds less than 20% of the outstanding
equity and does not exert significant influence.
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.
All purchases and sales of investments are recognized on the trade date, which
is not significantly different from the settlement date, which is the date that
Ternium commits to purchase or sell the investment.
Income from financial instruments is recognized in Financial (expenses) income,
net in the income statement. Interest receivable on investments in debt
securities is calculated using the effective rate. Dividends from investments in
equity instruments are recognized in the income statement when the Company's
right to receive payments is established.
(G) INVENTORIES
Inventories are stated at the lower of cost (calculated using the
first-in-first-out "FIFO" method) or net realizable value. The cost of finished
goods and goods in process comprises raw materials, direct labor, depreciation,
other direct costs and related production overhead costs. It excludes borrowing
costs. 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 year end are valued at supplier's invoice cost.
For purposes of determining net realizable value, the Company establishes an
allowance for obsolete or slow-moving inventory in connection with finished
goods and goods in process. The provision for slow-moving inventory is
recognized for finished goods and goods in process based on management's
analysis of their aging.
-16-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(G) INVENTORIES (CONTINUED)
In connection with supplies and spare parts the calculation is based on
management's analysis of their aging, the capacity of such materials to be used
based on their levels of preservation and maintenance and the potential
obsolescence due to technological change.
(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 consolidated balance sheet, bank overdrafts are included in borrowings
within current liabilities.
(J) NON CURRENT ASSETS (DISPOSAL GROUP) CLASSIFIED AS HELD FOR SALE
Non-current assets (disposal groups) are classified as assets held for sale and
stated at the lower of carrying amount and fair value less cost to sell if their
carrying amount is recovered principally through a sale transaction rather than
through a continuing use.
The carrying value of non-current assets classified as held for sale at December
31, 2006, totals USD 7.0 million and includes principally land and other real
estate items. Sale is expected to be completed within a one-year period.
(K) SHAREHOLDERS' EQUITY
The consolidated statement of changes in shareholders' equity for the years
2006, 2005 and 2004 was prepared based on the following criteria:
o 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.
o Expenses incurred in connection with the Initial Public Offering at December
31, 2006 and 2005 totaled USD 17.8 million and USD 5.5 million,
respectively, and have been deducted from equity, since they directly relate
to a transaction which itself is to be recorded in equity.
o For purposes of preparing the combined statement of changes in shareholders'
equity shown as comparative information, 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.
-17-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(L) 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.
Capitalized borrowing costs are amortized over the life of their respective
debt.
(M) 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 Company is subject to subscription tax of 0.2%. The Company has qualified
for, and was admitted to, the Billionaire holding company tax regime in
conjunction with the financing holding company tax regime in Luxemburg starting
January 1, 2006.
On December 29, 2006, the Grand-Duchy of Luxembourg announced the decision to
terminate its 1929 holding company regime, effective January 1, 2007. However,
under the implementing legislation, pre-existing publicly listed companies
(including Ternium S.A.) will be entitled to continue benefiting from their
current tax regime until December 31, 2010.
The current income tax charge is calculated on the basis of the tax laws in
force 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 at 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.
Under Mexican law, Ternium's subsidiaries are required to pay their employees an
annual benefit calculated on a basis similar to that used for local income tax
purposes. Employee statutory profit sharing is calculated using the liability
method, and is recorded in current other liabilities and non current other
liabilities on the balance sheet. Because Mexican employee statutory profit
sharing is determined on a basis similar to that used for determining local
income taxes, the Company accounts for temporary differences arising between the
statutory calculation and the reported expense determined under IFRS in a manner
similar to calculation of deferred income tax.
(N) EMPLOYEE LIABILITIES
(1) PENSION OBLIGATIONS
The Company has defined benefit and defined contribution plans. A defined
benefit plan is a pension plan that defines an amount of pension benefit that an
employee will receive on retirement, usually dependent on one or more factors
such as age, years of service and compensation.
The liability recognized in the 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.
-18-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(N) EMPLOYEE LIABILITIES (CONTINUED)
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.
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 defined contribution 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.
SIDERAR
Siderar implemented an unfunded defined benefit employee retirement plan for
certain officers 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 denominated
in U.S. Dollars and are calculated based on a seven-year salary average.
(2) TERMINATION BENEFITS
Termination benefits are payable when employment is terminated before the normal
retirement date, or whenever an employee accepts voluntary redundancy in
exchange for these benefits. The Company recognizes termination benefits when it
is demonstrably committed to either: (i) terminating the employment of current
employees according to a detailed formal plan without possibility of withdrawal
or (ii) providing termination benefits as a result of an offer made to encourage
voluntary redundancy.
(3) OTHER COMPENSATION OBLIGATIONS
Employee entitlements to annual leave and long-service leave are accrued as
earned.
-19-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
4 ACCOUNTING POLICIES (CONTINUED)
(N) EMPLOYEE LIABILITIES (CONTINUED)
(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.
(O) PROVISIONS AND OTHER LIABILITIES
Ternium has certain contingencies with respect to existing or potential claims,
lawsuits and other proceedings. Unless otherwise specified, Ternium accrues a
provision for a present legal or constructive obligation as a result of a past
event, when it is probable that future cost could be incurred and that cost can
be reasonably estimated. Generally, accruals are based on developments to date,
Ternium's estimates of the outcomes of these matters and the advice of Ternium's
legal advisors.
(P) 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 10).
(Q) COST OF SALES, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Cost of sales and expenses are recognized in the income statement on the accrual
basis of accounting.
(R) 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 (see Note 29).
(S) DERIVATIVE FINANCIAL INSTRUMENTS
Information about accounting for derivative financial instruments and hedging
activities is included in Note 33 "Financial risk management".
(T) 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. Flat steel products include hot rolled coils and sheets,
cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and
electrogalvanized sheets, pre-painted sheets and other tailor-made products to
serve its customers' requirements.
The long steel products segment comprises the manufacturing and marketing of
long steel products. Long steel products include billets (steel in its basic,
semifinished state), wire rod and bars.
The other products segment includes the products other than flat and long steel,
mainly pig iron and pellets.
The secondary reporting format is based on a geographical location. Ternium
sells its products to three main geographical areas: South and Central America,
North America, and Europe and Other. 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.
Allocation of net sales is based on the customers' location. Allocation of
assets, liabilities and capital expenditures is based on their corresponding
location.
-20-
TERNIUM S.A.
NOTES TO THE 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, 2006
Net sales 5,047,527 1,262,603 258,845 -- 6,568,975
Cost of sales (3,285,569) (857,753) (158,062) -- (4,301,384)
---------- -------- -------- --------- ----------
Gross profit 1,761,958 404,850 100,783 -- 2,267,591
Selling, general and administrative expenses (477,216) (118,367) (28,189) -- (623,772)
Other operating (expenses) income, net (9,837) 803 1,784 -- (7,250)
---------- -------- -------- --------- ----------
Operating income 1,274,905 287,286 74,378 -- 1,636,569
---------- -------- -------- --------- ----------
Capital expenditures - PP&E 358,541 17,730 7,401 -- 383,672
Depreciation - PP&E 356,518 46,426 1,240 -- 404,184
Segment assets
Inventories 1,078,954 109,143 53,228 -- 1,241,325
Trade receivables 407,684 141,228 28,954 -- 577,866
PP&E 4,632,273 732,131 56,279 -- 5,420,683
Other assets -- -- -- 1,530,665 1,530,665
Segment liabilities 592,734 109,870 24,820 2,555,974 3,283,398
FLAT STEEL LONG STEEL
PRODUCTS PRODUCTS OTHER UNALLOCATED TOTAL
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2005
Net sales 3,660,427 625,368 161,885 -- 4,447,680
Cost of sales (2,002,299) (386,757) (99,924) -- (2,488,980)
---------- -------- ------- -------- ----------
Gross profit 1,658,128 238,611 61,961 -- 1,958,700
Selling, general and administrative expenses (403,815) (80,444) (16,331) -- (500,590)
Other operating (expenses), net (56,281) (2,163) (7,505) -- (65,949)
---------- -------- ------- -------- ----------
Operating income 1,198,032 156,004 38,125 -- 1,392,161
---------- -------- ------- -------- ----------
Capital expenditures - PP&E 208,772 14,587 -- -- 223,359
Depreciation - PP&E 267,975 32,604 1,387 -- 301,966
Segment assets
Inventories
859,270 126,536 14,313 -- 1,000,119
Trade receivables 363,573 74,925 34,262 -- 472,760
PP&E 4,653,192 749,305 61,374 -- 5,463,871
Other assets -- -- -- 1,723,231 1,723,231
Segment liabilities 717,855 193,247 31,117 4,141,843 5,084,062
-21-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
5 SEGMENT INFORMATION (CONTINUED)
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
Selling, general and administrative
expenses (110,232) (5,070) (1,324) (116,626)
Other operating (expenses), net (2,953) (136) (35) -- (3,124)
----------- ---------- -------- ----------- -----------
Operating income 505,197 7,574 1,400 -- 514,171
----------- ---------- -------- ----------- -----------
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 111,945 58,877 783 -- 171,605
PP&E 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
SECONDARY REPORTING FORMAT - GEOGRAPHICAL SEGMENTS
SOUTH
CENTRAL NORTH EUROPE AND
AMERICA AMERICA OTHER TOTAL
------------ ------------------------ ------------
YEAR ENDED DECEMBER 31, 2006
Net sales 3,704,294 2,768,755 95,926 6,568,975
Segment assets
Trade receivables 202,784 355,631 19,451 577,866
Property, plant and equipment 3,450,176 1,970,420 87 5,420,683
Depreciation - PP&E 270,453 133,688 43 404,184
Capital expenditures - PP&E 286,008 97,662 2 383,672
YEAR ENDED DECEMBER 31, 2005
Net sales 2,805,214 1,290,353 352,113 4,447,680
Segment assets
Trade receivables 64,837 335,795 72,128 472,760
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
-22-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
5 SEGMENT INFORMATION (CONTINUED)
SOUTH AND
CENTRAL NORTH EUROPE AND
AMERICA AMERICA OTHER TOTAL
---------- --------- ---------- -----------
YEAR ENDED DECEMBER 31, 2004
Net sales 1,123,692 230,829 244,404 1,598,925
Segment assets
Trade receivables 50,956 42,563 78,086 171,605
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
6 COST OF SALES
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2006 2005 2004
--------------- -------------- ------------
INVENTORIES AT THE BEGINNING OF THE YEAR 1,000,119 254,286 144,307
Acquisition of business 8,180 629,729 -
PLUS: CHARGES FOR THE YEAR
Raw materials and consumables used and other movements 3,019,408 1,642,793 781,337
