Form 6-K

 

 

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

As of 2/22/2012

Ternium S.A.

(Translation of Registrant’s name into English)

Ternium S.A.

29, Avenue de la Porte-Neuve

L-2227 Luxembourg

(352) 2668-3152

(Address of principal executive offices)

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

Form 20-F  x             Form 40-F  ¨

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

Yes  ¨            No   x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):

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, 2011.

SIGNATURE

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

TERNIUM S.A.

 

By:   /s/ Pablo Brizzio     By:   /s/ Daniel Novegil
Name: Pablo Brizzio     Name: Daniel Novegil
Title: Chief Financial Officer     Title: Chief Executive Officer

Dated: February 22, 2012


TERNIUM S.A.

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

29, Avenue de la Porte-Neuve, 3rd floor

L – 2227

R.C.S. Luxembourg: B 98 668


TERNIUM S.A.

Index to financial statements

Consolidated Financial Statements

 

     Page  

Consolidated income statement for the years ended December 31, 2011, 2010 and 2009

     2   

Consolidated statement of comprehensive income for the years ended December 31, 2011, 2010 and 2009

     3   

Consolidated statement of financial position as of December 31, 2011 and 2010

     4   

Consolidated statement of changes in equity for the years ended December 31, 2011, 2010 and 2009

     5   

Consolidated statement of cash flows for the years ended December 31, 2011, 2010 and 2009

     8   

Notes to the consolidated financial statements

     9   


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

CONSOLIDATED INCOME STATEMENT

 

              Year ended December 31,  
       Notes      2011      2010      2009  

Continuing operations

            

Net sales

            9,157,198         7,382,004         4,958,983   

Cost of sales

     6        (7,094,252      (5,665,254      (4,110,370
         

 

 

    

 

 

    

 

 

 

Gross profit

            2,062,946         1,716,750         848,613   

Selling, general and administrative expenses

     7        (786,161      (665,306      (531,530

Other operating (expenses) income, net

     9        (11,566      2,493         (20,700
         

 

 

    

 

 

    

 

 

 

Operating income

            1,265,219         1,053,937         296,383   

Interest expense

            (100,712      (72,969      (105,810

Interest income

            28,689         27,347         21,141   

Interest income—Sidor financial asset

     27        11,390         61,012         135,952   

Other financial (expenses) income, net

     10        (239,997      115,112         81,639   

Equity in earnings of associated companies

     14        1,293         1,688         1,110   
         

 

 

    

 

 

    

 

 

 

Income before income tax expense

            965,882         1,186,127         430,415   

Income tax expense

     11        (315,974      (406,657      (91,314
         

 

 

    

 

 

    

 

 

 

Income from continuing operations

            649,908         779,470         339,101   
         

 

 

    

 

 

    

 

 

 

Discontinued operations

               

Income from discontinued operations

     27        —           —           428,023   
         

 

 

    

 

 

    

 

 

 

Profit for the year

            649,908         779,470         767,124   
         

 

 

    

 

 

    

 

 

 

Attributable to:

               

Equity holders of the Company

     26        513,541         622,076         717,400   

Non-controlling interest

            136,367         157,394         49,724   
         

 

 

    

 

 

    

 

 

 
            649,908         779,470         767,124   
         

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding

     26        1,968,327,917         2,004,743,442         2,004,743,442   

Basic and diluted earnings per share (expressed in USD per share) for profit:

               

- From continuing operations attributable to the equity holders of the Company

            0.26         0.31         0.15   

- From discontinued operations attributable to the equity holders of the Company

            —           —           0.21   

- For the year attributable to the equity holders of the Company

            0.26         0.31         0.36   

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

 

2


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011      2010      2009  

Profit for the year

       649,908         779,470         767,124   

Other comprehensive income:

          

Currency translation adjustment

       (433,633      35,915         (93,922

Changes in the fair value of derivatives classified as cash flow hedges

       14,134         14,729         35,881   

Income tax relating to cash flow hedges

       (6,701      (4,419      (9,112
    

 

 

    

 

 

    

 

 

 

Other comprehensive (loss) income for the year, net of tax

       (426,200      46,225         (67,153
    

 

 

    

 

 

    

 

 

 

Total comprehensive income for the year

       223,708         825,695         699,971   
    

 

 

    

 

 

    

 

 

 

Attributable to:

          

Equity holders of the Company

       172,863         684,635         698,789   

Non-controlling interest

       50,845         141,060         1,182   
    

 

 

    

 

 

    

 

 

 
       223,708         825,695         699,971   
    

 

 

    

 

 

    

 

 

 

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

 

3


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

       Notes      December 31, 2011        December 31, 2010  

ASSETS

                   

Non-current assets

                        

Property, plant and equipment, net

     12        4,032,675                4,262,896        

Intangible assets, net

     13        986,072                1,129,348        

Investments in associated companies

     14        9,311                8,212        

Sidor financial asset

     27        —                  74,549        

Other investments

     15        14,087                35,575        

Deferred tax assets

     21        8,101                12,387        

Receivables, net

     16        124,201                56,471        

Trade receivables, net

     17        7,526           5,181,973           —             5,579,438   
         

 

 

      

 

 

      

 

 

      

 

 

 

Current assets

                        

Receivables

     16        105,591                94,573        

Derivative financial instruments

     23        50                212        

Inventories, net

     18        2,137,024                1,953,390        

Trade receivables, net

     17        735,002                663,502        

Sidor financial asset

     27        136,294                183,439        

Other investments

     19        281,676                848,400        

Cash and cash equivalents

     19        2,158,591           5,554,228           1,779,416           5,522,932   
         

 

 

      

 

 

      

 

 

      

 

 

 

Non-current assets classified as held for sale

                 10,373                9,961   
              

 

 

           

 

 

 
                 5,564,601                5,532,893   
              

 

 

           

 

 

 

Total assets

                 10,746,574                11,112,331   
              

 

 

           

 

 

 

EQUITY

                        

Capital and reserves attributable to the company’s equity holders

                 5,756,372                5,880,740   

Non-controlling interest

                 1,084,827                1,135,361   
              

 

 

           

 

 

 

Total equity

                 6,841,199                7,016,101   
              

 

 

           

 

 

 

LIABILITIES

                        

Non-current liabilities

                        

Provisions

     20        15,340                16,144        

Deferred income tax

     21        748,999                877,742        

Other liabilities

     22        200,845                201,312        

Trade payables

            21,096                —          

Derivative financial instruments

     23        —                  18,822        

Borrowings

     24        948,495           1,934,775           1,426,574           2,540,594   
         

 

 

      

 

 

      

 

 

      

 

 

 

Current liabilities

                        

Current tax liabilities

            106,625                294,902        

Other liabilities

     22        114,776                123,610        

Trade payables

            677,747                588,086        

Derivative financial instruments

     23        29,902                35,955        

Borrowings

     24        1,041,550           1,970,600           513,083           1,555,636   
         

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities

                 3,905,375                4,096,230   
              

 

 

           

 

 

 

Total equity and liabilities

                 10,746,574                11,112,331   
              

 

 

           

 

 

 

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

 

4


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

    Attributable to the Company’s equity holders (1)              
    Capital
stock
(2)
    Treasury
shares
(3)
    Initial
public
offering
expenses
    Reserves
(4)
    Capital
stock issue
discount
(5)
    Currency
translation
adjustment
    Retained
earnings
    Total     Non-
controlling
interest
    Total
Equity
 

Balance at January 1, 2011

    2,004,743        —          (23,295     1,635,126        (2,324,866     (517,432     5,106,464        5,880,740        1,135,361        7,016,101   

Profit for the year

                513,541        513,541        136,367        649,908   

Other comprehensive income (loss) for the year

                   

Currency translation adjustment

              (346,921       (346,921     (86,712     (433,633

Cash flow hedges, net of tax

          6,243              6,243        1,190        7,433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

    —          —          —          6,243        —          (346,921     513,541        172,863        50,845        223,708   

Repurchase of own shares to Usiminas (3)

      (150,000               (150,000       (150,000

Dividends paid in cash (6)

          (99,329         (47,902     (147,231       (147,231

Dividends paid in cash by subsidiary companies

                  —          (140,579     (140,579

Contributions from non-controlling shareholders in consolidated subsidiaries

                  —          39,200        39,200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    2,004,743        (150,000     (23,295     1,542,040        (2,324,866     (864,353     5,572,103        5,756,372        1,084,827        6,841,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 25 (iii).

 

(2)

The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD1.00 per share. As of December 31, 2011, there were 2,004,743,442 shares issued. All issued shares are fully paid.

 

(3)

See Note 30.

 

(4)

Include legal reserve under Luxembourg law for USD 200.5 million, undistributable reserves under Luxembourg law for USD 1.4 billion, hedge accounting reserve, net of tax effect, for USD (14.9) million and reserves related to the acquisition of non-controlling interest in subsidiaries according to IAS 27 for USD (58.5) million.

 

(5)

Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.

 

(6)

Represents USD 0.075 per share (USD 0.75 per ADS).

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

 

5


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

    Attributable to the Company’s equity holders (1)              
    Capital
stock (2)
    Initial
public
offering
expenses
    Reserves (3)     Capital
stock issue
discount (4)
    Currency
translation
adjustment
    Retained
earnings
    Total     Non-
controlling
interest
    Total
Equity
 

Balance at January 1, 2010

    2,004,743        (23,295     1,726,216        (2,324,866     (570,844     4,484,388        5,296,342        964,897        6,261,239   

Profit for the year

              622,076        622,076        157,394        779,470   

Other comprehensive income (loss) for the year:

                 

Currency translation adjustment

            53,412          53,412        (17,497     35,915   

Cash flow hedges, net of tax

        9,147              9,147        1,163        10,310   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

        9,147          53,412        622,076        684,635        141,060        825,695   

Dividends paid in cash (5)

        (100,237           (100,237       (100,237

Dividends paid in cash by subsidiary companies

                  (38,304     (38,304

Contributions from non-controlling shareholders in consolidated subsidiaries

                  4,900        4,900   

Acquisition of business (See Note 3)

                  62,808        62,808   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    2,004,743        (23,295     1,635,126        (2,324,866     (517,432     5,106,464        5,880,740        1,135,361        7,016,101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 25 (iii).

 

(2)

The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD1.00 per share. As of December 31, 2010, there were 2,004,743,442 shares issued. All issued shares are fully paid.

 

(3)

Include legal reserve under Luxembourg law for USD 200.5 million, distributable reserves under Luxembourg law for USD 101.4 million, undistributable reserves under Luxembourg law for USD 1.4 billion, hedge accounting reserve, net of tax effect, for USD (22.4) million and reserves related to the acquisition of non-controlling interest in subsidiaries according to IAS 27 for USD (58.5) million.

 

(4)

Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.

 

(5)

Represents USD 0.05 per share (USD 0.50 per ADS).

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

 

6


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

    Attributable to the Company’s equity holders (1)              
    Capital
stock (2)
    Initial
public
offering
expenses
    Reserves     Capital
stock issue
discount (3)
    Currency
translation
adjustment
    Retained
earnings
    Total     Non-
controlling
interest
    Total
Equity
 

Balance at January 1, 2009

    2,004,743        (23,295     1,702,285        (2,324,866     (528,485     3,766,988        4,597,370        964,094        5,561,464   

Profit for the year

              717,400        717,400        49,724        767,124   

Other comprehensive income (loss) for the year

                 

Currency translation adjustment

            (42,359       (42,359     (51,563     (93,922

Cash flow hedges, net of tax

        23,748              23,748        3,021        26,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) for the year

        23,748          (42,359     717,400        698,789        1,182        699,971   

Acquisition of non-controlling interest (4)

        183              183        (379     (196
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

    2,004,743        (23,295     1,726,216        (2,324,866     (570,844     4,484,388        5,296,342        964,897        6,261,239   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 25 (iii).

 

(2)

The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD1.00 per share. As of December 31, 2009, there were 2,004,743,442 shares issued. All issued shares are fully paid.

 

(3)

Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.

 

(4)

On February 5, 2009, Ternium Internacional España S.L.U. acquired from its related company Siderca S.A.I.C., 53,452 shares of Siderar S.A.I.C., representing 0.015% of that company’s share capital, for an aggregate purchase price of USD 196 thousand. After this acquisition, Ternium increased its ownership in Siderar to 60.94%.

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 being recorded directly in equity.

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

 

7


TERNIUM S.A.

Consolidated financial statements

as of December 31, 2011 and 2010 and

for the years ended December 31, 2011, 2010 and 2009

(All amounts in USD thousands)

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

           Year ended December 31,  
       Notes   2011      2010      2009  

Cash flows from operating activities

            

Income from continuing operations:

         649,908         779,470         339,101   

Adjustments for:

            

Depreciation and amortization

     12 & 13     405,842         383,300         385,105   

Income tax accruals less payments

     31 (b)     (255,945      226,820         (49,342

Equity in earnings of associated companies

     14     (1,293      (1,688      (1,110

Interest accruals less payments

     31 (b)     43,047         (59      10,706   

Impairment charge

     25 (ii)     —           —           27,022   

Changes in provisions

     20     29,932         5,543         4,614   

Changes in working capital

     31 (b)     (397,806      (447,973      635,179   

Interest income—Sidor financial asset

     27 (i)     (11,390      (61,012      (135,952

Net foreign exchange results and others

         184,840         (77,576      (53,565
      

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

         647,135         806,825         1,161,758   
      

 

 

    

 

 

    

 

 

 

Cash flows from investing activities

            

Capital expenditures

     12 & 13     (601,343      (350,124      (208,590

Acquisition of business:

            

Purchase consideration

     3     —           (75,000      (196

Cash acquired

     3     —           6,593         —     

Decrease (Increase) in other investments

     15 & 19     588,212         (820,672      43,163   

Proceeds from the sale of property, plant and equipment

         1,696         1,693         3,245   

Proceeds from Sidor financial asset

     27     133,084         767,382         953,611   

Dividends received from associated companies

     14     —           302         —     

Contributions in associated companies

     14     —           (302      —     
      

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

         121,649         (470,128      791,233   
      

 

 

    

 

 

    

 

 

 

Cash flows from financing activities

            

Dividends paid in cash to company’s shareholders

         (147,231      (100,237      —     

Dividends paid in cash by subsidiary companies

         (140,579      (38,304      —     

Contributions from non-controlling shareholders in consolidated subsidiaries

         39,200         4,900         —     

Repurchase of treasury shares

     30     (150,000      —           —     

Proceeds from borrowings

         666,180         35,441         219,037   

Repayments of borrowings

         (632,140      (555,918      (1,141,625
      

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

         (364,570      (654,118      (922,588
      

 

 

    

 

 

    

 

 

 
      

 

 

    

 

 

    

 

 

 

Increase (Decrease) in cash and cash equivalents

         404,214         (317,421      1,030,403   
      

 

 

    

 

 

    

 

 

 

Movement in cash and cash equivalents

            

At January 1,

         1,779,416         2,095,798         1,065,552   

Effect of exchange rate changes

         (25,039      1,039         (157

Increase (Decrease) in cash and cash equivalents

         404,214         (317,421      1,030,403   
      

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at December 31, (1)

     19     2,158,591         1,779,416         2,095,798   
      

 

 

    

 

 

    

 

 

 

 

(1)

In addition, the Company had restricted cash for USD 248 and USD 12,343 as of December 31, 2011 and 2010, respectively. As of December 31, 2009, there were no restricted cash. Additionally, the Company had other investments with a maturity of more than three months for USD 281,676 and USD 848,400 at December 31, 2011 and 2010, respectively.

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

 

8


TERNIUM S.A.

Notes to the Consolidated Financial Statements

INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

  1

General information

 

  2

Basis of presentation

 

  3

Acquisition of business

 

  4

Accounting policies

 

  5

Segment information

 

  6

Cost of sales

 

  7

Selling, general and administrative expenses

 

  8

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

 

  9

Other operating (expenses) income, net

 

  10

Other financial (expenses) income, net

 

  11

Income tax expense

 

  12

Property, plant and equipment, net

 

  13

Intangible assets, net

 

  14

Investments in associated companies

 

  15

Other investments, net—non current

 

  16

Receivables, net—non current and current

 

  17

Trade receivables, net—non current and current

 

  18

Inventories, net

 

  19

Cash, cash equivalents and other investments

 

  20

Allowances and Provisions—non current and current

 

  21

Deferred income tax

 

  22

Other liabilities—non current and current

 

  23

Derivative financial instruments

 

  24

Borrowings

 

  25

Contingencies, commitments and restrictions on the distribution of profits

 

  26

Earnings per share

 

  27

Discontinued operations—Nationalization of Sidor

 

  28

Related party transactions

 

  29

Investments in Mexico

 

  30

Repurchase of Shares from Usiminas concurrently with secondary public offering

 

  31

Other required disclosures

 

  32

Recently issued accounting pronouncements

 

  33

Financial risk management

 

  34

Subsequent events—Share purchase agreement of Usiminas

 

 

9


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

1 General information

Ternium S.A. (the “Company” or “Ternium”), was incorporated on December 22, 2003 to hold investments in flat and long steel manufacturing and distributing companies. The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD1.00 per share. As of December 31, 2011, there were 2,004,743,442 shares issued. All issued shares are fully paid.

Following a corporate reorganization carried out during fiscal year 2005, in January 2006 the Company successfully completed its registration process with the United States Securities and Exchange Commission (“SEC”). Ternium’s ADSs began trading on the New York Stock Exchange under the symbol “TX” on February 1, 2006. The Company’s initial public offering was settled on February 6, 2006. On January 31, 2011, the Company filed with the SEC a registration statement on form F-3 relating to sales of equity and debt securities.

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

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

As part of the Company’s corporate reorganization in connection with the termination of Luxembourg’s 1929 holding company regime, on December 6, 2010, the Company contributed its equity holdings in all its subsidiaries and all its financial assets to its Luxembourg wholly-owned subsidiary Ternium Investments S.à.r.l., or Ternium Investments, in exchange for newly issued corporate units of Ternium Investments. As the assets contributed were recorded at their historical carrying amount in accordance with Luxembourg GAAP, the Company’s December 2010 contribution of such assets to Ternium Investments resulted in a non-taxable revaluation of the accounting value of the Company’s assets under Luxembourg GAAP. The amount of the December 2010 revaluation was equal to the difference between the historical carrying amounts of the assets contributed and the value at which such assets were contributed and amounted to USD4.0 billion. However, for the purpose of these consolidated financial statements, the assets contributed by Ternium to its wholly-owned subsidiary Ternium Investments were recorded based on their historical carrying amounts in accordance with IFRS, with no impact on the financial statements.

Following the completion of the corporate reorganization, and upon its conversion into an ordinary Luxembourg holding company, the Company voluntarily recorded a special reserve exclusively for tax-basis purposes. As of December 31, 2011 and 2010, this special tax reserve amounted to USD 7.7 billion and USD 7.9 billion, respectively. The Company expects that, as a result of its corporate reorganization, its current overall tax burden will not increase, as all or substantially all of its dividend income will come from high income tax jurisdictions. In addition, the Company expects that dividend distributions for the foreseeable future will be imputed to the special reserve and therefore should be exempt from Luxembourg withholding tax under current Luxembourg law.

2 Basis of presentation

These consolidated financial statements have been prepared in accordance with IFRS (International Financial Reporting Standards) issued and effective or issued and early adopted as at the time of preparing these statements (February 2012), as issued by the International Accounting Standards Board, and adopted by the European Union. These consolidated financial statements are presented in thousands of United States dollars (“USD”), except otherwise indicated.

Elimination 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.

Certain comparative amounts have been reclassified to conform to changes in presentation in the current period. These reclassifications do not have a material effect on the Company’s consolidated financial statements.

These consolidated financial statements have been approved for issue by the Board of Directors on February 22, 2012.

 

10


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

2 Basis of presentation (continued)

 

Detailed below are the companies whose financial statements have been included in these consolidated financial statements.

 

xxxx xxxx xxxx xxxx xxxx

Company

 

Country of Organization

    

Main activity

  Percentage of ownership
at December 31,
 
         2011     2010     2009  

Ternium S.A.

  Luxembourg      Holding     100.00     100.00     100.00

Ternium Investments S.à.r.l. (1)

  Luxembourg      Holding     100.00     100.00     —     

Ternium Solutions A.G. (2)

  Switzerland      Services     100.00     —          —     

Ternium Brasil S.A. (3)

  Brazil      Holding     100.00     100.00     100.00

Siderúrgica do Norte Fluminense S.A. (4)

  Brazil      Manufacturing and selling of steel products     100.00     100.00     —     

Ylopa—Servicos de Consultadoria Lda. (5)

  Portugal      Holding     —          94.38     94.38

Consorcio Siderurgia Amazonia S.L.U. (6)

  Spain      Holding     94.38     94.38     94.38

Secor—Servicios Corporativos S.A. (6)

  Venezuela      Holding     94.38     94.38     94.38

Ternium Internacional España S.L.U. (3)

  Spain      Marketing of steel products     100.00     100.00     100.00

Siderar S.A.I.C. (7)

  Argentina      Manufacturing and selling of flat steel products     60.94     60.94     60.94

Impeco S.A. (8)

  Argentina      Manufacturing of pipe products     60.97     60.97     60.97

Prosid Investments S.C.A. (8)

  Uruguay      Holding     60.94     60.94     60.94

Inversiones Basilea S.A. (9)

  Chile      Purchase and sale of real estate and other     60.94     60.94     60.94

Ternium Mexico S.A. de C.V. (10)

  Mexico      Holding     88.72     88.72     88.71

Hylsa S.A. de C.V. (11)

  Mexico      Manufacturing and selling of steel products     88.72     88.72     88.71

Las Encinas S.A. de C.V. (11)

  Mexico      Exploration, exploitation and pelletizing of iron ore     88.72     88.72     88.71

Ferropak Comercial S.A. de C.V. (11)

  Mexico      Scrap services company     88.72     88.72     88.71

Ferropak Servicios S.A. de C.V. (11)

  Mexico      Services     88.72     88.72     88.71

Galvacer America Inc (11)

  USA      Distributing company     88.72     88.72     88.71

Galvamet America Corp (11)

  USA      Manufacturing and selling of insulated panel products     88.72     88.72     88.71

Transamerica E. & I. Trading Corp (11)

  USA      Scrap services company     88.72     88.72     88.71

Técnica Industrial S.A. de C.V. (11)

  Mexico      Services     88.72     88.72     88.71

Sefimsa S.A. de C.V. (11)

  Mexico      Financial Services     88.72     88.72     88.71

Ecore Holding S. de R.L. de C.V. (11)

  Mexico      Holding     88.72     88.72     88.71

Neotec L.L.C. (11)

  USA      Holding     88.72     88.72     88.71

Treasury Services S.A. de C.V. (11)

  Mexico      Financial Services     88.72     88.72     88.71

APM, S.A. de C.V. (11)

  Mexico      Manufacturing and selling of steel products     88.72     88.72     88.71

Acedor, S.A. de C.V. (11)

  Mexico      Holding     88.72     88.72     88.71

 

11


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

2 Basis of presentation (continued)

 

Company

 

Country of
Organization

  

Main activity

  Percentage of ownership
at December 31,
 
       2011     2010     2009  

Empresas Stabilit S.A. de C.V. (12)

  Mexico    Holding     —          88.72     88.71

Acerus S.A. de C.V. (11)

  Mexico    Manufacturing and selling of steel products     88.72     88.72     88.71

Imsa Monclova S.A. de C.V. (11)

  Mexico    Services     88.72     88.72     88.71

Ternium Internacional Guatemala S.A. (13)

  Guatemala    Selling of steel products     99.98     88.72     88.71

Corporativo Grupo Imsa S.A. de C.V. (11)

  Mexico    Services     88.72     88.72     88.71

Ternium USA Inc. (11)

  USA    Manufacturing and selling of steel products     88.72     88.72     88.71

Consorcio Minero Benito Juarez Peña Colorada

S.A.de C.V. (14)

  Mexico    Exploration, exploitation and pelletizing of iron ore     44.36     44.36     44.36

Peña Colorada Servicios S.A. de C.V. (14)

  Mexico    Services     44.36     44.36     44.36

Servicios Integrales Nova de Monterrey S.A. de

C.V. (15)

  Mexico    Medical and Social Services     66.09     66.09     66.09

Ternium Guatemala S.A. (16)

  Guatemala    Manufacturing and selling of steel products     —          88.72     88.71

Ternium Internacional Nicaragua S.A.