Services and fees 152,978 119,155 42,277
Labor cost 520,717 306,215 89,362
Depreciation of property, plant and equipment 377,808 279,480 89,836
Amortization of intangible assets 14,470 10,488 5,400
Maintenance expenses 350,903 207,490 62,488
Office expenses 8,135 8,020 1,145
Freight and transportation 25,451 22,746 18,746
Insurance 10,041 4,749 815
Provision for obsolescence 30,320 7,927 -
Recovery from sales of scrap and by-products (48,488) (35,266) (23,315)
Others 72,667 31,287 6,892
LESS: INVENTORIES AT THE END OF THE YEAR (1,241,325) (1,000,119) (254,286)
--------------- -------------- ------------
COST OF SALES 4,301,384 2,488,980 965,004
--------------- -------------- ------------
7 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2006 2005 2004
---------------- ---------------------------------
Services and fees 52,169 48,668 15,728
Labor cost 157,155 119,960 24,249
Depreciation of property plant and equipment 26,376 22,486 2,846
Amortization of intangible assets 5,841 3,951 1,110
Maintenance and expenses 17,397 7,316 2,162
Taxes 44,781 45,108 21,911
Office expenses 29,722 24,529 1,540
Freight and transportation 271,286 217,368 42,354
Insurance 1,234 475 529
Recovery of provision for impairment of trade receivables (5,207) (2,467) (2,326)
Others 23,018 13,196 6,523
---------------- ---------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 623,772 500,590 116,626
---------------- ---------------------------------
-23-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
LABOR COSTS (INCLUDED IN COST OF SALES, SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES)
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2006 2005 2004
---------------- ----------------- ---------------
Wages, salaries and social security costs 558,800 361,250 104,268
Termination benefits 18,176 40,364 7,969
Pension benefits - defined benefit plan (Note 25 (i)) 100,896 24,561 1,374
---------------- ----------------- ---------------
677,872 426,175 113,611
---------------- ----------------- ---------------
9 OTHER OPERATING EXPENSES, NET
YEAR ENDED DECEMBER 31,
------------------------------------------------
2006 2005 2004
---------------- ----------------- ------------
(I) OTHER OPERATING INCOME 16,716 6,543 502
---------------- ----------------- -------------
(II) OTHER OPERATING EXPENSES
Provision for legal claims and other matters (8,645) (13,586) (2,714)
Others (1,998) (4,558) (912)
---------------- ----------------- -------------
TOTAL OTHER OPERATING EXPENSES (10,643) (18,144) (3,626)
---------------- ----------------- -------------
(III)DERECOGNITION OF PROPERTY, PLANT AND EQUIPMENT (13,323) (54,348) -
---------------- ----------------- -------------
TOTAL OTHER OPERATING EXPENSES, NET (7,250) (65,949) (3,124)
---------------- ----------------- -------------
10 OTHER FINANCIAL (EXPENSES) INCOME, NET
YEAR ENDED DECEMBER 31
------------------------------------------------
2006 2005 2004
---------------- ---------------- --------------
Debt issue costs (13,686) (3,171) -
Net foreign exchange transaction gains and change in fair
value of derivative instruments (16,541) (28,828) 9,845
Income from Participation Account (i) - 44,050 203,429
Loss from Participation Account (i) (270,161) (265,207) -
Others (22,029) (8,296) (1,639)
---------------- ---------------- --------------
OTHER FINANCIAL (EXPENSES) INCOME, NET (322,417) (261,452) 211,635
---------------- ---------------- ----------------
(i) As a result of the debt restructuring process carried out by Sidor in 2003,
Ylopa became Sidor's creditors in a Participation Account Agreement. This
agreement provides for a compensation in the form of cash payments to be
paid on a quarterly basis and 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.
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 above 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.
11 EQUITY IN EARNINGS OF ASSOCIATED COMPANIES
YEAR ENDED DECEMBER 31,
----------------------------------------------
2006 2005 2004
------------- ------------ -------------
Equity in earnings of associated companies (Note 15) 4,534 21,524 60,908
Impairments (i) - - 148,293
------------- ------------ -------------
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES 4,534 21,524 209,201
------------- ------------ -------------
(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 CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
12 INCOME TAX EXPENSE
INCOME TAX
Income tax expense for each of the years presented is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2006 2005 2004
---------------------------------------------
Current tax (387,741) (246,024) (209,147)
Deferred tax (Note 24) 111,418 24,990 31,661
Utilization of previously unrecognized tax losses (see Note 24) 13,967 2,542 -
---------------------------------------------
(262,356) (218,492) (177,486)
---------------------------------------------
Income tax expense for the years ended December 31, 2006, 2005 and 2004 differed
from the amount computed by applying the statutory income tax rate in force in
each country in which the company operates to pre-tax income as a result of the
following:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2006 2005 2004
---------------------------------------------
Income before income tax 1,258,322 1,291,305 925,661
Income tax expense at statutory tax rate (383,498) (271,953) (179,827)
Non taxable income / (losses) 156,008 70,115 2,341
Non deductible expenses (36,050) (19,196) -
Utilization of previously unrecognized tax losses 13,967 2,542 -
Provisions for tax loss carry-forwards (12,783) - -
---------------------------------------------
INCOME TAX EXPENSE (262,356) (218,492) (177,486)
---------------------------------------------
13 PROPERTY, PLANT AND EQUIPMENT, NET
YEAR ENDED DECEMBER 31, 2006 VEHICLES,
BUILDING AND PRODUCTION FURNITURE WORK IN SPARE
LAND IMPROVEMENTS EQUIPMENT AND FIXTURES PROGRESS PARTS TOTAL
-------------------------------------------------------------------------------------------
COST
Values at the beginning of the year 314,467 1,441,769 5,257,096 187,207 190,356 18,619 7,409,514
Translation differences (3,807) (11,287) (43,129) (1,644) (770) (155) (60,792)
Acquisition of business 2,624 42,603 2,598 - - - 47,825
Additions - - 21,275 3,424 351,744 7,229 383,672
Disposals / Consumptions (19) (40) (1,374) (2,500) - (106) (4,039)
Derecognition - - (38,950) (17) (192) - (39,159)
Transfers (1,749) 83,648 87,448 5,588 (189,855) - (14,920)
-------------------------------------------------------------------------------------------
Values at the end of the year 311,516 1,556,693 5,284,964 192,058 351,283 25,587 7,722,101
-------------------------------------------------------------------------------------------
DEPRECIATION
Accumulated at the beginning of the
year - (386,021) (1,442,682) (116,019) - (921) (1,945,643)
Translation differences - 3,706 13,403 1,097 - 12 18,218
Depreciation charge - (83,357) (305,320) (15,397) - (110) (404,184)
Disposals / Consumptions - 20 388 1,582 - 85 2,075
Derecognition - - 25,836 - - - 25,836
Transfers - 2,280 - - 2,280
-------------------------------------------------------------------------------------------
Accumulated at the end of the year - (463,372) (1,708,375) (128,737) - (934) (2,301,418)
-------------------------------------------------------------------------------------------
AT DECEMBER 31, 2006 311,516 1,093,321 3,576,589 63,321 351,283 24,653 5,420,683
--------------------------------------------------------------------------------------------
-25-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
13 PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED)
YEAR ENDED DECEMBER 31, 2005 VEHICLES,
BUILDING AND PRODUCTION FURNITURE WORK IN SPARE
LAND IMPROVEMENTS EQUIPMENT AND FIXTURES PROGRESS PARTS TOTAL
------------------------------------------------------------------------------------------
COST
COST
Values 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 290,765 819,850 3,230,621 47,863 184,515 -- 4,573,614
Additions 266 7,539 42,747 2,633 165,966 4,208 223,359
Disposals / Consumptions -- (52) (8,021) (1,331) -- (1,538) (10,942)
Derecognition -- (28,977) (75,331) (2,065) -- -- (106,373)
Transfers 6,252 59,808 115,457 5,379 (186,896) -- --
--------------------------------------------------------------------------------------------
Values at the end of the year 314,467 1,441,769 5,257,096 187,207 190,356 18,619 7,409,514
--------------------------------------------------------------------------------------------
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
Depreciation charge -- (68,442) (221,566) (11,801) -- (157) (301,966)
Disposals / Consumptions -- 35 3,086 796 -- 1,040 4,957
Derecognition -- 14,172 36,843 1,010 -- -- 52,025
--------------------------------------------------------------------------------------------
Accumulated at the end of the year -- (386,021) (1,442,682) (116,019) -- (921) (1,945,643)
--------------------------------------------------------------------------------------------
AT DECEMBER 31, 2005 314,467 1,055,748 3,814,414 71,188 190,356 17,698 5,463,871
--------------------------------------------------------------------------------------------
14 INTANGIBLE ASSETS, NET
YEAR ENDED DECEMBER 31, 2006 MINING
INFORMATION CONCESSIONS AND
SYSTEM PROJECTS EXPLORATION COSTS GOODWILL TOTAL
--------------------------------------------------------------------
COST
Values at the beginning of the year 50,385 126,934 399,694 577,013
Translation differences (409) (1,159) (2,426) (3,994)
Additions 18,350 3,795 675 22,820
--------------------------------------------------------------------
Values at the end of the year 68,326 129,570 397,943 595,839
--------------------------------------------------------------------
AMORTIZATION
Accumulated at the beginning of the year (19,807) (4,324) - (24,131)
Translation differences 147 43 - 190
Amortization charge (11,216) (9,095) - (20,311)
--------------------------------------------------------------------
Accumulated at the end of the year (30,876) (13,376) - (44,252)
--------------------------------------------------------------------
AT DECEMBER 31, 2006 37,450 116,194 397,943 551,587
--------------------------------------------------------------------
-26-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
14 INTANGIBLE ASSETS, NET (CONTINUED)
YEAR ENDED DECEMBER 31, 2005 MINING
INFORMATION CONCESSIONS AND
SYSTEM PROJECTS EXPLORATION COSTS GOODWILL TOTAL
----------------------------------------------------------------
COST
Values at the beginning of the year 20,547 - - 20,547
Translation differences (1,767) (603) (5,694) (8,064)
Acquisition of business 10,538 127,101 - 137,639
Additions 21,144 436 405,388 426,968
Disposals (77) - - (77)
---------------------------------------------------------------
Values at the end of the year 50,385 126,934 399,694 577,013
---------------------------------------------------------------
AMORTIZATION
Accumulated at the beginning of the (10,498) - - (10,498)
year
Translation differences 806 - - 806
Amortization charge (10,115) (4,324) - (14,439)
---------------------------------------------------------------
Acumulated at the end of the year (19,807) (4,324) - (24,131)
---------------------------------------------------------------
AT DECEMBER 31, 2005 30,578 122,610 399,694 552,882
---------------------------------------------------------------
15 INVESTMENTS IN ASSOCIATED COMPANIES
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
---------------------------
At the beginning of the year 9,122 309,318
Translation adjustment 31 (3,554)
Acquisition of associated companies 2,598 -
Equity in earnings of associated companies 4,534 21,524
Consolidation of Amazonia (see Note 3) - (318,166)
---------------------------
AT THE END OF THE YEAR 16,285 9,122
---------------------------
The principal associated companies, all of which are unlisted, are:
COUNTRY OF VOTING RIGHTS VALUE AT DECEMBER 31,
COMPANY INCORPORATION AT DECEMBER 31,
-------------------------------------- ---------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------- --------------- -----------------------------------------------------------
Lomond Holdings BV. (1) Holanda 50.00% - 2,747 -
Matesi Materiales Siderurgicos S.A.(2) Venezuela 49.80% 49.80% 12,866 9,002
Compania Afianzadora de Empresas
Siderurgicas S.G.R. (3) Argentina 38.89% 38.89% 120 120
Finma S.A.I.F. (4) Argentina 33.33% - 552 -
--------------- ---------------
16,285 9,122
--------------- ---------------
(1) Holding Company. Indirectly through the participation in Alvory.