  Nicaragua    Manufacturing and selling of steel products     99.38     88.18     88.18

Ternium Internacional Honduras S.A. de C.V.

  Honduras    Manufacturing and selling of steel products     99.18     88.01     88.00

Ternium Internacional El Salvador, S.A. de C.V.

  El Salvador    Manufacturing and selling of steel products     99.91     88.66     88.65

Ternium Internacional Costa Rica S.A.

  Costa Rica    Manufacturing and selling of steel products     99.98     88.72     88.71

Ferrasa S.A.S. (17)

  Colombia    Manufacturing and selling of steel products     54.00     54.00     —     

Perfilamos del Cauca S.A.S. (17)

  Colombia    Manufacturing and selling of steel products     54.00     54.00     —     

Figuraciones S.A.S. (17)

  Colombia    Manufacturing and selling of steel products     54.00     54.00     —     

Siderúrgica de Caldas S.A.S. (17)

  Colombia    Manufacturing and selling of steel products     54.00     54.00     —     

Procesadora de Materiales Industriales S.A.

  Colombia    Scrap services company     32.40     32.40     —     

Recolectora Industrial de Colombia S.A. (18)

  Colombia    Scrap services company     —          28.70     —     

Desechos Industriales de Colombia S.A. (18)

  Colombia    Scrap services company     —          29.70     —     

Tenigal S. de R.L. de C.V. (19)

  Mexico    Manufacturing and selling of steel products     51.00     51.00     —     

Ternium Investments Switzerland AG (3)

  Switzerland    Holding     100.00     100.00     —     

Ternium Internacional S.A. (20)

  Uruguay    Holding and marketing of steel products     100.00     100.00     100.00

Ternium International Ecuador S.A. (21)

  Ecuador    Marketing of steel products     100.00     100.00     100.00

 

12


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

2 Basis of presentation (continued)

 

 

xxxx xxxx xxxx xxxx xxxx

Company

 

Country of
Organization

    

Main activity

  Percentage of ownership
at December 31,
 
         2011     2010     2009  

Ternium International USA Corporation (21)

  USA      Marketing of steel products     100.00     100.00     100.00

Ternium Internationaal B.V. (21)

  Netherlands      Marketing of steel products     100.00     100.00     100.00

Ternium Internacional Perú S.A. (21)

  Peru      Marketing of steel products     100.00     100.00     100.00

Ternium Internacional de Colombia S.A.S. (formerly Ternium Internacional de Colombia S.A.) (21)

  Colombia      Marketing of steel products     100.00     100.00     100.00

Ternium Procurement S.A. (20)

  Uruguay      Procurement services     100.00     100.00     100.00

Ternium International Inc. (20)

  Panama      Marketing of steel products     100.00     100.00     100.00

Ternium Engineering & Services S.A. (22)

  Uruguay      Engineering and other services     100.00     100.00     100.00

Ternium Ingeniería y Servicios de Argentina S.A.

  Argentina      Engineering and other services     100.00     100.00     100.00

Ternium Ingeniería y Servicios de Mexico S.A. de C.V.

  Mexico      Engineering and other services     100.00     100.00     100.00

Ternium Treasury Services S.A. (20)

  Uruguay      Financial Services     100.00     100.00     100.00

Ternium Treasury Services B.V. (20)

  Netherlands      Financial Services     100.00     100.00     100.00

Ferrasa Panamá, S.A. (23)

  Panama      Manufacturing and selling of steel products     54.00     54.00     —     

Aceros Transformados de Panamá, S.A. (23)

  Panama      Manufacturing and selling of steel products     54.00     54.00     —     

Ternium Investments S.A. (formerly Dirken Company S.A.) (24)

  Uruguay      Holding     —          —          100.00

 

(1)

Incorporated in the fourth quarter of 2010.

(2)

Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%. Incorporated in the first quarter of 2011.

(3)

Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%.

(4)

Indirectly through Ternium Brasil S.A. Total voting rights held: 100.00%. Incorporated during 2010.

(5)

This company was dissolved as of December 27, 2011.

(6)

Since December 27, 2011, indirectly through Ternium Investments S.á.r.l. (85.62%) and Prosid Investments S.C.A. (8.76%). Total voting rights held: 100.00%. Before that, indirectly through Ylopa – Servicos de Consultadoría Lda.

(7)

Indirectly through Ternium Internacional España S.L.U. Total voting rights held: 60.94%.

(8)

Indirectly through Siderar S.A.I.C and Ternium Internacional S.A. Total voting rights held 100.00%.

(9)

Indirectly through Siderar S.A.I.C. Total voting rights held 100.00%.

(10)

Indirectly through Siderar S.A.I.C., Inversiones Basilea S.A. and Ternium Internacional España S.L.U. Total voting rights held 99.93%.

(11)

Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 100.00%.

(12)

Merged with Ternium Mexico S.A. de C.V. during the fourth quarter of 2011.

(13)

Indirectly through Ternium Internacional España S.L.U. Total voting rights held: 100%.

(14)

Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 50.00%. Consolidated under the proportionate consolidation method.

(15)

Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 74.50%.

(16)

This company was merged with Ternium Internacional Guatemala, S.A. during the first quarter of 2011.

(17)

Indirectly through Ternium Internacional España S.L.U. Total voting rights held: 54.00%. Incorporated during 2010. (See note 3).

(18)

These companies were sold during the second quarter of 2011.

(19)

Indirectly through Ternium Internacional España S.L.U. Total voting rights held: 51.00%. Incorporated during 2010. (See note 29).

(20)

Indirectly through Ternium Investments Switzerland AG. Total voting rights held: 100.00%.

(21)

Indirectly through Ternium Internacional S.A. Total voting rights held 100.00%.

(22)

Indirectly through Ternium Internacional Inc. Total voting rights held 100.00%.

(23)

Indirectly through Ternium Treasury Services S.A. Total voting rights held: 54.00%. Incorporated during 2010. (See note 3).

(24)

This company was dissolved as of December 6, 2010.

 

13


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

3 Acquisition of business

Ferrasa S.A.S and Ferrasa Panamá S.A.

On August 25, 2010, Ternium completed the acquisition of a 54% ownership interest in Ferrasa S.A.S., a company organized under the laws of Colombia (“Ferrasa”) through a capital contribution in the amount of USD 74.5 million. Ferrasa has a 100% ownership interest in Sidecaldas S.A.S. (“Sidecaldas”), Figuraciones S.A.S. (“Figuraciones”) and Perfilamos del Cauca S.A.S. (“Perfilamos”), all of which are also Colombian companies. Ternium has also completed the acquisition of a 54% ownership interest in Ferrasa Panamá S.A. (“Ferrasa Panamá”) and its subsidiary Aceros Transformados de Panamá S.A. (“Aceros”) for USD 0.5 million. On the mentioned date the Company obtained control over the assets and liabilities of the acquired companies.

Ferrasa is a long and flat steel products processor and distributor. Sidecaldas is a scrap-based long steel making and rolling facility, with an annual production capacity of approximately 140,000 tons. Figuraciones and Perfilamos manufacture welded steel tubes, profiles and beams. These companies have combined annual sales of approximately 300,000 tons, of which approximately 70% are long products and 30% are flat and tubular products, used mainly in the construction sector. Ferrasa Panamá is a long steel products processor and distributor based in Panama, with annual sales of approximately 8,000 tons.

The former controlling shareholders have an option to sell to Ternium, at any time, all or part of their remaining 46% interest in each of Ferrasa and Ferrasa Panamá, and Ternium has an option to purchase all or part of that remaining interest from the former controlling shareholders, at any time after the second anniversary of the closing.

Ferrasa and Ferrasa Panamá contributed revenues of USD 128.0 million and a net loss of USD 1.5 million (net of USD 1.3 million corresponding to non-controlling interests) in the period from August 25, 2010 to December 31, 2010. The fair value and book value of assets and liabilities arising from the transaction are as follows:

 

September 30,
       Fair value  

Property, plant and equipment

       140,118   

Previously recognized goodwill

       —     

Customer relationships

       15,403   

Trademarks

       4,407   

Other contractual rights

       4,064   

Other intangible assets

       42   

Inventories

       76,771   

Cash and cash equivalents

       6,593   

Deferred tax assets

       7,832   

Borrowings

       (134,120

Other assets and liabilities, net

       15,141   

Non-controlling interest in subsidiaries

       (236
    

 

 

 

Net

       136,015   

Non-controlling interest

       (62,572

Goodwill

       1,557   
    

 

 

 

Total Purchase Consideration

       75,000   

The Company accounts for the acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values.

The application of the purchase method requires certain estimates and assumptions especially concerning the determination of the fair values of the acquired intangible assets and property, plant and equipment as well as the liabilities assumed at the date of the acquisition. Moreover the useful lives of the acquired intangible assets, property, plant and equipment have to be determined. The judgments made in the context of the purchase price allocation can materially impact the Company’s future results of operations. The valuations are based on information available at the acquisition date.

 

14


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

3 Acquisition of business (continued)

 

Significant judgments and assumptions made regarding the purchase price allocation in the course of the acquisition of Ferrasa and Ferrasa Panamá, included the following:

For valuation of customer relationship the excess earnings method was used, which is based on calculating the present value of the future cash flows of the future economic benefits during the remaining useful life attributable to the customer base. Customer relationships are being amortized over an estimated useful life of 10 years.

For the valuation of brands, the relief-from-royalty method was applied, both with the value that a third party would have paid for these trademarks. The expected amortization of these assets is determined on the basis of the expected benefit the asset provides the entity (e.g. expected decline in value). For valuation of the other contractual rights, the postulated loss of income method was used. Both intangible assets are being amortized over an estimated useful life of 10 years.

The valuation of acquired intangible assets is to a great extent based on anticipated cash flows. Nevertheless it is possible that actual outcomes could vary significantly from such estimated future cash flows.

For property, plant and equipment, fair values were derived from expert appraisals.

The valuation of inventories at the date of acquisition was based on the corresponding selling price less estimated costs of completion or estimated costs to make the sale.

The excess of the purchase price for Ferrasa and Ferrasa Panamá over the estimated fair values of the net assets acquired is recorded as goodwill amounting to USD 1.6 million as of August 25, 2010. Goodwill derives mainly from the fair value of the going concern element of the acquiree.

The Company has chosen to recognize the non-controlling interest at its proportionate share in net identifiable assets acquired.

Acquisition related costs are included in the income statement.

Pro forma data for the acquisitions

Had the Ferrasa transaction been consummated on January 1, 2010, unaudited pro forma net sales and net loss totaling USD 336 million and USD 4 million, respectively, would have been included in Ternium’s financial statements for the year ended December 31, 2010. These pro forma results were prepared based on unaudited accounting records maintained prior to such transaction and adjusted by depreciation and amortization of tangible and intangible assets and interest expense of the borrowing incurred for the transaction as described above.

4 Accounting policies

These Consolidated Financial Statements have been prepared following the same accounting policies used in the preparation of the audited Consolidated Financial Statements for the year ended December 31, 2010.

The following is a summary of the principal accounting policies followed in the preparation of these consolidated financial statements:

(a) Group accounting

(1) Subsidiary companies and transactions with non-controlling interests

Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases.

The Company uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at the fair values at the acquisition date. Indemnification assets are recognized at the same time that the Company recognizes the indemnified item and measures them on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. The Company measures the value of a reacquired right recognized as an intangible asset on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals in determining its fair value.

 

15


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

On an acquisition-by-acquisition basis, the Company recognizes any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the acquiree’s net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the income statement.

The measurement period is the earlier of the date that the acquirer receives the information that it is looking for or cannot obtain the information and one year after the acquisition date. Where the accounting for a business combination is not complete by the end of the reporting period in which the business combination occurred provisional amounts are reported.

The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

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

Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. However, the fact that the functional currency of some subsidiaries is their respective local currency, generates some financial gains (losses) arising from intercompany transactions, that are included in the consolidated income statement under Other financial expenses, net.

(2) Joint ventures

The Company reports its interests in jointly controlled entities using proportionate consolidation. The Company’s share of the assets, liabilities, income, expenses and cash flows of jointly controlled entities are combined on a line-by-line basis with similar items in the Company’s financial statements.

Where the Company transacts with its jointly controlled entities, unrealized profits and losses are eliminated to the extent of the Company’s interest in the joint venture.