(2) Manufacturing and marketing of briquettes. Indirectly through the
participation in Sidor.
(3) Granting of guarantees to participating partners to facilitate or
permit access to credits for purchase of national raw material.
Indirectly through the participation in Siderar.
(4) Consulting and financial services. Indirectly through the participation
in Siderar.
16 OTHER INVESTMENTS, NET - NON-CURRENT
AS OF DECEMBER 31,
--------------------------
2006 2005
--------------------------
Investments in companies under cost method 243 243
Time deposits with related parties (i) 11,249 10,450
Guarantee fund Compania Afianzadora de Empresas Siderugicas S.G.R. (ii) 2,978 3,402
Provision for impairment of other investments (Note 22 ) (1,083) (1,488)
--------------------------
TOTAL 13,387 12,607
--------------------------
-27-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
16 OTHER INVESTMENTS, NET - NON-CURRENT (CONTINUED)
(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 AFIANZADORA DE EMPRESAS SIDERURGICAS S.G.R..
Corresponds to the Company's portion of the risk funds sponsored by Compania
Afianzadora de Empresas Siderurgicas S.G.R., which acts as guarantor of third
parties' debts.
17 RECEIVABLES, NET - NON-CURRENT
AS OF DECEMBER 31,
--------------------------
2006 2005
--------------------------
Receivables with related parties (Note 30) 63,323 39,285
Employee advances and loans 12,616 6,323
Trade receivables 1,373 3,474
Receivables from sale of fixed assets 1,542 1,729
Others 1,422 1,028
Provision for impairment - receivables (Note 22 ) (1,373) (3,024)
------------- ------------
78,903 48,815
------------- ------------
18 RECEIVABLES - CURRENT
AS OF DECEMBER 31,
-------------------------
2006 2005
------------ ------------
Value added tax 8,513 55,326
Asset tax 15,892 60,312
Prepaid taxes 3,550 2,894
Employee advances and loans 6,222 5,943
Advances to suppliers 27,583 58,839
Expenses paid in advance 12,175 15,172
Government tax refunds on exports 43,531 36,425
Receivables with related parties (Note 30) 42,619 35,548
Others, net 15,733 20,843
------------ ------------
175,818 291,302
------------ ------------
19 INVENTORIES, NET
AS OF DECEMBER 31,
-------------------------
2006 2005
------------- -----------
Raw materials, materials and spare parts 519,530 509,266
Goods in process 458,839 298,847
Finished goods 262,873 201,085
Goods in transit 78,862 43,740
Provision for obsolescence (Note 23) (78,779) (52,819)
------------- -----------
1,241,325 1,000,119
------------- -----------
20 TRADE RECEIVABLES, NET
AS OF DECEMBER 31,
---------------------------
2006 2005
------------- -------------
Current accounts 592,800 487,952
Trade receivables with related parties (Note 30) 10,149 14,659
Provision for impairment - trade receivables (Note 23 ) (25,083) (29,851)
------------- -------------
577,866 472,760
------------- -------------
-28-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
21 CASH, CASH EQUIVALENTS AND OTHER INVESTMENTS
AS OF DECEMBER 31,
-------------------------------
2006 2005
--------------- ---------------
(I) OTHER INVESTMENTS
Trust funds with specific objective (Note 30) - 5,185
--------------- ---------------
- 5,185
--------------- ---------------
(II) CASH AND CASH EQUIVALENTS
Cash at banks and in hand 65,035 117,737
Deposits and foreign private sector bonds 567,967 637,243
Restricted cash 10,350 10,650
--------------- ---------------
643,352 765,630
--------------- ---------------
22 PROVISIONS - NON CURRENT
DEDUCTED FROM ASSETS LIABILITIES
--------------------------------- ------------------
PROVISION FOR IMPAIRMENT LEGAL CLAIMS
AND
OTHER MATTERS
---------------------------------
RECEIVABLES OTHER
INVESTMENTS
--------------------------------- ------------------
YEAR ENDED DECEMBER 31, 2006
Values at the beginning of the year 3,024 1,488 54,138
Translation differences (27) (17) (137)
Additional provisions - - 9,966
Reversals (1,624) (388) (1,321)
Used - - (2,103)
--------------------------------- ------------------
AT DECEMBER 31, 2006 1,373 1,083 60,543
--------------------------------- ------------------
YEAR ENDED DECEMBER 31, 2005
Values at the beginning of the year 3,404 2,001 12,885
Translation differences (47) (17) (4,355)
Acquisition of business - - 37,163
Additional provisions - - 13,586
Reversals (333) - -
Used - (496) (5,141)
--------------------------------- ------------------
AT DECEMBER 31, 2005 3,024 1,488 54,138
--------------------------------- ------------------
23 PROVISIONS - CURRENT
DEDUCTED FROM ASSETS
--------------------------------
PROVISION FOR PROVISION FOR
IMPAIRMENT - OBSOLESCENCE
TRADE RECEIVABLES
----------------------------------
YEAR ENDED DECEMBER 31, 2006
Values at the beginning of the year 29,851 52,819
Translation differences (420) (513)
Reversals (3,937) (19,300)
Additional provisions 354 49,620
Used (765) (3,847)
----------------------------------
AT DECEMBER 31, 2006 25,083 78,779
----------------------------------
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 30,617 37,897
Additional provisions 1,853 7,927
Used (8,968) (3,727)
----------------------------------
AT DECEMBER 31, 2005 29,851 52,819
----------------------------------
-29-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
24 DEFERRED INCOME TAX
Deferred income taxes are calculated in full on temporary differences under the
liability method using the tax rate of the applicable country.
Changes in deferred income tax are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005
--------------- ----------------
At beginning of the year (1,019,062) (337,473)
Acquisition of business (1,067) (711,028)
Translation differences 9,705 4,449
Uses of tax loss carry-forwards (63,677) -
Income statement credit 125,385 24,990
--------------- ----------------
AT END OF THE YEAR (948,716) (1,019,062)
--------------- ----------------
The changes in deferred tax assets and liabilities (prior to offsetting the
balances within the same tax jurisdiction) during the year are as follow:
DEFERRED TAX LIABILITIES FIXED INVENTORIES INTANGIBLE OTHER TOTAL AT
ASSETS ASSETS DECEMBER 31,
2006
------------------------------------------- ------------- -------------------------- --------------- ---------------
At beginning of year (1,054,020) (107,175) (45,849) (43,476) (1,250,520)
Acquisition of business (1,140) 3 - - (1,137)
Translation differences 9,876 1,816 684 (48) 12,328
Income statement credit (charge) 78,056 20,908 3,902 (27,468) 75,398
------------- -------------------------- --------------- ---------------
AT END OF YEAR (967,228) (84,448) (41,263) (70,992) (1,163,931)
------------- -------------------------- --------------- ---------------
DEFERRED TAX ASSETS PROVISIONS TRADE TAX LOSS OTHER TOTAL AT
RECEIVABLES CARRY-FORWARDS DECEMBER 31,
2006
------------------------------------------- ------------- -------------------------- --------------- ---------------
At beginning of year 36,312 20,322 98,213 76,611 231,458
Acquisition of business 39 - - 31 70
Translation differences (385) (133) (1,486) (620) (2,624)
Uses of tax loss carry-forwards - - (63,677) - (63,677)
Income statement credit 1,533 3,394 13,967 31,094 49,988
------------- -------------------------- --------------- ---------------
AT END OF YEAR 37,499 23,583 47,017 107,116 215,215
------------- -------------------------- --------------- ---------------
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 December 31, 2006 and 2005, USD 36,439 and USD 29,126, respectively, have
been classified as non-current assets and USD 985,155 and USD 1,048,188,
respectively, have been classified as non-current liabilities.
The amounts shown in the balance sheet include the following:
AS OF DECEMBER 31,
2006
---------------------
Deferred tax assets to be recovered after more than 12 months 158,205
Deferred tax liabilities to be settled after more than 12 months (1,078,181)
---------------------
(919,976)
---------------------
-30-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
25 OTHER LIABILITIES
AS OF DECEMBER 31,
--------------------------------
2006 2005
---------------- ---------------
(I) OTHER LIABILITIES - NON-CURRENT
Termination benefits 3,716 3,118
Pension benefits 263,454 177,899
Related Parties (Note 30) 1,149 -
Other 6,247 6,900
---------------------------------
274,566 187,917
---------------------------------
PENSION BENEFITS
The amounts recognized in the consolidated balance sheet are determined as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2006 2005
---------------------------------
Present value of unfunded obligations 304,922 172,394
Unrecognized actuarial (losses) gains (16,282) 8,594
Unrecognized prior service costs (25,186) (3,089)
---------------------------------
LIABILITY IN THE BALANCE SHEET 263,454 177,899
---------------------------------
The amounts recognized in the consolidated income statement are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005
--------------------------------
Current service cost 8,079 7,227
Interest cost 36,549 17,785
Changes to pension plan (1) 46,947 -
Amortization of prior service costs 593 443
Net actuarial losses (gains) recognized in the year 8,728 (894)
--------------------------------
TOTAL INCLUDED IN LABOR COSTS 100,896 24,561
--------------------------------
(1) In December 2006, Sidor decided a change in the benefits associated to the
pension plan which became effective on January 1, 2007. This change consists
mainly of an increase of the minimum pension benefit to be provided to
retired employees. Consequently, the pension plan actuarial liability was
accordingly adjusted.
Changes in the liability recognized in the consolidated balance sheet are as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2006 2005
---------------------------------
At the beginning of the year 177,899 6,117
Acquisition of business - Amazonia - 195,285
Transfers and new participants of the plan (130) (25,153)
Total expense 100,896 24,561
Translation differences (1,355) (9,550)
Contributions paid (13,856) (13,361)
---------------------------------
AT THE END OF YEAR 263,454 177,899
---------------------------------
-31-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
25 OTHER LIABILITIES (CONTINUED)
The principal actuarial assumptions used were as follows:
VENEZUELA YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
------------- -------------
Discount rate 26.81% 23.32 %
Rate of compensation increase 16.34% 16.34 %
MEXICO YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
------------- -------------
Discount rate 9.50% 8.67 %
Rate of compensation increase 4.00% 4.54 %
ARGENTINA YEAR ENDED DECEMBER 31,
---------------------------
2006 2005
------------- -------------
Discount rate 7.00% 7.00 %
Rate of compensation increase 2.00% 2.00 %
AS OF DECEMBER 31,
--------------------------
2006 2005
--------------------------
(II) OTHER LIABILITIES - CURRENT
Payroll and social security payable 81,841 67,639
Termination benefits 2,885 18,966
Participation account 54,454 90,186
Related Parties (Note 30) 15,090 17
Others 4,104 17,265
------------ -------------
158,374 194,073
------------ -------------
26 DERIVATIVE FINANCIAL INSTRUMENTS
NET FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
The net fair values of derivative financial instruments at December 31, 2006 and
2005 were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2006 2005
-----------------------------
CONTRACTS WITH POSITIVE FAIR VALUES:
Interest rate swap contracts 6,857 5,316
Foreign exchange contracts 995 86
-----------------------------
7,852 5,402
-----------------------------
CONTRACTS WITH NEGATIVE FAIR VALUES:
Commodities contracts (15,487) -
-----------------------------
(15,487) -
-----------------------------
Derivative financial instruments breakdown is as follows:
A) INTEREST RATE CONTRACTS
Fluctuations in market interest rates create a degree of risk by affecting the
amount of the Company's interest payments and the value of its fixed rate debt.
As of December 31, 2006, most of the Company's long-term borrowings were at
variable rates.
-32-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
26 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
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. At
December 31, 2006 the notional amount totaled USD 226.2 million.
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. At December 31, 2006 the notional amount totaled USD 160
million.
In March 2003, Hylsa entered into several interest rate cap agreements to manage
the impact of the floating interest rate changes on its financial debt. As of
December 31, 2006, Hylsa has an agreement, with a notional amount of USD 179.9
million and a fixed interest rate of 7.00% per annum; and another agreement with
a notional amount of USD 24.5 million and a fixed interest rate of 5.0% per
annum, both with Credit Suisse. These two agreements are due on January 2, 2008
and on January 22, 2007, respectively.
FAIR VALUE AT DECEMBER 31,
NOTIONAL AMOUNT -----------------------------
CONTRACT AVERAGE RATE AT DECEMBER 31, 2006 2006 2005
---------------------------------------------------------------------------------------------------------------
Interest rate contracts 5.10% 590,640 6,857 5,316
B) FOREIGN EXCHANGE CONTRACTS
During 2006, Siderar entered into several exchange rate derivative contracts to
manage its exposure to changes in the Argentine Peso against the US Dollar. As
of December 31, 2006, Siderar had 10 non-deliverable forward agreements with JP
Morgan Chase Bank N.A. with a notional amount of ARS 10 million each at an
average exchange rate of 3.0918 Argentine Pesos per US Dollar. These forwards
are due between January and March, 2007.
FAIR VALUE AT DECEMBER 31,
NOTIONAL AMOUNT -----------------------------
CURRENCIES CONTRACT AT DECEMBER 31, 2006 2006 2005
---------------------------------------------------------------------------------------------------------------
USD/EUR Euro forward sales - - 86
MXN/USD Mexican peso forward purchases (1) - 817 -
ARS/USD Argentine peso forward purchases ARS 100,000 178 -
---------------------- ------------- --------------
ARS 100,000 995 86
---------------------- ------------- --------------
(1)Hylsa has a contract for half of its electricity purchases with an affiliate
of Iberdrola, S.A., a Spanish utility company, up to the year 2027. Prices in
this contract are mostly denominated in U.S. dollars, while payments to its
alternative provider CFE are in Mexican pesos. Under the contract, Hylsa is
allowed to terminate this agreement under specified price-related circumstances.
The fair value of this embedded derivative as of December 31, 2006, was USD 0.8
million.
C) COMMODITIES CONTRACTS
Hylsa entered into several derivative contracts with JP Morgan Chase Bank N.A.,
Citibank N.A. and Deutsche Bank AG to manage the impact of the fluctuation on
the natural gas price. The contracts outstanding at December 31, 2006, are due
between January 2007 and March 2008.
CONTRACT AVERAGE PRICE NOTIONAL AMOUNT IN MMBTU FAIR VALUE AT DECEMBER 31,
AT DECEMBER 31, 2006
--------------------------------
2006 2005
-------------------------------------------------------------------------------------------------- ---------------
Call - Purchases 7.65/7.45 12,000 13,167 -
Call - Sales 9.00/10.00 18,000 (6,716) -
Put - Sales 7.65@KI /7.45@KI 12,000 (12,505) -
Swaps - Purchases 7.36 6,000 (9,433) -
---------------- ---------------
(15,487) -
---------------- ---------------
-33-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
27 BORROWINGS
YEAR ENDED DECEMBER 31,
---------------------------------
2006 2005
---------------- ----------------
(I) NON-CURRENT
Bank borrowings 551,990 1,810,910
Borrowings with related parties (Note 30) - 603,683
---------------- ----------------
551,990 2,414,593
Less: debt issue costs (3,589) (14,715)
---------------- ----------------
548,401 2,399,878
---------------- ----------------
(II) CURRENT
Bank borrowings 509,201 518,629
Borrowings with related parties (Note 30) 2,161 3,789
---------------- ----------------
511,362 522,418
Less: debt issue costs (2,668) (6,019)
---------------- ----------------
508,694 516,399
---------------- ----------------
TOTAL BORROWINGS 1,057,095 2,916,277
---------------- ----------------
The maturity of borrowings is as follows:
EXPECTED MATURITY DATE
-----------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 THEREAFTER AT DECEMBER 31, (1)
--------------------------
2006 2005
-----------------------------------------------------------------------------------------------
Fixed Rate 150,918 - - - - 7,206 158,124 56,257
Floating Rate 357,776 290,804 120,021 94,923 1,358 34,089 898,971 2,860,020
-----------------------------------------------------------------------------------------------
TOTAL 508,694 290,804 120,021 94,923 1,358 41,295 1,057,095 2,916,277
-----------------------------------------------------------------------------------------------
(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.
The weighted average interest rates - which incorporate instruments denominated
in various currencies - at the balance sheet date were as follows:
DECEMBER 31,
---------------------------
2006 2005
------------- -------------
Bank borrowings 6.82% 6.08%
The nominal average interest rates shown above were calculated using the rates
set for each instrument in its corresponding currency and weighted using the
dollar-equivalent outstanding principal amount of said instruments at December
31, 2006 and 2005, respectively.
Breakdown of long-term borrowings by currency is as follows:
CURRENCY INTEREST RATES DECEMBER 31,
------------- ------------------------------ -------------------------
2006 2005
-------------------------
USD Floating 898,971 2,795,144
USD Fixed 62,179 14,692
EUR Fixed - 404
ARS Floating - 54
ARS Fixed 55,845 -
MXN Floating - 64,822
VEB Fixed 40,100 41,161
-------------------------
TOTAL BANK BORROWINGS 1,057,095 2,916,277
-------------------------
EUR: Euro; ARS: Argentine pesos; MXN: Mexican pesos; VEB: Venezuelan Bolivar
-34-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
28 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 consolidated financial position or results of operations.
(I) 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, 2006, Sidor's potential exposure under this litigation
amounted to USD125.7 million.