(3) 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.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit or loss where appropriate.

(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 and presentation 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.

 

16


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(2) Subsidiary companies

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

(i) assets and liabilities are translated at the closing rate of each statement of financial position;

(ii) income and expenses for each income statement are translated at average exchange rates; and

(iii) all resulting translation differences are recognized within other comprehensive income.

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

(3) Transactions in currencies other than the functional currency

Transactions in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the date of the transactions or valuation where items are re-measured.

At the end of each reporting period: (i) monetary items denominated in currencies other than the functional currency are translated using the closing rates, (ii) non-monetary items that are measured in terms of historical cost in a currency other than the functional currency are translated using the exchange rates prevailing at the date of the transactions; and (iii) non-monetary items that are measured at fair value in a currency other than the functional currency are translated using the exchange rates prevailing at the date when the fair value was determined.

Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than the functional currency are recorded as gains and losses from foreign exchange and included in “Other financial income (expenses), net” in the consolidated income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the “fair value gain or loss,” while translation differences on non-monetary financial assets such as equities classified as available for sale are included in the “available for sale reserve” in equity. Ternium had no such assets or liabilities for any of the periods presented.

(c) Financial instruments

Non derivative financial instruments

Non derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Ternium non derivative financial instruments are classified into the following categories:

 

   

Financial instruments at fair value through profit or loss: comprises mainly cash and cash equivalents and investments in debt securities held for trading;

   

Held-to-maturity instruments: measured at amortized cost using the effective interest method less impairment losses. As of December 31, 2011 and 2010, there are no instruments classified under this category;

   

Loans and receivables: measured at amortized cost using the effective interest method less impairment losses;

   

Available-for-sale (“AFS”) financial assets: gains and losses arising from changes in fair value are recognized within other comprehensive income (“OCI”) with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognized directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in OCI is included in the income statement for the period. As of December 31, 2011 and 2010, there are no instruments classified under this category;

   

Other financial liabilities: measured at amortized cost using the effective interest method.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial assets and liabilities are recognized and derecognized on the settlement date.

Financial assets are initially measured at fair value, net of transaction costs, except for those financial assets classified as financial assets at fair value through profit or loss.

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.

 

17


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

Impairment of financial assets

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Company first assesses whether objective evidence of impairment exists.

For loans and receivables category and for held-to-maturity investments, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the consolidated income statement.

Derivative financial instruments

Information about accounting for derivative financial instruments and hedging activities is included in Note 33 “Financial Risk management”.

(d) Property, plant and equipment

Land and buildings comprise mainly factories and offices. All property, plant and equipment are recognized at historical acquisition or construction cost less accumulated depreciation and accumulated impairment (if applicable), except for land, which is carried at acquisition cost less accumulated impairment (if applicable). There are no material residual values for property, plant and equipment items.

Major overhaul and rebuilding expenditures are recognized as a separate asset when future economic benefits are expected from the item, and the cost can be measured reliably.

Ordinary maintenance expenses on manufacturing properties are recorded as cost of products sold in the period in which they are incurred.

Where a tangible fixed asset comprises major components having different useful lives, these components are accounted for as separate items.

Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Depreciation method is reviewed at each year end. Depreciation is calculated using the straight-line method to amortize the cost of each asset to its residual value over its estimated useful life as follows:

 

September 30,

Land

       No Depreciation   

Buildings and improvements

       10-45 years   

Production equipment

       5-20 years   

Vehicles, furniture and fixtures and other equipment

       5-10 years   

Property, plant and equipment used in mining activities are depreciated over its useful life or over the remaining life of the mine if shorter and there is no alternative use possible.

The assets’ useful lives are reviewed, and adjusted if appropriate, at each year end.

Gains and losses on disposals are determined by comparing the proceeds with the corresponding carrying amounts and are included in the income statement.

If the carrying amount of an asset were greater than its estimated recoverable amount, it would be written down to its recoverable amount. (see Note 4 (f) “Impairment”).

 

18


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(e) Intangible assets

(1) Information system projects

Generally, costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. However, costs directly related to the acquisition and implementation of information systems are recognized as intangible assets if they have a probable economic benefit exceeding the cost beyond one year and comply with the recognition criteria of IAS 38.

Information system projects recognized as assets are amortized using the straight-line method over their useful lives, not exceeding a period of 3 years. Amortization charges are included in cost of sales, selling, general and administrative expenses.

(2) Mining concessions

Mining license was recognized as a separate intangible asset upon the acquisition of the investment in Mexico and comprises the right to exploit the mines and is recognized at its fair value at acquisition date less accumulated amortization.

These mining concessions were granted for a 50-year period; following the expiration of the initial concession term, the concessions are renewable for an additional 50- year term in accordance with, and subject to the procedures set forth in, applicable Mexican mining law.

Amortization charge is calculated by using the unit-of-production method, on the basis of actual mineral extracted in each period compared to the estimated mineral reserves, and is included in cost of sales. Any change in the estimation of reserves is accounted for prospectively. The resulting amortization rate for the years ended December 31, 2011 and 2010, is approximately 9% per year.

(3) Exploration costs

Exploration and evaluation costs are measured at cost. Costs directly associated with exploration activities and leasehold acquisition costs are capitalized until the determination of reserves is evaluated. If it is determined that commercial discovery has not been achieved, these costs are charged to expense. If it is determined that commercial discovery has been achieved, costs incurred are reclassified into Property, Plant and Equipment or Intangible Assets according to the nature of the expenditure and amortization starts. Exploration costs are tested for impairment annually. No impairment losses have been recorded for any of the years presented.

(4) Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of Ternium’s participation in acquired companies’ net assets at the acquisition date. Under IFRS 3 (revised), goodwill is considered to have an indefinite life and not amortized, but is subject to annual impairment testing.

Goodwill is allocated to Cash-generating units (“CGU”) for the purpose of impairment testing. The allocation is made to those cash-generating units expected to benefit from the business combination which generated the goodwill being tested.

As of December 31, 2011, the carrying amount of goodwill allocated to the Mexico CGU was USD 662.3 million, while the carrying amount of goodwill allocated to other CGUs totaled USD 1.5 million.

(5) Research and development

Research expenditures are recognized as expenses as incurred. Development costs are recorded as cost of sales in the income statement as incurred because they do not fulfill the criteria for capitalization. Research and development expenditures for the years ended December 31, 2011, 2010 and 2009 totaled USD 8.8 million, USD 5.7 million and USD 6.0 million, respectively.

(6) Customer relationships acquired in a business combination

In accordance with IFRS 3 (revised) and IAS 38, Ternium has recognized the value of customer relationships separately from goodwill in connection with the acquisitions of Grupo Imsa and Ferrasa S.A.S.

Customer relationships are amortized using the straight-line method over a useful life of approximately 10 years.

(7) Trademarks acquired in a business combination

In accordance with IFRS 3 and IAS 38, Ternium has recognized the value of trademarks separately from goodwill in connection with the acquisitions of Grupo Imsa and Ferrasa S.A.S.

Trademarks are amortized using the straight-line method over a useful life of between 5 to 10 years.

 

19


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(f) Impairment

Assets that have an indefinite useful life (including goodwill) are not subject to amortization and are tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortization and investments in affiliates are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and the value in use.

To carry out these tests, assets are grouped at the lowest levels for which there are separately identifiable cash flows (each, a CGU). When evaluating long-lived assets for potential impairment, the Company estimates the recoverable amount based on the value in use of the corresponding CGU. The value in use of each CGU is determined on the basis of the present value of net future cash flows which will be generated by the assets tested.

Determining the present value of future cash flows involves highly sensitive estimates and assumptions specific to the nature of each CGU’s activities, including estimates and assumptions relating to amount and timing of projected future cash flows, expected changes in market prices, expected changes in the demand of Ternium products and services, selected discount rate and selected tax rate.

Ternium uses cash flow projections for the next five years based on past performance and expectations of market development; thereafter, it uses a perpetuity rate with no growth increase. Application of the discounted cash flow (DCF) method to determine the value in use of a CGU begins with a forecast of all expected future net cash flows. Variables considered in forecasts include the gross domestic product (GDP) growth rates of the country under study and their correlation with steel demand, level of steel prices and estimated raw material costs as observed in industry reports.

Cash flows are discounted at post-tax rates that reflect specific country and currency risks associated with the cash flow projections. The discount rates used are based on Ternium’s weighted average cost of capital (WACC), which is considered to be a good indicator of cost of capital. As of December 31, 2011, the discount rate used to test goodwill allocated to Mexico CGU for impairment was 11.4%.

As a result of the above factors, actual cash flows and values could vary significantly from the forecasted future cash flows and related values derived using discounting techniques. Based on the information currently available, however, Ternium believes that it is not reasonably possible that the variation would cause the carrying amount to exceed the recoverable amount of the CGUs.

At December 31, 2009, an impairment provision over the agreement with Corus recognized as intangible assets, was recorded for the amount of USD 27.0 million. See note 25 (ii). At December 31, 2011 and 2010, no impairment provisions were recorded.

(g) 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.

All purchases and sales of investments are recognized on the settlement date, which is not significantly different from the trade date, which is the date that Ternium commits to purchase or sell the investment.

Income from financial instruments is recognized in Other financial income (expenses), net in the income statement. The fair value of quoted investments are based on current bid prices. If the market for a financial investment is not active or the securities are not listed, the Company estimates the fair value by using standard valuation techniques. Dividends from investments in equity instruments are recognized in the income statement when the Company’s right to receive payments is established.

(h) Inventories

Inventories are stated at the lower of cost (calculated using the first-in-first-out “FIFO” method) or net realizable value. The cost of finished goods and goods in process comprises raw materials, direct labor, depreciation, other direct costs and related production overhead costs. It excludes borrowing costs. Goods acquired in transit at year end are valued at supplier’s invoice cost.

The cost of iron ore produced in our mines comprises all direct costs necessary to extract and convert stockpiled inventories into raw materials, including stripping costs, depreciation of fixed assets related to the mining activity and amortization of mine exploration costs for those under-production mines.

The Company assesses the recoverability of its inventories considering their selling prices, if the inventories are damaged, or if they have become wholly or partially obsolete (see note 4 (x) (4)).

 

20


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(i) Trade receivables and other receivables

Trade and other receivables are carried at face value less an allowance for doubtful accounts, 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.

(j) Cash and cash equivalents

Cash and cash equivalents and highly liquid short-term securities are carried at fair market value or at a historical cost which approximates fair market value.

For purposes of the cash flow statement, cash and cash equivalents comprise cash, bank current accounts and short-term highly liquid investments (original maturity of three months or less at date of acquisition) and overdrafts.

In the consolidated statement of financial position, bank overdrafts are included in borrowings within current liabilities.

(k) Non current assets (disposal groups) classified as held for sale

Non-current assets (disposal groups) are classified as assets held for sale, complying with the recognition criteria of IFRS 5, and stated at the lower of carrying amount and fair value less cost to sell if their carrying amount is recovered principally through a sale transaction rather than through continuing use.

The carrying value of non-current assets classified as held for sale, at December 31, 2011 and 2010 totals USD 10.4 million and USD 10.0 million, respectively, which corresponds principally to land and other real estate items. Sale is expected to be completed within a one-year period.

(l) Borrowings

Borrowings are recognized initially for an amount equal to the 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 costs for issue of debt are amortized over the life of their respective debt.

(m) Income taxes — current and deferred

The current income tax charge is calculated on the basis of the tax laws in force in the countries in which Ternium and its subsidiaries operate. Management evaluates positions taken in tax returns with respect to situations in which applicable tax regulation could be subject to interpretation. A liability is recorded for tax benefits that were taken in the applicable tax return but have not been recognized for financial reporting.

Deferred income taxes are calculated using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. The principal temporary differences arise on fixed assets, intangible assets, inventories valuation and provisions for pensions. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted at year end. Under IFRS, deferred income tax assets (liabilities) are classified as non-current assets (liabilities).

Deferred tax assets are recognized to the extent it is probable that future taxable income will be available to offset temporary differences.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associated companies, except where the timing of the reversal of the temporary difference is controlled by the Company and it 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 which is determined as a percentage of taxable profit for the year.

 

21


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(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 statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at year end, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually (at year end) by independent actuaries using the projected unit credit method.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income over the employees’ expected average remaining working lives.

Past-service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.

Mexico

Ternium Mexico has defined benefit and defined contribution plans.

The valuation of the liabilities for the defined benefit employee retirement plans (pensions and seniority premiums) covers all employees and is based primarily on their years of service, their present age and their remuneration at the date of retirement. The cost of the employee retirement plans (pension, health-care expenses and seniority premiums) is recognized as an expense in the year in which services are rendered in accordance with actuarial studies made by independent 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.

The defined contribution plans provides a benefit equivalent to the capital accumulated with the company’s contributions, which are provided as a match of employees’ contributions to the plan. The plan provides vested rights according to the years of service and the cause of retirement.

Argentina

Siderar implemented an unfunded defined benefit employee retirement plan for certain senior officers. The plan is designed to provide certain benefits to those officers (additional to those contemplated under applicable Argentine labor laws) in case of terminations of the employment relationship due to certain specified events, including retirement. 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.

During 2007, Ternium launched an incentive retention program (the “Program”) applicable to certain senior officers and employees of the Company, who will be granted a number of Units throughout the duration of the Program. The value of each of these Units is based on Ternium’s shareholders’ equity (excluding non-controlling interest). Also, the beneficiaries of the Program are entitled to receive cash amounts based on (i) the amount of dividend payments made by Ternium to its shareholders, and (ii) the number of Units held by each beneficiary to the Program. Units vest ratably over a period of four years and will be redeemed by the Company ten years after grant date, with the option of an early redemption at seven years after grant date. As the cash payment of the benefit is tied to the book value of the shares, and not to their market value, Ternium valued this long-term incentive program as a long term benefit plan as classified in IAS 19.

 

22


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

As of December 31, 2011 and 2010, the outstanding liability corresponding to the Program amounts to USD 12.5 million and USD 10.8 million, respectively. The total value of the units granted to date under the program, considering the number of units and the book value per share as of December 31, 2011 and 2010, is USD 15.1 million and USD 12.6 million, respectively.

(4) Social security contributions

Social security laws in force in the countries in which the Company operates provide for pension benefits to be paid to retired employees from government pension plans and/or private fund managed plans to which employees may elect to contribute. As stipulated by the respective laws, Siderar and Ternium Mexico make monthly contributions calculated based on each employee’s salary to fund such plans. The related amounts are expensed as incurred. No additional liabilities exist once the contributions are paid.

(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) Trade payables

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

(q) 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.

(r) Borrowing Costs

Beginning on January 1, 2009, and as required by IAS 23 revised, Ternium capitalizes the borrowing costs incurred to finance construction, acquisition or production of qualifying assets. In the case of specific borrowings, Ternium determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. For general borrowings, Ternium determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that Ternium capitalizes during a period will not exceed the amount of borrowing costs incurred during that period. At December 31, 2011, the capitalized borrowing costs are not material.

(s) Cost of sales, selling, general and administrative expenses

Cost of sales and expenses are recognized in the income statement on the accrual basis of accounting.

Commissions, freight and other selling expenses, including shipping and handling costs, are recorded in Selling, general and administrative expenses in the Consolidated Income Statement.

(t) Removal of waste materials to access mineral deposits

Stripping costs (the costs associated with the removal of overburden and other waste materials) that are incurred during the development of a mine (pre-production stripping costs) are expensed when incurred, while post-production stripping costs are included in the cost of the inventory produced (that is extracted) at each mine individually during the period they are incurred.

(u) 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 26).

 

23


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(v) Derivative financial instruments and hedging activities

Ternium designates certain derivatives as hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. These transactions are classified as cash flow hedges (mainly interest rate swaps, collars, currency forward contracts on highly probable forecast transactions and commodities contracts). The effective portion of the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in OCI. Amounts accumulated in OCI are recognized in the income statement in the same period as any offsetting losses and gains on the hedged item. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. The fair value of Ternium derivative financial instruments (asset or liability) continues to be reflected in the statement of financial position.

For transactions designated and qualifying for hedge accounting, Ternium documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. At December 31, 2011, the effective portion of designated cash flow hedges amounts to USD 14.9 million (net of taxes for USD 2.9 million) and is included under “changes in the fair value of derivatives classified as cash flow hedges” line item in the statement of comprehensive income (see Note 32 (a)).

More information about accounting for derivative financial instruments and hedging activities is included in Note 34 “Financial risk management”.

(w) Segment information

Reportable operating 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 Company is not aggregating any operating segments in order to arrive at its reportable segments.

The flat steel products segment comprises the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized 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 billets (steel in its basic, semi-finished state), wire rod and bars.

The other products segment includes products other than flat and long steel, mainly pig iron, pellets and pre-engineered metal buildings.

(x) Critical Accounting Estimates

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management makes estimates and assumptions concerning the future. Actual results may differ significantly from these estimates under different assumptions or conditions.

The principal estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(1) Goodwill impairment test

Assessment of the recoverability of the carrying value of goodwill requires significant judgment. Management evaluates goodwill allocated to the operating units for impairment on an annual basis or whenever there is an impairment indicator.

Goodwill is tested at the level of the CGU. Impairment testing of the CGU is carried out and the value in use determined in accordance with the accounting policy stated in Note 4(f). The discount rates used for these tests are based on Ternium’s weighted average cost of capital adjusted for specific country and currency risks associated with the cash flow projections. The discount rate used at December 31, 2011 was 11.4% and no impairment charge resulted from the impairment test performed.

 

(2)

Income taxes

Management calculates current and deferred income taxes according to the tax laws applicable to each subsidiary in the countries in which such subsidiaries operate. However, certain adjustments necessary to determine the income tax provision are finalized only after the balance sheet is issued. In cases in which the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

 

24


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

Also, when assessing the recoverability of tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies.

(3) Loss contingencies

Ternium is subject to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business, including customer claims in which a third party is seeking reimbursement or indemnity. The Company’s liability with respect to such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Periodically, management reviews the status of each significant matter and assesses potential financial exposure. If the potential loss from the claim or proceeding is considered probable and the amount can be reasonably estimated, a liability is recorded. Management estimates the amount of such liability based on the information available and the assumptions and methods it has concluded are appropriate, in accordance with the provisions of IFRS. Accruals for such contingencies reflect a reasonable estimate of the losses to be incurred based on information available, including the relevant litigation or settlement strategy, as of the date of preparation of these financial statements. As additional information becomes available, management will reassess its evaluation of the pending claims, lawsuits and other proceedings and revise its estimates. The loss contingencies provision amounts to USD 15.3 million and USD 16.1 million as of December 31, 2011 and 2010, respectively.

(4) Allowance for obsolescence of supplies and spare parts and slow-moving inventory

Management assesses the recoverability of its inventories considering their selling prices or whether they are damaged or have become wholly or partly obsolete.

Net realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

The Company establishes an allowance for obsolete or slow-moving inventory in connection with finished goods and goods in process. The allowance for slow-moving inventory is recognized for finished goods and goods in process based on management’s analysis of their aging. In connection with supplies and spare parts, the calculation is based on management’s analysis of their aging, the capacity of such materials to be used based on their levels of preservation and maintenance, and their potential obsolescence due to technological change.

As of December 31, 2011 and 2010, the Company recorded no allowance for net realizable value and USD 60.5 million and USD 68.2 million, respectively, as allowance for obsolescence.

During 2011 and 2010, no charges were recorded in connection with net realizable value allowance. Charges to mark the inventory to net realizable value in 2009 were USD 127.6 million. Of this amount, USD 82.8 million in 2009 corresponded to inventories for shipments to the North America region, while USD 44.8 million in 2009 corresponded to inventories for exports within the South and Central America region.

The additions to the allowance for net realizable value recorded during 2009 responded to the steep fall of steel prices as a result of the global financial crisis that began in 2008. Beginning in the second half of 2008 up to the first half of 2009 average prices of flat steel products decreased 41%. Accordingly, inventory values were compared to their estimated net selling prices and written down when the selling prices were lower than historical costs. This was the case of inventories produced from third-party slabs in Mexico and certain raw materials in Argentina that had been acquired at market prices in force prior to the beginning of the global financial crisis.

(5) Valuation of the Sidor financial asset

The Sidor financial asset recorded as a result of the nationalization of Sidor was treated as a receivable and valued at its amortized cost using the applicable effective interest rate. The discount rate used to measure this receivable at amortized cost was estimated on the basis of management’s best estimate of market rates adjusted to reflect specific risks.

The initial measurement of the receivable and its subsequent measurements until November 8, 2010, were performed on the basis of its discounted amount using an annual discount rate of 14.36%. This discount rate was estimated on the basis of the yield (13.3%) of Venezuelan sovereign debt with maturities similar to that of the receivable held by Ternium against CVG; however, as the Venezuelan sovereign debt with similar maturities was governed by New York law, while the receivable with CVG was governed by Venezuelan law, the discount rate was further adjusted to adequately reflect the specific risk of Ternium’s receivable. After the rescheduling of the last unpaid installment agreed on December 18, 2010, the annual discount rate used to measure the receivable was estimated at 6.28%, on the basis of the specific risks associated to the third-party promissory notes received as guarantee for full payment of CVG obligations.

For further information on the Sidor nationalization and the rescheduling of the related receivable, refer to Note 27.

 

25


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

4 Accounting policies (continued)

 

(6)

Useful Lives and Impairment of Property, Plant and Equipment and Other Long-lived Assets

In determining useful lives, management considered, among others, the following factors: age, operating condition and level of usage and maintenance. Management conducted visual inspections for the purpose of (i) determining whether the current conditions of such assets are consistent with normal conditions of assets of similar age; (ii) confirming that the operating conditions and levels of usage of such assets are adequate and consistent with their design; (iii) establishing obsolescence levels and (iv) estimating life expectancy, all of which were used in determining useful lives. Management believes, however, that it is possible that the periods of economic utilization of property, plant and equipment may be different than the useful lives so determined. Furthermore, management believes that this accounting policy involves a critical accounting estimate because it is subject to change from period to period as a result of variations in economic conditions and business performance.

When assessing whether an impairment indicator may exist, the Company evaluates both internal and external sources of information, such as the following:

 

whether significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated;

whether market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;

whether the carrying amount of the net assets of the entity is more than its market capitalization;

whether evidence is available of obsolescence or physical damage of an asset.

whether significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite; and

whether evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

None of the Company’s CGUs were tested for impairment, other than for goodwill test (see note 4 (x) (1)), in 2011 and 2010, as no impairment indicators were identified. Furthermore, based on information currently available, management believes that the recognition of a future impairment charge is not reasonably possible.

 

(7)

Allowances for doubtful accounts

Management makes estimates of the uncollectibility of our accounts receivable. Management analyses the trade accounts receivable on a regular basis and, when aware of a third party´s inability to meet its financial commitments to the Company, managements impairs the amount due by means of a charge to the allowance for doubtful accounts. Management specifically analyses accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

Allowances for doubtful accounts are adjusted periodically in accordance with the aging of overdue accounts. For this purpose, trade accounts receivable overdue by more than 90 days, and which are not covered by a credit collateral, guarantee or similar surety, are fully provisioned. As of December 31, 2011 and 2010, allowance for doubtful accounts totals USD 16.1 million and USD 17.2 million, respectively.