(II) 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 by 13.9 million and instructing the recalculation of taxes in accordance
with this ruling. The Company questioned the recalculation conducted by the
AFIP, generating an incident that had favorable resolution to the criteria
exposed by the Company. Consequently, in December, 2006 there was a payment of
USD 0.1 million according to the Company's filing and the Fiscal Court's
approval, which was then appealed by the AFIP.
Based on the above, the Company recognized a provision amounting to USD 4.6
million as of December 31, 2006 as management considers there is a probable cash
outflow.
(B) SIDOR
The Company recorded a provision for a total amount of USD26.3 million in
connection with tax matters arising from compensations of tax credits made by
the Company since the implementation of the V.A.T. law in June, 1999. The
SENIAT, the Venezuelan tax and customs authority, is claiming the interest
accrued on the application of those tax credits as payment on account of tax
obligations.
-35-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
28 CONTINGENCIES, COMMITMENTS AND RESTRICTIONS ON THE DISTRIBUTION OF
PROFITS (CONTINUED)
(III) COMMITMENTS
The following are the Company's main off-balance sheet commitments:
(a) In March 2003, Siderar entered into an agreement with Tecpetrol, a related
company of Ternium, 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 maximum 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%. At December 31, 2006 there is no residual
advanced payment.
(b) Siderar entered into a contract with Tenaris, a related company of Ternium,
for the supply of steam generated at the power generation facility that Tenaris
owns in the compound of the Ramallo facility of Siderar. Under this contract,
Tenaris has to provide 250 tn/hour of steam, and Siderar has the obligation to
take or pay this volume. Tenaris detected technical problems at this facility
that impeded the delivery of certain steam volume, between October 2004 and
September 2005. This outsourcing contract is due to terminate in 2018.
(c) On August 20, 2004, Sidor entered into a contract with its associated
company 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 one year prior to its
termination.
(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
on 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 thousand m3/day),
whether 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 Ternium's related company TAVSA Tubos
de Acero de Venezuela S.A. (a Venezuelan seamless steel pipe producer controlled
by 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 contract with Ferrominera del
Orinoco ("FMO") for the supply of iron ore. Pursuant to this contract, FMO will
supply Sidor up to a maximum annual volume of iron ore needed to produce 6.6
million tons of pellets until 2017. Sidor and FMO entered into an amendment to
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 (that 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 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 Energia
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 entered into 21 long-term operating
lease agreements for the rental of machinery, materials handling equipment,
earth moving equipment, computers and assorted vehicles. Total amounts due, from
2007 to 2010, include USD24.9 million in lease payments. Total loss for lease
payments recorded in the year ended December 31, 2006 accounts for USD 16.6
million.
Future minimum lease payments under non-cancellable operating leases are as
follows:
YEAR USD THOUSANDS
2007 12,394
2008-2010 12,477
----------------
TOTAL 24,871
----------------
-36-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
28 CONTINGENCIES, COMMITMENTS AND RESTRICTIONS ON THE DISTRIBUTION OF
PROFITS (CONTINUED)
(k) On October 24, 2003, Siderar entered into a joint gas purchase agreement
with Repsol-YPF. Under the agreement, which includes certain take-or-pay
clauses, 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 negotiated 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. There is an agreement with
Repsol-YPF to continue with the supply of natural gas up to February 28, 2007
under the same contractual conditions.
(l) On April 6, 2006, Sidor entered into a slag removal and raw material
handling services contract with Sidernet de Venezuela C.A., for a total estimate
amount of USD 155.9 million. The agreement is due to terminate in June 2016.
(IV) RESTRICTIONS ON THE DISTRIBUTION OF PROFITS
Under the credit agreements that financed the acquisition of Hylsamex, the
Company and its affiliates have some restrictions to the payment of dividends in
excess of certain amounts, among other limitations (see Note 3e)).
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
financial statements may not be wholly distributable.
Shareholders' equity under Luxembourg law and regulations comprises the
following captions:
AT DECEMBER
31, 2006
--------------
Share capital 2,004,744
Legal reserve 200,474
Distributable reserves 402,149
Non distributable reserves 1,414,122
Accumulated profit at January 1, 2006 107,612
Profit for the year 392,230
--------------
TOTAL SHAREHOLDERS EQUITY UNDER LUXEMBOURG GAAP 4,521,331
--------------
29 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 with 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.
-37-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
29 EARNINGS PER SHARE (CONTINUED)
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, as of December 31, 2005 the capital was
increased to USD 1,396,552,887 represented by 1,396,551,887 shares of 1 USD
nominal value each.
Furthermore, in November 2005, Sidetur, a subsidiary of Sivensa, exchanged with
ISL its 3.42% equity interest in Amazonia and USD 3.1 million in cash for shares
of the Company.
As mentioned in Note 1, on January 11, 2006, the Company launched an Initial
Public Offering of 24,844,720 ADSs (each representing 10 shares of the Company)
in the United States. The Company's Initial Public Offering was settled on
February 6, 2006.
As per the provisions contained in the Subordinated Convertible Loan Agreement,
on February 6, 2006 the Company exchanged the Subordinated Convertible Loans
(including interest accrued through January 31, 2006) held by ISL and converted
them into shares at a conversion price of USD2 per share, resulting in the
issuance of 302,962,261 new shares on February 9, 2006.
As provided in the Corporate Reorganization Agreement, on February 9, 2006, ISL
contributed all of its assets and liabilities (including its interest in
Amazonia) to the Company in exchange for 959,482,775 newly-issued shares of the
Company after the settlement of the Initial Public Offering.
In connection with the over-allotment described in Note 1, on March 1, 2006,
the Company issued 22,981,360 new shares.
Upon consummation of the transactions mentioned, as of December 31, 2006, the
capital was increased to USD 2,004,743,442 represented by 2,004,743,442 shares,
each having a nominal value of USD 1.00 each.
The Company's combined earnings per share for the year ended December 31, 2004
have been calculated based on the assumption that 1,168,943,632 shares were
issued and outstanding in that period. For fiscal years 2006 and 2005, the
weighted average of shares outstanding totaled 1,936,833,060 and 1,209,476,609
shares, respectively.
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.
2006 2005 2004
-----------------------------------------------------
Profit attributable to equity holders of the Company 795,424 704,406 457,339
Weighted average number of ordinary shares in issue 1,936,833,060 1,209,476,609 1,168,943,632
Basic earnings per share (USD per share) 0.41 0.58 0.39
Diluted earnings per share (USD per share) 0.41 0.54 0.39
30 RELATED PARTY TRANSACTIONS
The Company is controlled by San Faustin, which at December 31, 2006 indirectly
owned 70.52% 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 28.
-38-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
30 RELATED PARTY TRANSACTIONS (CONTINUED)
The following transactions were carried out with related parties:
YEAR ENDED DECEMBER 31,
--------------------------------
2006 2005
---------------- ---------------
(I) TRANSACTIONS
(A) SALES OF GOODS AND SERVICES
Sales of goods to associated parties 1,650 -
Sales of goods to other related parties 90,665 36,978
Sales of services to associated parties 2,938 2,905
Sales of services to other related parties 1,608 5,636
---------------- ---------------
96,861 45,519
---------------- ---------------
(B) PURCHASES OF GOODS AND SERVICES
Purchases of goods from associated parties 75,751 85,636
Purchases of goods from other related parties 62,023 71,205
Purchases of services from associated parties 3,999 -
Purchases of services from other related parties 156,716 21,792
---------------- ---------------
298,489 178,633
---------------- ---------------
(C) FINANCIAL RESULTS
Income with associated parties 3,820 44,697
Income with other related parties 38 89
Expenses with other related parties (1,815) (10,043)
---------------- ---------------
2,043 34,743
---------------- ---------------
AT DECEMBER 31,
-------------------------------
2006 2005
--------------- ---------------
(II) YEAR-END BALANCES
(A) ARISING FROM SALES/PURCHASES OF GOODS/SERVICES
Receivables from associated parties 67,558 71,317
Receivables from other related parties 48,533 18,175
Payables to associated parties (5,588) (13,644)
Payables to other related parties (48,032) (17,914)
--------------- ---------------
62,471 57,934
--------------- ---------------
(B) OTHER INVESTMENTS
--------------- ---------------
Time deposit 11,249 10,450
--------------- ---------------
(C) OTHER BALANCES
Trust fund with other related parties (Note 21) - 5,185
--------------- ---------------
- 5,185
--------------- ---------------
(D) FINANCIAL DEBT
--------------- ---------------
Borrowings with other related parties (Note 27) (2,161) (607,472)
--------------- ---------------
(III) OFFICERS AND DIRECTORS' COMPENSATION
The aggregate compensation of Officers and Directors earned during the years
ended December 31, 2006, 2005 and 2004 amounts to USD 10,276 thousand, USD
4,485 thousand and USD 3,050 thousand, respectively.
-39-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
31 CASH FLOW DISCLOSURES
AT DECEMBER 31,
--------------------------------------
2006 2005 2004
--------------------------------------
(I) CHANGES IN WORKING CAPITAL (I)
Inventories ( 271,480) (133,995) (114,686)
Receivables and prepayments 122,917 3,103 (138,248)
Trade receivables (96,122) 97,814 (55,273)
Other liabilities (93,472) 46,117 10,233
Trade payables 62,004 41,381 93,304
--------------------------------------
(276,153) 54,420 (204,670)
--------------------------------------
(II INCOME TAX ACCRUALS LESS PAYMENTS
Tax accrued 262,356 218,492 177,486
Taxes paid (280,431) (262,500) (57,276)
--------------------------------------
(18,075) (44,008) 120,210
--------------------------------------
(II INTEREST ACCRUALS LESS PAYMENTS
Interest accrued 112,918 81,608 18,257
Debt issue costs 13,686 3,171 -
Interest paid (122,407) (60,256) (9,174)
--------------------------------------
4,197 24,523 9,083
--------------------------------------
(i) Changes in working capital are shown net of the effect of exchange rate
changes.
32 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
1. INTERNATIONAL FINANCIAL REPORTING STANDARD 8, OPERATING SEGMENTS
In November 2006, the International Accounting Standards Board issued
International Financial Reporting Standard 8, "Operating Segments" ("IFRS").
IFRS 8 sets out requirements for disclosure of information about an entity's
operating segments and also about the entity's products and services, the
geographical areas in which it operates, and its major customers.
An entity shall apply IFRS 8 in its annual financial statements for periods
beginning on or after January 1, 2009. Earlier application is permitted. If an
entity applies IFRS 8 in its financial statements for a period before January 1,
2009, it shall disclose that fact.
The Company's management has not assessed the potential impact that the
application of IFRS 8 may have on the Company's financial condition or results
of operations.
2. IFRIC INTERPRETATION 11, GROUP AND TREASURY SHARE TRANSACTIONS
In November 2006, IFRIC issued IFRIC Interpretation 11 "Group and Treasury Share
Transactions" ("IFRIC 11"). IFRIC 11 gives guidance on how to account for
certain transactions involving share-based payment arrangements and is effective
for annual periods beginning on or after March 1, 2007, although earlier
application is permitted. If an entity applies the Interpretation for an annual
period beginning before March 1, 2007, 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.
3. IFRIC INTERPRETATION 12, SERVICE CONCESSION ARRANGEMENTS
In November 2006, IFRIC issued IFRIC Interpretation 12 "Service Concession
Arrangements" ("IFRIC 12"). IFRIC 12 gives guidance on the accounting by
operators for public-to-private service concession arrangements. This
Interpretation sets out general principles on recognizing and measuring the
obligations and related rights in service concession arrangements.
This Interpretation applies to public-to-private service concession arrangements
if:
(a) the grantor controls or regulates what services the operator must
provide with the infrastructure, to whom it must provide them, and
at what price; and
(b) the grantor controls--through ownership, beneficial entitlement or
otherwise--any significant residual interest in the infrastructure
at the end of the term of the arrangement.
-40-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
32 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
3. IFRIC INTERPRETATION 12, SERVICE CONCESSION ARRANGEMENTS (CONTINUED)
This Interpretation applies to both:
(a) infrastructure that the operator constructs or acquires from a
third party for the purpose of the service arrangement; and
(b) existing infrastructure to which the grantor gives the operator
access for the purpose of the service arrangement.
An entity shall apply this Interpretation for annual periods beginning on or
after January 1, 2008. Earlier application is permitted. If an entity applies
this Interpretation for a period beginning before 1 January 2008, 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.
33 FINANCIAL RISK MANAGEMENT
(1) FINANCIAL RISK FACTORS
Ternium's activities expose the Company to a variety of risks, including the
effects of changes in foreign currency exchange rates, interest rates and
commodities prices. Ternium's subsidiaries may use derivative transactions to
manage potential adverse effects of certain risk exposures on Ternium's
financial performance.
(I) FOREIGN EXCHANGE RATE RISK
Ternium operates and sells its products in different countries, and as a result
is exposed to foreign exchange rate volatility. Ternium's subsidiaries may use
derivative contracts in order to hedge their exposure to exchange rate risk
derived from their trade and financial operations.
Ternium aims to neutralize the negative impact of fluctuations in the value of
other 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 manages its exposure to interest rate volatility through its financing
alternatives and hedging instruments. Borrowings issued at variable rates expose
the Group to the risk of increased interest expense in the event of a raise in
market interest rates, while borrowings issued at fixed rates expose the Group
to a variation in its fair value. The Group's interest-rate risk mainly arises
from long-term borrowings that bear variable-rate interest that is partially
fixed through different derivative transactions, such as swaps and caps.
(III) COMMODITY PRICE RISK
Ternium uses certain commodities and raw materials that are subject to price
volatility caused by supply and weather conditions, political situations,
financial variables and other unpredictable factors. As a result, the Company is
exposed to the volatility in the prices of these commodities and raw materials.
Ternium's policy is to manage this risk by partially fixing the underlying price
or limiting its volatility for defined period.
(IV) 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 are made to
customers with an appropriate credit history, and that credit insurances,
letters of credit or other instruments are requested to reduce credit risk
whenever deemed necessary. These subsidiaries maintain allowances for potential
credit losses.
Ternium's subsidiaries also have credit guidelines in place to ensure that
derivative and treasury counterparties are limited to high credit quality
financial institutions.
-41-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
33 FINANCIAL RISK MANAGEMENT (CONTINUED)
(1) FINANCIAL RISK FACTORS (CONTINUED)
(V) LIQUIDITY RISK
Management maintains sufficient cash and marketable securities and credit
facilities to finance normal operations. The company also has committed credit
facilities to support its ability to close out market positions if needed.
(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 26.
(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.
-42-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
I. DIFFERENCES IN MEASUREMENT METHODS
The principal differences between IFRS and US GAAP as they relate to the Company
are described below, together with an explanation, where appropriate, of the
method used in the determination of the necessary adjustments.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2006 2005 2004
------------ ------------ ------------
Net income attributable to equity holders of the Company in accordance with
IFRS 795,424 704,406 457,339
US GAAP adjustments - income (expense)
Valuation of fixed assets- PP&E (Note 34.a) 100,975 123,824 79,493
Troubled debt restructuring (Note 34.b) 8,923 14,820 -
Accounting for pension plans (Note 34.c) (191) (991) (164)
Inventory valuation (Note 34.d) 741 (5,882) (1,628)
Capitalization of interest cost- PP&E (Note 34.e) 587 (910) 152
Capitalization of interest cost- Intangible assets (Note 34.e) (185) (302) 313
Changes in fair value of financial assets through profit and loss (Note 34.f) - 50,819 (1,361)
Equity in investments in associated companies- Amazonia (Note 34.g) - - (76,926)
Excess of fair value of assets acquired over cost (Note 34.h) 20,395 (170,510) -
Revaluation reserve over pre-acquisition interest in Amazonia (Note 34.i) 6,553 5,734 -
Acquisition of minority interest in controlled subsidiaries (Note 34.j) (24,172) (4,101) -
Valuation of intangible assets and other assets (Note 34.l) (361) (674) -
Deferred income tax (Note 34.m) (39,004) (51,315) (27,101)
Minority interest (Note 34.n) (28,667) (105,613) (5,462)
------------ ------------ ------------
Net income in accordance with US GAAP 841,018 559,305 424,655
------------ ------------ ------------
Weighted average number of shares outstanding (thousands) 1,936,833 1,209,477 1,168,944
Consolidated basic earnings per share in accordance with U.S. GAAP 0.43 0.46 0.36
Consolidated diluted earnings per share in accordance with U.S. GAAP 0.43 0.43 0.36
AS OF DECEMBER 31,
--------------------------
2006 2005
------------ ------------
Shareholders' equity in accordance with IFRS 3,757,558 1,842,454
Valuation of fixed assets- PP&E (Note 34.a) (1,300,420) (1,410,264)
Troubled debt restructuring (Note 34.b) (3,128) (12,051)
Accounting for pension plans (Note 34.c) (44,642) 5,227
Inventory valuation (Note 34.d) (14,596) (14,854)
Capitalization of interest cost- PP&E (Note 34.e) 8,411 7,083
Capitalization of interest cost- Intangible assets (Note 34.e) 155 344
Excess of fair value of assets acquired over cost (Note 34.h) (247,147) (267,542)
Revaluation reserve over pre-acquisition interest in Amazonia (Note 34.i) (79,409) (85,962)
Acquisition of minority interest in controlled subsidiaries (Note 34.j) 583,291 470,850
Equity securities issuance cost (Note 34.k) - 5,456
Valuation of intangible assets and other assets (Note 34.l) (1,871) (1,300)
Deferred income tax (Note 34.m) 448,134 507,253
Minority interest (Note 34.n) 329,180 389,944
------------ ------------
Shareholders' equity in accordance with US GAAP 3,435,516 1,436,638
------------ ------------
Changes in shareholders' equity under U.S. GAAP are as follows:
YEAR ENDED DECEMBER 31,
--------------------------
2006 2005
------------ ------------
Shareholders' equity at the beginning of the year in accordance with US GAAP 1,436,638 954,255
Net income for the year in accordance with US GAAP 841,018 559,305
Other comprehensive (loss) income (25,385) (424,116)
Capital increase 81,853 54,758
Conversion of Subordinated Convertible Loans 605,924 -
Initial public offering, net of offering costs of USD23,295 519,563 -
Cumulative effect adjustment due to the adoption of SFAS 158, net of tax and minority
interests (24,095) -
Usiminas exchange - 531,088
Dividends paid in cash and other distributions - (238,652)
------------ ------------
Shareholders' equity at the end of the year in accordance with US GAAP 3,435,516 1,436,638
------------ ------------
-43-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
(A) VALUATION OF FIXED ASSETS - PROPERTY, PLANT AND EQUIPMENT
Under IFRS, the Company applied the provisions of IFRS 1 for the revaluation of
property, plant and equipment. Accordingly, the Company elected to use a
technical revaluation as the deemed cost for its property, plant and equipment.
This technical revaluation is not permitted under US GAAP and remains a
difference between IFRS and US GAAP. Thus, no revaluations have been made for US
GAAP purposes and historical cost has been used as the basis of accounting for
these assets. The adjustment to net income represents the difference in
depreciation expense under IFRS and U.S. GAAP.
(B) TROUBLED DEBT RESTRUCTURING
In June 2003, Amazonia and Sidor concluded the restructuring of their financial
indebtedness. Under IFRS, those companies accounted for their debt restructuring
process in accordance with the guidelines set forth by IAS 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 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. If an exchange of debt instruments or
modification of terms is accounted for as an extinguishment, any costs or fees
incurred are recognized as part of the gain or loss on the extinguishment. If
the exchange or modification is not accounted for as an extinguishment, any
costs or fees incurred are an adjustment to the carrying amount of the liability
and are amortized over the remaining term of the modified loan. As the terms of
Sidor's new debt were deemed to be substantially different (as this term is
defined by IAS 39), that company recorded a USD59.5 million gain on
restructuring in fiscal 2003.