 

26


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

5 Segment information

Reportable operating segments

 

September 30, September 30, September 30, September 30, September 30,
       Year ended December 31, 2011  
       Flat steel
products
     Long steel
products
     Other      Unallocated        Total  

Net sales

       7,792,045         1,217,877         147,276         —             9,157,198   

Cost of sales

       (6,138,685      (864,522      (91,045      —             (7,094,252
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Gross profit

       1,653,360         353,355         56,231         —             2,062,946   

Selling, general and administrative expenses

       (673,363      (96,832      (15,966      —             (786,161

Other operating income (expenses), net

       (14,912      3,247         99         —             (11,566
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Operating income

       965,085         259,770         40,364         —             1,265,219   
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Capital expenditures—PP&E

       470,641         70,181         12,528         —             553,350   

Depreciation—PP&E

       300,795         31,468         6,284         —             338,547   

Segment assets

                  

Inventories, net

       1,870,523         239,060         27,441         —             2,137,024   

Trade receivables, net

       588,371         143,255         10,902         —             742,528   

Property, plant and equipment, net

       3,591,733         389,820         51,122         —             4,032,675   

Intangible assets, net

       868,978         72,629         44,465         —             986,072   

Assets—discontinued operations

                136,294           136,294   

Other assets

                2,711,981           2,711,981   

 

September 30, September 30, September 30, September 30, September 30,
       Year ended December 31, 2010  
       Flat steel
products
     Long steel
products
     Other      Unallocated        Total  

Net sales

       6,376,380         833,137         172,487         —             7,382,004   

Cost of sales

       (4,932,551      (633,958      (98,745      —             (5,665,254
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Gross profit

       1,443,829         199,179         73,742         —             1,716,750   

Selling, general and administrative expenses

       (585,746      (62,419      (17,141      —             (665,306

Other operating income (expenses), net

       2,887         (506      112         —             2,493   
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Operating income

       860,970         136,254         56,713         —             1,053,937   
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Capital expenditures—PP&E

       272,623         38,123         6,172         —             316,918   

Depreciation—PP&E

       285,755         20,851         6,214         —             312,820   

Segment assets

                  

Inventories, net

       1,804,896         117,721         30,773         —             1,953,390   

Trade receivables, net

       514,521         121,872         27,109         —             663,502   

Property, plant and equipment, net

       3,831,181         378,212         53,503         —             4,262,896   

Intangible assets, net

       1,004,680         75,504         49,164         —             1,129,348   

Assets—discontinued operations

                257,988           257,988   

Other assets

                2,845,207           2,845,207   

 

27


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

5 Segment information (continued)

 

September 30, September 30, September 30, September 30, September 30,
       Year ended December 31, 2009  
       Flat steel
products
     Long steel
products
     Other      Unallocated        Total  

Net sales

       4,249,979         572,900         136,104         —             4,958,983   

Cost of sales

       (3,634,854      (392,983      (82,533      —             (4,110,370
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Gross profit

       615,125         179,917         53,571         —             848,613   

Selling, general and administrative expenses

       (477,067      (40,739      (13,724      —             (531,530

Other operating income (expenses), net

       (21,303      414         189         —             (20,700
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Operating income

       116,755         139,592         40,036         —             296,383   
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Capital expenditures—PP&E

       178,425         10,270         1,983         —             190,678   

Depreciation—PP&E

       287,177         19,017         6,786         —             312,980   

Segment assets

                  

Inventories, net

       1,219,347         102,423         28,798         —             1,350,568   

Trade receivables, net

       349,230         60,825         27,780         —             437,835   

Property, plant and equipment, net

       3,724,825         263,461         52,129         —             4,040,415   

Intangible assets, net

       977,552         60,795         47,065         —             1,085,412   

Assets—discontinued operations

                964,359           964,359   

Other assets

                2,414,084           2,414,084   

Geographical information

There are no revenues from external customers attributable to the Company’s country of incorporation (Luxembourg). Ternium sells its products to three main geographical areas: South and Central America, North America, and Europe and others. The North American area comprises principally United States and Mexico. The South and Central American area comprises principally Argentina, Colombia, Paraguay, Guatemala, Costa Rica, Uruguay, Dominican Republic and Honduras.

 

September 30, September 30, September 30, September 30,
       Year ended December 31, 2011  
       South and
Central  America
       North America        Europe and other        Total  

Net sales

       4,015,858           5,085,227           56,113           9,157,198   

Segment assets

                   

Trade receivables, net

       237,910           496,506           8,112           742,528   

Property, plant and equipment , net

       1,392,065           2,639,229           1,381           4,032,675   

Intangible assets, net

       50,438           935,634           —             986,072   

Capital expenditures—PP&E

       201,849           350,524           977           553,350   

Depreciation—PP&E

       141,352           197,067           128           338,547   

 

September 30, September 30, September 30, September 30,
       Year ended December 31, 2010  
       South and
Central America
       North America        Europe and other        Total  

Net sales

       3,057,676           4,208,617           115,711           7,382,004   

Segment assets

                   

Trade receivables, net

       192,723           456,433           14,346           633,502   

Property, plant and equipment , net

       1,437,417           2,825,370           109           4,262,896   

Intangible assets, net

       54,443           1,074,905           —             1,129,348   

Capital expenditures—PP&E

       182,845           134,027           46           316,918   

Depreciation—PP&E

       118,774           194,029           17           312,820   

 

28


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

5 Segment information (continued)

 

September 30, September 30, September 30, September 30,
       Year ended December 31, 2009  
       South and
Central  America
       North America        Europe and other        Total  

Net sales

       1,782,446           2,976,938           199,599           4,958,983   

Segment assets

                   

Trade receivables, net

       116,231           318,466           3,138           437,835   

Property, plant and equipment , net

       1,297,289           2,743,045           81           4,040,415   

Intangible assets, net

       36,188           1,049,224           —             1,085,412   

Capital expenditures—PP&E

       117,583           73,044           51           190,678   

Depreciation—PP&E

       111,895           201,071           14           312,980   

Revenues by product

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011        2010        2009  

Semi-finished (1)

       —             29           11,389   

Hot rolled

       2,749,607           2,264,308           1,214,349   

Cold rolled

       1,458,875           1,213,813           837,798   

Coated (2)

       2,926,291           2,410,809           1,846,967   

Roll-formed and tubular (3)

       657,272           487,421           339,476   
    

 

 

      

 

 

      

 

 

 

Flat steel products

       7,792,045           6,376,380           4,249,979   
    

 

 

      

 

 

      

 

 

 

Semi-finished (4)

       91,955           147,282           30,835   

Hot rolled (5)

       1,125,922           685,855           542,065   
    

 

 

      

 

 

      

 

 

 

Long steel products

       1,217,877           833,137           572,900   
    

 

 

      

 

 

      

 

 

 

TOTAL STEEL PRODUCTS

       9,009,922           7,209,517           4,822,879   
    

 

 

      

 

 

      

 

 

 
    

 

 

      

 

 

      

 

 

 

Other products

       147,276           172,487           136,104   
    

 

 

      

 

 

      

 

 

 
    

 

 

      

 

 

      

 

 

 

TOTAL SALES

       9,157,198           7,382,004           4,958,983   
    

 

 

      

 

 

      

 

 

 

 

(1)

Semi-finished includes slabs.

(2)

Coated includes hot-dipped galvanized, electrogalvanized, pre-painted, tin plate and tin-free steel.

(3)

Roll-formed and tubular includes steel pipes, tubular products, beams, insulated panels, roofing and cladding, roof tiles and steel decks.

(4)

Semi-finished includes billets and round bars.

(5)

Hot rolled includes wire rod, bars and stirrups.

 

29


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

6 Cost of sales

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011      2010      2009  

Inventories at the beginning of the year

       1,953,390         1,350,568         1,826,547   

Acquisition of business (Note 3)

       —           76,771         —     

Translation differences

       (229,685      28,621         (46,857

Plus: Charges for the year

          

Raw materials and consumables used and other movements

       5,933,893         4,763,000         2,473,327   

Services and fees

       246,364         197,873         126,325   

Labor cost

       577,101         496,961         378,558   

Depreciation of property, plant and equipment

       323,210         295,504         308,156   

Amortization of intangible assets

       16,557         19,453         14,462   

Maintenance expenses

       348,721         342,529         221,175   

Office expenses

       6,678         6,662         4,997   

Freight and transportation

       56,035         36,892         32,846   

Insurance

       7,032         7,530         9,256   

Charge (Recovery) of obsolescence allowance

       6,121         11,710         (7,556

Valuation allowance

       —           —           127,553   

Recovery from sales of scrap and by-products

       (40,532      (40,654      (27,326

Others

       26,391         25,224         19,475   

Less: Inventories at the end of the year

       (2,137,024      (1,953,390      (1,350,568
    

 

 

    

 

 

    

 

 

 

Cost of Sales

       7,094,252         5,665,254         4,110,370   
    

 

 

    

 

 

    

 

 

 

7 Selling, general and administrative expenses

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011        2010      2009  

Services and fees (1)

       71,091           60,874         46,923   

Labor cost

       180,650           153,807         150,914   

Depreciation of property plant and equipment

       15,337           17,316         4,824   

Amortization of intangible assets

       50,738           51,027         57,663   

Maintenance expenses

       17,730           11,113         6,858   

Taxes

       120,264           89,412         65,889   

Office expenses

       32,973           29,567         26,134   

Freight and transportation

       269,630           232,184         156,520   

Increase (Decrease) of allowance for doubtful accounts

       322           (393      (1,635

Others

       27,426           20,399         17,440   
    

 

 

      

 

 

    

 

 

 

Selling, general and administrative expenses

       786,161           665,306         531,530   
    

 

 

      

 

 

    

 

 

 

 

(1)

Includes fees accrued for professional services rendered by PwC to Ternium S.A. and its subsidiaries during the year ended December 31, 2011 that amounted to USD 3,776, including USD 3,281 for audit services, USD 447 for audit-related services, USD 24 for tax services and USD 24 for all other services.

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

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011        2010        2009  

Wages, salaries and social security costs

       687,877           594,909           450,828   

Termination benefits

       38,786           27,872           55,358   

Pension benefits (Note 22 (i))

       31,088           27,987           23,286   
    

 

 

      

 

 

      

 

 

 

Labor costs

       757,751           650,768           529,472   
    

 

 

      

 

 

      

 

 

 

 

30


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

9 Other operating (expenses) income, net

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011      2010      2009  

Results from the sale of sundry assets

       (4,169      (4,681      (2,121

Provision for legal claims and other matters (Note 20 and 25 (ii))

       (29,932      (5,543      (4,614

Fees related to the repurchase of shares from Usiminas (Note 30)

       10,200         —           —     

Impairment charge (Note 25 (ii))

       —           —           (27,022

Others

       12,335         12,717         13,057   
    

 

 

    

 

 

    

 

 

 

Other operating (expenses) income, net

       (11,566      2,493         (20,700
    

 

 

    

 

 

    

 

 

 

10 Other financial (expenses) income, net

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011      2010      2009  

Net foreign exchange (loss) gain

       (236,362      123,690         83,057   

Change in fair value of financial instruments

       7,968         1,545         10,607   

Debt issue costs

       (5,078      (4,562      (5,149

Others

       (6,525      (5,561      (6,876
    

 

 

    

 

 

    

 

 

 

Other financial (expenses) income, net

       (239,997      115,112         81,639   
    

 

 

    

 

 

    

 

 

 

11 Income tax expense

Income tax

Income tax expense for each of the years presented is as follows:

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011      2010      2009  

Current tax

       (368,378      (410,041      (124,647

Deferred tax (Note 21)

       41,285         (1,035      (24,812

Deferred tax—effect of changes in tax rates

       —           —           (11,216

Effect of change in fair value of cash flow hedge

       6,701         4,419         9,112   

Recovery of income tax (1)

       4,417         —           60,249   
    

 

 

    

 

 

    

 

 

 

Income tax expense

       (315,974      (406,657      (91,314
    

 

 

    

 

 

    

 

 

 

 

(1)

Represents gains recorded in 2011 and 2009 for several income tax claims filed against the tax authorities for which definitive favorable rulings were obtained in such years.

Income tax expense for the years ended December 31, 2011, 2010 and 2009 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:

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011      2010      2009  

Income before income tax

       965,882         1,186,127         430,415   

Income tax expense at statutory tax rate

       (292,300      (366,992      (92,662

Non taxable income

       5,929         2,797         1,940   

Non deductible expenses

       (28,568      (38,132      (41,085

Unrecognized tax losses

       (5,452      (4,330      (8,540

Recovery of income tax

       4,417         —           60,249   

Effect of changes in tax rate

       —           —           (11,216
    

 

 

    

 

 

    

 

 

 

Income tax expense

       (315,974      (406,657      (91,314
    

 

 

    

 

 

    

 

 

 

Tax rates used to perform the reconciliation between tax expense (income) and accounting profit are those in effect at each relevant date or period in each applicable jurisdiction.