Under US GAAP, Sidor followed the provisions contained in Statement of Financial
Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled
Debt Restructurings" ("SFAS 15") which states that in the case of a troubled
debt restructuring (as this term is defined by SFAS 15) involving a cash payment
and a modification of terms, a debtor shall reduce the carrying amount of the
payable by the total fair value of the assets transferred and no gain on
restructuring of payables shall be recognized unless the remaining carrying
amount of the payable exceeds the total future cash payments (including amounts
contingently payable) specified by the terms of the debt remaining unsettled
after the restructuring. Future interest expense, if any, shall be determined by
applying the interest rate that equates the present value of the future cash
payments specified by the new terms (excluding amounts contingently payable)
with the carrying amount of the payable. Based on the above, no gain on
restructuring has been recorded by Sidor under US GAAP. The US GAAP adjustment
to net income represents the difference in interest expense for the year arising
from the application of a different effective interest rate under US GAAP as
compared to IFRS.
(C) ACCOUNTING FOR PENSION PLANS
Under IFRS, the Company accounts for benefits granted to its employees in
accordance with the provisions contained in International Accounting Standard
No. 19 "Employee Benefits" ("IAS 19"), which requires an enterprise to recognize
(i) a liability when an employee has provided service in exchange for employee
benefits to be paid in the future; and (ii) an expense when the enterprise
consumes the economic benefit arising from service provided by an employee in
exchange for employee benefits.
Under US GAAP, the Company adopted Statement of Financial Accounting Standards
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R)" ("SFAS 158") effective December 31, 2006. SFAS 158 requires an employer
to recognize the funded status of each of its defined pension and postretirement
benefit plans as a net asset or liability in its consolidated balance sheet and
to recognize as a component of accumulated other comprehensive (loss) income,
net of tax, the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net periodic benefit
cost. Following the adoption of SFAS 158, additional minimum pension liabilities
and related intangible assets are no longer recognized. The provisions of SFAS
158 are to be applied on a prospective basis; therefore, prior periods presented
are not restated. The adoption of SFAS 158 resulted in the following impacts:
the recognition of USD 46,243 in accrued pension liabilities, and a net charge
of USD 24,095 (USD 51,279, net of income taxes of USD 17,801 and minority
interest of USD 9,383) to accumulated other comprehensive (loss) income.
Additionally, SFAS 158 requires an employer to measure the funded status of each
of its plans as of the date of its year-end balance sheet. This provision
becomes effective for Ternium for its December 31, 2008 year-end. The funded
status of Ternium's pension plans are currently measured as of December 31.
-44-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
Before the adoption of SFAS 158, as discussed above, the Company followed the
guidance set forth by Statement of Financial Accounting Standard No. 87
"Employers' Accounting for Pensions" ("SFAS No. 87"), which contains provisions
substantially consistent with those provided by IAS No. 19. Nevertheless,
differences arose as a consequence of the following:
a. Under IFRS Venezuela was considered a hyperinflationary country through
December 31, 2002 while under US GAAP Venezuela ceased being
hyperinflationary as from January 1, 2002. The effect of such a divergence
gave rise to differences in the accounting for employee benefits.
b. Under IFRS, past-service costs are recognized immediately as expenses,
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. Under US GAAP, past service costs are
recognized over the remaining service lives of active employees.
(D) INVENTORY VALUATION
Under both IFRS and US GAAP, the Company values inventory at the lower of cost
or net realizable value. Nevertheless, under IFRS, Venezuela was considered a
hyperinflationary country through December 31, 2002, while, under US GAAP,
Venezuela ceased being hyperinflationary as from January 1, 2002. Accordingly,
for IFRS purposes, the historical cost of inventories has been adjusted to
reflect the effects of inflation up to December 31, 2002, whereas under US GAAP,
no inflation adjustment has been recorded.
As mentioned in Note 34.a above, under IFRS the value of property, plant and
equipment has been determined based on a technical revaluation, while under US
GAAP these assets have been stated at historical cost. Accordingly, the year-end
balances and the annual depreciation charge under IFRS are higher than those
determined under US GAAP. This US GAAP adjustment reflects the reversal of the
difference between the amount of depreciation of property, plant and equipment
allocated to inventories under IFRS and US GAAP.
(E) CAPITALIZATION OF INTEREST COST
Under IFRS, the Company follows the guidance set forth by International
Accounting Standard No. 23 "Borrowing Costs" ("IAS 23"), which states that
interest cost should be recognized as an expense in the period in which it is
incurred. IAS 23 provides for an allowed alternative treatment under which
interest cost that is directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalized as part of the cost of
that asset. In case the allowed alternative treatment is applied, the amount of
interest cost eligible for capitalization should be determined in accordance
with IAS 23. However, for IFRS purposes, the Company elected to follow the
general guidance contained in IAS 23 and interest cost has been expensed as
incurred.
Under US GAAP, the Company applies the provisions of Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost" ("SFAS No. 34"),
which requires interest capitalization on assets which have a period of time to
get them ready for their intended use. In accordance with these requirements,
interest was capitalized during the years ended December 31, 2006, 2005 and
2004. The net US GAAP adjustment also includes amortization of the interest cost
capitalized.
(F) CHANGES IN FAIR VALUE OF FINANCIAL ASSETS THROUGH PROFIT AND LOSS
The Company had certain investments in trust funds. Under IFRS, the Company
carried these investments at fair value through profit or loss with unrealized
gains and losses, if any, included in the statement of income.
Under US GAAP, the Company carried these investments at market value with
material unrealized gains and losses, if any, included in Other comprehensive
income in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). At December 31, 2005, the Company settled its available-for-sale
investments and the unrealized gains recorded within other comprehensive (loss)
income were reclassified into the statement of income.
(G) EQUITY IN INVESTMENTS IN ASSOCIATED COMPANIES
Under both IFRS and US GAAP, investments in companies in which the Company
exercises significant influence, but not control, are accounted for by the
equity method. For purposes of the US GAAP reconciliation of net income and
shareholders' equity for the year ended December 31, 2004, the Company included
under this line item the effect of the differences mentioned in items a. to e.
above related to its investment in Amazonia and Sidor, as well as the following:
-45-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
- Ternium recorded an impairment provision on its investment in Amazonia in
previous years. In 2004, and due to better conditions in the economic
environment market of Sidor and based on projections of future cash flows
estimated by the Company's management, the impairment provision was
reversed under IFRS. No impairment provision has been recorded under US
GAAP.
(H) EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED OVER COST
As mentioned in Note 3(f), 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. As a result, Ternium's indirect
participation in Amazonia increased from 31.03% to 53.47%. Under IFRS, 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. 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.
Under US GAAP, the Company applied the provisions contained in Statement of
Financial Accounting Standard No. 141 "Business Combinations" ("SFAS No. 141"),
which states that the excess of fair value of acquired net assets over cost
shall be allocated as a pro rata reduction of the amounts that otherwise would
have been assigned to all of the acquired assets except (a) financial assets
other than investments accounted for by the equity method, (b) assets to be
disposed of by sale, (c) deferred tax assets, (d) prepaid assets relating to
pension or other postretirement benefit plans, and (e) any other current assets.
Accordingly, under US GAAP, the Company reversed the gain recognized for IFRS
purposes. This adjustment also reflects the effect of the above-mentioned
difference on the depreciation of fixed assets, totaling USD 20.4 million and
USD 17.8 million, in 2006 and 2005, respectively.
(I) REVALUATION RESERVE OVER PRE-ACQUISITION INTEREST IN AMAZONIA
As mentioned in Note 3(f), on February 3, 2005, the Company increased its equity
interest in Amazonia from 31.03% to 53.47%.Under IFRS, this acquisition has been
accounted for following the provisions contained in IFRS 3 and, accordingly, the
Company recorded in equity (under "Revaluation and other reserves" line item)
the excess of the fair value of its pre-acquisition interest in Amazonia's net
assets over their corresponding carrying amounts.
For US GAAP purposes, the Company applied the provisions contained in SFAS No.
141. Under SFAS No. 141, when a company increases its shareholding interest in
an equity investee, no fair value revaluation shall be made on the
pre-acquisition equity interest held. This adjustment also reflects the effect
of the above-mentioned difference on the depreciation of fixed assets.
(J) ACQUISITION OF MINORITY INTEREST IN CONTROLLED SUBSIDIARIES
As discussed in notes 1, 2 and 3 to the financial statements (i) in August 2005,
the Company acquired an additional equity interest in Amazonia through the
acquisition of Hylsamex; (ii) in October 2005, the Company acquired an
additional equity interest in Ylopa, Amazonia and Siderar through the exchange
transaction entered into with Usiminas; (iii) in February 2006, the Company
acquired an additional equity interest in Amazonia through the issuance of
shares to ISL, (iv) in April 2006, the Company acquired a 50% interest in Acerex
S.A. de C.V. through its subsidiary Hylsa S.A. de C.V., and (v) in December
2006, the Company acquired an additional 4.85% equity interest in Siderar .
Under IFRS, these acquisitions have been accounted for following the economic
entity model, which requires that the acquisition of an additional equity
interest in a controlled subsidiary be accounted for at its carrying amount at
the acquisition date, with the difference resulting from the purchase price
allocation being deducted from equity.
Under US GAAP, the acquisition of noncontrolling equity interests of a
subsidiary should be accounted for using the purchase method, which requires the
acquiring entity to allocate the cost of an acquired entity to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. Accordingly, under US GAAP, the Company (i) reversed the
amounts charged to equity under IFRS in connection with the acquisition of
additional equity interests in Amazonia, Ylopa, Siderar, and Acerex, and (ii)
allocated the difference between fair value and carrying amount arising from the
above mentioned acquisitions to net tangible and identifiable intangible assets
and goodwill.
As discussed in Note 3(f), on February 3, 2005, the Company increased its equity
interest in Amazonia from 31.03% to 53.47%. Under IFRS, this acquisition has
been accounted for following the provisions contained in IFRS 3 and,
accordingly, the Company recorded the interest attributable to minority equity
holders of Amazonia at fair value. Under IFRS, the remaining minority interest
in Amazonia (representing 5.6% and 10.9% of this company's share capital as of
December 31, 2006 and 2005, respectively) has been valued at fair value. Under
US GAAP, the interest of minority equity holders of Amazonia has been valued at
pre-acquisition carrying amount of net assets. No reconciling item has been
shown as the difference does not affect shareholders' equity or net income under
US GAAP.
-46-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
The chart below shows the net carrying amount of Property, plant and equipment
and goodwill under IFRS and US GAAP after the application of all the above
mentioned adjustments:
NET CARRYING AMOUNT AT DECEMBER 31,
-----------------------------------------------------
2006 2005
-----------------------------------------------------
IFRS US GAAP IFRS US GAAP
-----------------------------------------------------
Property, plant and equipment 5,420,683 4,122,749 5,463,871 3,967,401
Goodwill 397,943 659,818 399,694 610,330
(K) EQUITY SECURITIES ISSUANCE COST
Under IFRS, expenses incurred at December 31, 2005 in connection with the
issuance of equity securities effected in 2006 (totaling USD 5.5 million) were
deducted from shareholders' equity at that date..
Under U.S. GAAP, specific incremental costs directly attributable to a proposed
or actual offering of securities may be deferred and charged against the gross
proceeds of the offering. Accordingly, under US GAAP, this amount was deferred
in 2005, and charged against the gross proceeds of the offering in 2006,
together with additional costs of USD 17.8 million incurred in 2006, totaling
USD 23.3 million.
(L) VALUATION OF INTANGIBLE ASSETS AND OTHER ASSETS
Under both IFRS and US GAAP, the Company values intangible assets and other
assets at historical cost. Nevertheless, as mentioned in Note 34.c above, under
IFRS, Venezuela was considered a hyperinflationary country through December 31,
2002 while, under US GAAP, Venezuela ceased to be considered a hyperinflationary
country as from January 1, 2002. Accordingly, for IFRS purposes, the historical
cost of intangible assets and other assets has been adjusted to reflect the
effects of inflation up to December 31, 2002, whereas under US GAAP, no
inflation adjustment has been recorded.
(M) DEFERRED INCOME TAX
Under US GAAP the Company calculated the effect of all of the above mentioned
adjustments on deferred income taxes.
(N) MINORITY INTEREST
This adjustment represents the effect on minority interest of all the foregoing
differences between IFRS and US GAAP.
(O) NET INCOME
Under US GAAP, net income is shown net of the portion of the Company's gain
(loss) for the year attributable to minority shareholders. Accordingly, for US
GAAP purposes, net income represents the gain (loss) attributable only to
majority equity holders. Under IFRS, net income represents total gain (loss)
obtained by the Company in a given period before offsetting the portion
attributable to minority shareholders.
(P) CUMULATIVE TRANSLATION DIFFERENCES EXEMPTION
As mentioned in Note 4.(a), Ternium applied the cumulative translation
differences exemption provided by IFRS 1 and, accordingly, has set the
previously cumulative translation differences to zero at January 1, 2003. This
exemption is not available under US GAAP. Nevertheless, this circumstance does
not give rise to a difference between total shareholders' equity under IFRS and
US GAAP, but to a reclassification within shareholders' equity.
II. OTHER SIGNIFICANT US GAAP DISCLOSURE REQUIREMENTS
The following is a summary of additional financial statement disclosures
required under US GAAP:
(A) STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME UNDER US GAAP
Ternium applies the provisions contained in SFAS No. 130, "Reporting
Comprehensive Income", which requires that an enterprise (i) classify items of
other comprehensive (loss) income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive (loss) income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position.
-47-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
AS OF DECEMBER 31,
--------------------------
2006 2005
------------ ------------
Net income for the year 841,018 559,305
Foreign currency translation adjustment (25,385) (39,247)
Change in fair value of available for sale securities - (384,869)
------------ ------------
Total other comprehensive loss (25,385) (424,116)
------------ ------------
Comprehensive income 815,633 135,189
------------ ------------
The accumulated balances related to each component of other comprehensive (loss)
income were as follows:
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2006 2005
------------ ------------
Balance at beginning of the year (183,834) (144,587)
Decrease for the year (25,385) (39,247)
------------ ------------
Balance at end of the year (209,219) (183,834)
------------ ------------
CHANGES IN FUNDED
STATUS OF DEFINED
BENEFIT PLANS
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2006 2005
------------ ------------
Balance at beginning of the year - -
Cumulative effect adjustment due to the adoption of SFAS 158, net of tax and minority
interests (24,095) -
------------ ------------
Balance at end of the year (24,095) -
------------ ------------
CHANGE IN FAIR VALUE OF
FINANCIAL ASSETS
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2006 2005
------------ ------------
Balance at beginning of the year 384,869
Decrease for the year (384,869)
------------ ------------
Balance at end of the year - -
------------ ------------
-48-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
(B) SUPPLEMENTAL CASH FLOW INFORMATION
DETAILS OF ACQUISITION OF SUBSIDIARY COMPANIES AND ADDITIONAL EQUITY INTERESTS
IN CONTROLLED SUBSIDIARY COMPANIES:
FOR THE YEAR ENDED DECEMBER 31, 2006
------------------------------------------------------------------
IMPECO ACEREX HYLSAMEX AMAZONIA SIDERAR
NON-CASH ASSETS ACQUIRED:
Inventories 8,180 - - - -
Property, plant and equipment 47,825 - - - -
Other assets 53 - - - -
------------ ------------- ------------ ------------ ------------
TOTAL NON-CASH ASSETS ACQUIRED 56,058 - - - -
------------ ------------- ------------ ------------ ------------
LIABILITIES ASSUMED:
Deferred income tax (875) - - - -
------------ ------------- ------------ ------------ ------------
TOTAL LIABILITIES ASSUMED (875) - - - -
------------ ------------- ------------ ------------ ------------
NET NON-CASH ASSETS ACQUIRED - NET ASSETS ACQUIRED 55,183 - - - -
------------ ------------- ------------ ------------ ------------
NET CASH PAID FOR ACQUIRED COMPANIES 55,183 - - - -
------------ ------------- ------------ ------------ ------------
INCREASE IN SHAREHOLDING INTEREST IN SUBSIDIARY
COMPANIES:
Minority interest - 16,555 2,586 32,105 75,126
Increase in fair value of net assets acquired - - - 23,473 32,374
Goodwill - 28,049 675 23,190 -
------------ ------------- ------------ ------------ ------------
Purchase price paid - 44,604 3,261 78,768 107,500
------------ ------------- ------------ ------------ ------------
FOR THE YEAR ENDED DECEMBER 31, 2005
---------------------------------------
HYLSAMEX AMAZONIA SIDERAR
NON-CASH ASSETS ACQUIRED:
Investments 337,039 9,875 -
Trade accounts receivable 305,831 188,978 -
Other receivables 72,069 162,199 -
Inventories 345,053 284,676 -
Intangible assets 133,079 3,893 -
Property, plant and equipment 2,129,325 2,444,289 -
Other assets 7,032 36,800 -
------------ ------------ ------------
TOTAL NON-CASH ASSETS ACQUIRED 3,329,428 3,130,710 -
------------ ------------ ------------
LIABILITIES ASSUMED:
Trade accounts payable (234,325) (371,908) -
Current tax liabilities (19,000) (7,630) -
Borrowings (751,730) (656,658) -
Pension benefits (116,860) (78,425) -
Deferred income tax (449,537) (284,242) -
Other liabilities (21,521) (35,666) -
Provisions (37,163) -
------------ ------------ ------------
TOTAL LIABILITIES ASSUMED (1,592,973) (1,471,692) -
------------ ------------ ------------
NET NON-CASH ASSETS ACQUIRED 1,736,455 1,659,018 -
Cash acquired 215,411 305,342 -
------------ ------------ ------------
NET ASSETS ACQUIRED 1,951,866 1,964,360 -
------------ ------------ ------------
Minority interest (160,576) (1,338,320) -
Pre-acquisition interest in Amazonia (323,229) -
Goodwill (excess of fair value of net assets acquired over cost) 405,388 (220,767) -
Non-cash assets surrendered (82,044) -
------------ ------------ ------------
PURCHASE PRICE PAID FOR ACQUIRED COMPANIES 2,196,678 - -
Cash acquired (215,411) (305,342) -
------------ ------------ ------------
NET CASH PAID (RECEIVED) FOR ACQUIRED COMPANIES 1,981,267 (305,342) -
------------ ------------ ------------
INCREASE IN SHAREHOLDING INTEREST IN SUBSIDIARY COMPANIES:
Minority interest - 109,171 54,432
Increase in fair value of net assets acquired - 116,424 38,404
Goodwill - 149,391 61,244
------------ ------------ -----------
Purchase price paid - 374,986 154,080
------------ ------------ -----------
-49-
TERNIUM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
34 RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO US GAAP
(CONTINUED)
(C) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements," ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The provisions of this
standard apply to other accounting pronouncements that require or permit fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of SFAS 157 on the consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109 ("FIN
48"), which clarifies the accounting for uncertainty in tax positions. FIN 48
requires financial statement recognition of the impact of a tax position, if
that position is more likely than not to be sustained on examination, based on
the technical merits of the position. The provisions of FIN 48 will be effective
for financial statements issued for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The company is currently
evaluating the impact of FIN 48 on the consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets -- an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156
requires recognition of a servicing asset or liability at fair value each time
an obligation is undertaken to service a financial asset by entering into a
servicing contract. SFAS 156 also provides guidance on subsequent measurement
methods for each class of servicing assets and liabilities and specifies
financial statement presentation and disclosure requirements. This statement is
effective for fiscal years beginning after September 15, 2006. The company is
currently evaluating the impact of SFAS 156 on the consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for the Company on January 1, 2008. The Company is evaluating the
impact that the adoption of SFAS No. 159 will have on its consolidated financial
statements.
Roberto Philipps
Chief Financial Officer
-50-