 

31


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

12 Property, plant and equipment, net

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
       Year ended December 31, 2011  
       Land      Buildings
and
improvements
     Production
equipment
     Vehicles,
furniture
and
fixtures
     Work
in
progress
     Spare
parts
     Total  

Cost

                      

Values at the beginning of the year

       489,750         1,799,404         4,181,696         152,280         318,330         37,148         6,978,608   

Translation differences

       (59,328      (158,079      (409,796      (12,920      (51,784      (2,955      (694,862

Additions

       46,565         2,514         13,760         4,359         482,981         3,171         553,350   

Disposals / Consumptions

       —           (10,412      (10,563      (3,942      (1,315      (133      (26,365

Transfers

       —           86,869         106,692         6,749         (200,310      —           —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Values at the end of the year

       476,987         1,720,296         3,881,789         146,526         547,902         37,231         6,810,731   

Depreciation

                      

Accumulated at the beginning of the year

       —           (611,089      (1,975,650      (127,363      —           (1,610      (2,715,712

Translation differences

       —           53,672         195,284         10,570         —           129         259,655   

Depreciation charge

       —           (96,190      (232,395      (9,393      —           (569      (338,547

Disposals / Consumptions

       —           4,787         9,474         2,250         —           37         16,548   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated at the end of the year

       —           (648,820      (2,003,287      (123,936      —           (2,013      (2,778,056
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

       476,987         1,071,476         1,878,502         22,590         547,902         35,218         4,032,675   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
       Year ended December 31, 2010  
       Land        Buildings
and
improvements
     Production
equipment
     Vehicles,
furniture
and
fixtures
     Work
in
progress
     Spare
parts
     Total  

Cost

                        

Values at the beginning of the year

       424,722           1,511,825         4,024,494         149,214         387,721         32,590         6,530,566   

Translation differences

       20,717           (18,926      43,439         (4,097      (7,566      (1,522      32,045   

Acquisition of business

       26,041           41,217         67,280         4,070         1,510         —           140,118   

Additions

       18,270           5,575         2,730         1,955         282,139         6,249         316,918   

Disposals / Consumptions

       —             (3,616      (34,111      (2,381      (762      (169      (41,039

Transfers

       —             263,329         77,864         3,519         (344,712      —           —     
    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Values at the end of the year

       489,750           1,799,404         4,181,696         152,280         318,330         37,148         6,978,608   

Depreciation

                        

Accumulated at the beginning of the year

       —             (554,581      (1,809,902      (124,455      —           (1,213      (2,490,151

Translation differences

       —             20,341         29,192         4,128         —           54         53,715   

Depreciation charge

       —             (78,000      (225,866      (8,464      —           (490      (312,820

Disposals / Consumptions

       —             1,151         30,926         1,428         —           39         33,544   
    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated at the end of the year

       —             (611,089      (1,975,650      (127,363      —           (1,610      (2,715,712
    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010

       489,750           1,188,315         2,206,046         24,917         318,330         35,538         4,262,896   
    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

32


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

13 Intangible assets, net

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
    Year ended December 31, 2011  
    Information
system
projects
    Mining
concessions
    Exploration
costs
    Customer
relationships
and other
contractual
rights
    Trademarks     Goodwill     Total  

Cost

             

Values at the beginning of the year

    118,784        109,809        31,688        324,670        81,023        750,127        1,416,101   

Translation differences

    (14,399     (14,981     (3,019     (34,349     (7,358     (86,321     (160,427

Additions

    34,345        —          13,648        —          —          —          47,993   

Transfers

    —          16,493        (16,493     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Values at the end of the year

    138,730        111,321        25,824        290,321        73,665        663,806        1,303,667   

Depreciation

             

Accumulated at the beginning of the year

    (82,741     (47,600     —          (108,711     (47,701     —          (286,753

Translation differences

    8,437        6,635        —          15,032        6,349        —          36,453   

Depreciation charge

    (11,455     (9,884     —          (31,625     (14,331     —          (67,295
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated at the end of the year

    (85,759     (50,849     —          (125,304     (55,683     —          (317,595
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2011

    52,971        60,472        25,824        165,017        17,982        663,806        986,072   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
    Year ended December 31, 2010  
    Information
system
projects
    Mining
concessions
    Exploration
costs
    Customer
relationships
and other
contractual
rights
    Trademarks     Goodwill     Total  

Cost

             

Values at the beginning of the year

    98,736        103,909        20,812        288,414        73,358        708,643        1,293,872   

Translation differences

    (363     5,900        1,412        14,795        3,258        39,927        64,929   

Acquisition of business

    42        —          —          19,467        4,407        1,557        25,473   

Additions

    20,369        —          10,843        1,994        —          —          33,206   

Disposals / Consumptions

    —          —          (1,379     —          —          —          (1,379
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Values at the end of the year

    118,784        109,809        31,688        324,670        81,023        750,127        1,416,101   

Depreciation

             

Accumulated at the beginning of the year

    (66,363     (35,568     —          (74,474     (32,055     —          (208,460

Translation differences

    690        (2,215     —          (4,390     (1,898     —          (7,813

Depreciation charge

    (17,068     (9,817     —          (29,847     (13,748     —          (70,480
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated at the end of the year

    (82,741     (47,600     —          (108,711     (47,701     —          (286,753
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2010

    36,043        62,209        31,688        215,959        33,322        750,127        1,129,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

14 Investments in associated companies

 

September 30, September 30,
       As of December 31,  
       2011      2010  

At the beginning of the year

       8,212         6,577   

Translation adjustment

       (124      (53

(Disposals)/Acquisitions

       (70      302   

Dividends received from associated companies

       —           (302

Equity in earnings of associated companies

       1,293         1,688   
    

 

 

    

 

 

 

At the end of the year

       9,311         8,212   
    

 

 

    

 

 

 

The principal associated companies, all of which are unlisted, are:

 

September 30, September 30, September 30, September 30, September 30,

Company

     Country of
incorporation
  Voting rights at
December 31,
    Value at December 31,  
       2011     2010     2011     2010  

Lomond Holdings BV. (1)

     Netherlands     50.00     50.00     7,299        6,635   

Finma S.A.I.F. (2)

     Argentina     33.33     33.33     1,429        1,200   

Arhsa S.A. (2)

     Argentina     33.33     33.33     379        176   

Techinst S.A. (3)

     Argentina     33.33     33.33     204        126   

Compañía Afianzadora de Empresas Siderúrgicas S.G.R. (4)

     Argentina     —          38.89     —          75   
          

 

 

   

 

 

 
             9,311        8,212   
          

 

 

   

 

 

 

 

(1)

Holding Company. Indirectly through the participation in Ternium Investments Switzerland A.G. since December 7, 2011. Prior to this date and since August 9, 2010, the participation was held by Ternium Treasury Services S.A. and prior to August 9, 2010, it was held by Ternium Procurement S.A.

(2)

Consulting and financial services. Indirectly through the participation in Siderar.

(3)

Consulting and financial services. Indirectly through the participation in Ternium Treasury Services S.A.

(4)

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.

15 Other investments, net — Non-current

 

September 30, September 30,
       As of December 31,  
       2011        2010  

Time deposits with related parties (i) (Note 28)

       —             18,086   

Investments in debt instruments

       13,900           17,227   

Others

       187           262   
    

 

 

      

 

 

 

Other investments, net — Non-current

       14,087           35,575   
    

 

 

      

 

 

 

 

(i)

The Company held a savings fund denominated in U.S. dollars until the fourth quarter of 2011.

 

34


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

16 Receivables, net — Non-current and Current

 

September 30, September 30,
       As of December 31,  
       2011        2010  

Receivables with related parties (Note 28)

       197           285   

Employee advances and loans

       8,163           8,821   

Advances to suppliers for the purchase of property, plant and equipment

       98,455           21,125   

Advances to suppliers for the purchase of property, plant and equipment with related parties (Note 28)

       290           1,548   

Tax credits

       12,582           18,369   

Others

       4,514           6,323   
    

 

 

      

 

 

 

Receivables, net — Non-current

       124,201           56,471   
    

 

 

      

 

 

 
       As of December 31,  
       2011        2010  

Value added tax

       14,455           26,169   

Tax credits

       46,059           26,806   

Employee advances and loans

       9,128           10,465   

Advances to suppliers

       8,289           4,815   

Advances to suppliers with related parties (Note 28)

       955           552   

Expenses paid in advance

       7,145           3,695   

Government tax refunds on exports

       3,092           9,263   

Receivables with related parties (Note 28)

       286           548   

Others

       16,182           12,260   
    

 

 

      

 

 

 

Receivables, net — Current

       105,591           94,573   
    

 

 

      

 

 

 

17 Trade receivables, net — Non-current and Current

 

September 30, September 30,
       As of December 31,  
       2011      2010  

Trade receivables

       7,672         354   

Allowance for doubtful accounts (Note 20)

       (146      (354
    

 

 

    

 

 

 

Trade receivables, net — Non-current

       7,526         —     
    

 

 

    

 

 

 
       As of December 31,  
       2011      2010  

Current accounts

       720,667         669,403   

Trade receivables with related parties (Note 28)

       30,337         10,959   

Allowance for doubtful accounts (Note 20)

       (16,002      (16,860
    

 

 

    

 

 

 

Trade receivables, net — Current

       735,002         663,502   
    

 

 

    

 

 

 

18 Inventories, net

 

September 30, September 30,
       As of December 31,  
       2011      2010  

Raw materials, materials and spare parts

       593,903         523,832   

Goods in process

       1,055,934         998,552   

Finished goods

       414,614         415,985   

Goods in transit

       133,033         83,214   

Obsolescence allowance (Note 20)

       (60,460      (68,193
    

 

 

    

 

 

 

Inventories, net

       2,137,024         1,953,390   
    

 

 

    

 

 

 

 

35


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

19 Cash, cash equivalents and other investments

 

September 30, September 30,
       As of December 31,  
       2011        2010  

(i) Other investments

         

Deposits with maturity of more than three months

       281,676           848,400   
    

 

 

      

 

 

 

(ii) Cash and cash equivalents

         

Cash and banks

       115,585           98,811   

Restricted cash

       248           12,343   

Deposits with maturity of less than three months

       2,042,758           1,668,262   
    

 

 

      

 

 

 

Cash and cash equivalents

       2,158,591           1,779,416   
    

 

 

      

 

 

 

20 Allowances and Provisions — Non-current and Current

 

 

September 30, September 30,

Provisions and allowances — Non-current

     Deducted
from assets
     Liabilities  
       Allowance for
doubtful
accounts
     Legal claims
and other
matters
 

Year ended December 31, 2011

       

Values at the beginning of the year

       354         16,144   

Translation differences

       (23      (2,228

Additions

       —           31,289   

Reversals

       (185      (1,357

Uses

       —           (28,508
    

 

 

    

 

 

 

At December 31, 2011

       146         15,340   
    

 

 

    

 

 

 

Year ended December 31, 2010

       

Values at the beginning of the year

       416         18,913   

Translation differences

       (18      (290

Additions

       —           6,721   

Reversals

       (44      (1,178

Uses

       —           (8,022
    

 

 

    

 

 

 

At December 31, 2010

       354         16,144   
    

 

 

    

 

 

 

 

 

September 30, September 30,

Provisions and allowances — Current

     Deducted from assets  
       Allowance for
doubtful
accounts
     Obsolescence
allowance
 

Year ended December 31, 2011

       

Values at the beginning of the year

       16,860         68,193   

Translation differences

       (1,103      (7,385

Acquisition of business

       —           —     

Reversals

       (2,133      (26,261

Additions

       2,640         32,382   

Uses

       (262      (6,469
    

 

 

    

 

 

 

At December 31, 2011

       16,002         60,460   
    

 

 

    

 

 

 

Year ended December 31, 2010

       

Values at the beginning of the year

       16,310         58,153   

Translation differences

       (460      1,911   

Acquisition of business

       4,168         1,290   

Reversals

       (3,885      (17,719

Additions

       3,536         29,429   

Uses

       (2,809      (4,871
    

 

 

    

 

 

 

At December 31, 2010

       16,860         68,193   
    

 

 

    

 

 

 

 

36


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

21 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:

 

September 30, September 30,
       Year ended December 31,  
       2011      2010  

At beginning of the year

       (865,355      (857,297

Translation differences

       83,172         (14,855

Acquisition of business

       —           7,832   

Deferred tax credit (charge)

       41,285         (1,035
    

 

 

    

 

 

 

At end of the year

       (740,898      (865,355
    

 

 

    

 

 

 

The changes in deferred tax assets and liabilities (prior to offsetting the balances within the same tax jurisdiction) during the year are as follow:

 

September 30, September 30, September 30, September 30, September 30,

Deferred tax liabilities

     Fixed assets      Inventories      Intangible
assets
     Other      Total at
December 31,
2011
 

At beginning of year

       (682,027      (70,498      (81,161      (169,373      (1,003,059

Translation differences

       67,654         7,975         8,832         12,430         96,891   

Income statement credit (charge)

       27,936         10,718         10,596         (12,965      36,285   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At end of year

       (586,437      (51,805      (61,733      (169,908      (869,883
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred tax assets

     Provisions      Trade
Receivables
     Tax losses (1)      Other      Total at
December 31,
2011
 

At beginning of year

       66,626         7,971         22,210         40,897         137,704   

Translation differences

       (6,037      (1,531      (3      (6,148      (13,719

Income statement credit (charge)

       409         2,363         (6,328      8,556         5,000   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At end of year

       60,998         8,803         15,879         43,305         128,985   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1) As of December 31, 2011, the recognized tax losses amount to USD 15,879 and the net unrecognized deferred tax assets amount to USD 17,885. According to the tax law in force in the jurisdictions in which the tax losses are generated, these amounts do not have a certain expiration date.

Deferred tax assets and liabilities are offset when the entity a) has a legally enforceable right to set off the recognized amounts; and b) intends to settle the tax on a net basis or to realize the asset and settle the liability simultaneously.

The amounts shown in the statement of financial position include the following:

 

September 30, September 30,
       As of December 31,  
       2011      2010  

Deferred tax assets to be recovered after more than 12 months

       74,202         82,980   

Deferred tax liabilities to be settled after more than 12 months

       (807,914      (922,136
    

 

 

    

 

 

 
       (733,712      (839,156
    

 

 

    

 

 

 

 

37


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

22 Other liabilities — Non-current and Current

 

September 30, September 30,
       As of December 31,  
       2011        2010  

(i) Other liabilities — Non-current

         

Termination benefits

       4,238           4,877   

Pension benefits

       155,625           166,812   

Related parties (Note 28)

       —             507   

Other

       40,982           29,116   
    

 

 

      

 

 

 

Other liabilities — Non-current

       200,845           201,312   
    

 

 

      

 

 

 

Pension benefits

The amounts recognized in the consolidated statement of financial position are determined as follows:

 

September 30, September 30,
       Year ended December 31,  
       2011      2010  

Present value of unfunded obligations

       251,354         262,366   

Unrecognized prior service costs

       (3,578      (3,694

Unrecognized actuarial losses

       (72,253      (72,946

Fair value of plan assets

       (19,898      (18,914
    

 

 

    

 

 

 

Liability in the statement of financial position

       155,625         166,812   
    

 

 

    

 

 

 

The amounts recognized in the consolidated income statement are as follows:

 

September 30, September 30,
       Year ended December 31,  
       2011        2010  

Current service cost

       6,150           4,697   

Interest cost

       22,030           20,000   

Amortization of prior service costs

       818           634   

Net actuarial losses recognized in the year

       2,090           2,656   
    

 

 

      

 

 

 

Total included in labor costs

       31,088           27,987   
    

 

 

      

 

 

 

Changes in the liability recognized in the consolidated statement of financial position are as follows:

 

September 30, September 30,
       Year ended December 31,  
       2011      2010  

At the beginning of the year

       166,812         151,562   

Transfers, new participants and funding of the plan

       (19,321      (20,412

Total expense

       31,088         27,987   

Translation differences

       (21,261      8,473   

Contributions paid

       (1,693      (798
    

 

 

    

 

 

 

At the end of the year

       155,625         166,812   
    

 

 

    

 

 

 

The principal actuarial assumptions used were as follows:

 

 

September 30, September 30,
       Year ended December 31,  

Mexico

     2011     2010  

Discount rate

       8.75     8.75

Rate of compensation increase

       4.00     4.00

 

 

September 30, September 30,
       Year ended December 31,  

Argentina

     2011     2010  

Discount rate

       7.00     7.00

Rate of compensation increase

       2.00     2.00

 

38


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

22 Other liabilities (continued)

 

September 30, September 30,
       As of December 31,  
       2011        2010  

(ii) Other liabilities — Current

         

Payroll and social security payable

       97,536           88,727   

Termination benefits

       8,547           6,693   

Related Parties (Note 28)

       4,052           22,017   

Others

       4,641           6,173   
    

 

 

      

 

 

 

Other liabilities — Current

       114,776           123,610   
    

 

 

      

 

 

 

23 Derivative financial instruments

Net fair values of derivative financial instruments

The net fair values of derivative financial instruments at December 31, 2011 and 2010 were as follows:

 

September 30, September 30,
       Year ended December 31,  
       2011      2010  

Contracts with positive fair values:

       

Foreign exchange contracts

       50         212   
    

 

 

    

 

 

 
       50         212   
    

 

 

    

 

 

 

Contracts with negative fair values:

       

Interest rate swap contracts

       (19,264      (54,675

Foreign exchange contracts

       (10,638      (102
    

 

 

    

 

 

 
       (29,902      (54,777
    

 

 

    

 

 

 

Derivative financial instruments breakdown is as follows:

a) Interest rate contracts

Fluctuations in market interest rates create a degree of risk by affecting the amount of the Company’s interest payments and the value of its floating-rate debt. As of December 31, 2011, most of the Company’s long-term borrowings were at variable rates.

Ternium Mexico entered into derivative instruments to manage the impact of the floating interest rate changes on its financial debt. The notional amount represents 42% of its total exposure as of December 31, 2011.

On February 23, 2007, Ternium Mexico entered into several interest rate collar agreements that fix the interest rate to be paid over an aggregate notional amount of USD 140 million, in an average range of 4.19% to 6.00%. These agreements are due in March 2012.

On June 18, 2008, Ternium Mexico entered into several knock-in swap agreements in an average swap level of 5.22% and a knock-in level of 2.5%. As of December 31, 2011, the notional amount outstanding is USD 396 million. These agreements are due in July 2012 and have been accounted for as cash flow hedges. Changes in fair value of derivative instruments designated as cash flow hedges for each of the years presented are included below:

 

September 30, September 30, September 30,
       Cash flow hedges  
       Gross amount      Income Tax      Total  

At December 31, 2009

       (46,693      14,009         (32,684

(Decrease) / Increase

       (19,334      5,800         (13,534

Reclassification to income statement

       34,063         (10,219      23,844   
    

 

 

    

 

 

    

 

 

 

At December 31, 2010

       (31,964      9,590         (22,374
    

 

 

    

 

 

    

 

 

 

(Decrease) / Increase

       (658      197         (460

Reclassification to income statement

       22,994         (6,898      16,096   
    

 

 

    

 

 

    

 

 

 

At December 31, 2011

       (9,628      2,889         (6,738
    

 

 

    

 

 

    

 

 

 

The gross amount of the pre-tax reserve recorded in other comprehensive income at December 31, 2011 (amounting to a loss of USD 9.6 million) is expected to be reclassified to the income statements in 2012.

 

39


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

23 Derivative financial instruments (continued)

 

b) Foreign exchange contracts

From time to time, Ternium’s subsidiaries enter into derivative agreements to manage their exposure to currencies other than the USD.

During 2011, Prosid Investments entered into several forward agreements to manage the exchange rate exposure generated by Siderar’s debt in ARS against USD. The notional amount hedged as of December 31, 2011 was ARS 2.1 billion with an average forward price of 4.67 ARS per USD.

Furthermore, during 2011, Ferrasa Colombia S.A.S. has been hedging the exposure of certain trade receivables denominated in its local currency through non-deliverable forward agreements. As of December 31, 2011, the agreements aggregate notional amount were COP 34.4 billion at an exchange rate of 1,923 COP per USD.

On December 14, 2011, Ternium Mexico S.A. de C.V. entered into a forward agreement over an aggregate notional amount of MXN 627.5 million, at an exchange rate of 13.94 MXN per USD, to manage its operating exposure in MXN. This agreement is due in January 19, 2012.

During December 2011 and in connection with the purchase of the investment in Usiminas (see note 35), both Ternium Investments S.a.r.l., through its Zug branch, and Prosid Investments entered into several non-deliverable forward and forward exchange collar agreements to manage the exchange rate exposure generated by the share purchase agreement in BRL against USD. The notional amount hedged as of December 31, 2011 by Ternium Investments S.a.r.l. and Prosid Investments was BRL 2.9 billion and BRL 1.0 billion, respectively. These agreements are due in January 2012 and have been accounted for as cash flow hedges. As of December 31, 2011, the after-tax cash flow hedge reserve related to these agreements amounted to USD 8.2 million.

The net fair values of the exchange rate derivative contracts as of December 31, 2011 and December 31, 2010 were as follows:

 

September 30, September 30, September 30, September 30,
                    Fair Value at December 31,  

Currencies

     Contract   Notional amount        2011      2010  

BRL/USD

     ND Forward (1)     3.9 billion BRL           (8,902      —     

ARS/USD

     Forward     2.1 billion ARS           (1,653      —     

MXN/USD

     Forward     0.6 billion MXN          (83      —     

COP/USD

     ND Forward     34.4 billion COP           50         —     

USD/EUR

     Forward     —             —           212   

USD/EUR

     Cross Currency Swap     —             —           (52

CRC/USD

     ND Forward     —             —           8   

GTQ/USD

     ND Forward     —             —           (57
           

 

 

    

 

 

 
              (10,588      111   
           

 

 

    

 

 

 

 

(1)

These foreign exchange contracts were accounted for as cash flow hedges.

USD: US dollars; ARS: Argentine pesos; BRL: Brazilian reales; MXN: Mexican pesos; COP: Colombian pesos; GTQ: Guatemalan quetzales; CRC: Costa Rican colon.

24 Borrowings

 

September 30, September 30,
       Year ended December 31,  
       2011      2010  

(i) Non-current

       

Bank borrowings

       951,469         1,429,278   

Less: debt issue costs

       (2,974      (2,704
    

 

 

    

 

 

 
       948,495         1,426,574   
    

 

 

    

 

 

 

(ii) Current

       

Bank borrowings

       1,043,977         517,718   

Less: debt issue costs

       (2,427      (4,635
    

 

 

    

 

 

 
       1,041,550         513,083   
    

 

 

    

 

 

 

Total Borrowings

       1,990,045         1,939,657   
    

 

 

    

 

 

 

 

40


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

24 Borrowings (continued)

 

The maturity of borrowings is as follows:

 

September 30, September 30, September 30, September 30, September 30,
       Expected Maturity Date  
                         2014 and        At December 31, (1)  
       2012        2013        thereafter        2011        2010  

Fixed Rate

       484,996           —             —             484,996           14,206   

Floating Rate

       556,554           401,791           546,704           1,505,049           1,925,451   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

       1,041,550           401,791           546,704           1,990,045           1,939,657   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(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 their carrying amount and it is not disclosed separately.

The weighted average interest rates—which incorporate instruments denominated mainly in US dollars and Argentina pesos and which also include the effect of derivative financial instruments- at year end were as follows:

 

September 30, September 30,
       December 31,  
       2011     2010  

Bank borrowings

       3.42     3.29

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, 2011 and 2010, respectively.

Breakdown of borrowings by currency is as follows:

 

           December 31,  

Currency

 

Interest rates

     2011        2010  

USD

  Floating        1,357,795           1,786,928   

USD

  Fixed        1,690           —     

ARS

  Floating        467           —     

ARS

  Fixed        460,946           312   

BRL

  Floating        17,177           12,725   

COP

  Floating        125,300           125,798   

COP

  Fixed        —             3,746   

CRC

  Fixed        6,475           —     

GTQ

  Fixed        15,885           10,148   

MXN

  Floating        4,310           —     
      

 

 

      

 

 

 

Total Borrowings

       1,990,045           1,939,657   
      

 

 

      

 

 

 

USD: US dollars; ARS: Argentine pesos; BRL: Brazilian reales; COP: Colombian pesos; CRC: Costa Rican colon; GTQ: Guatemalan quetzales; MXN: Mexican pesos.

On April 6, 2011, the Company’s subsidiary Ternium Mexico, S.A. de C.V. (Ternium Mexico), Crédit Agricole Corporate and Investment Bank, acting as Administrative Agent, and certain banks parties to a loan agreement dated as of July 12, 2007, partially refinanced a syndicated loan facility that had been incurred to finance Ternium’s 2007 acquisition of Grupo Imsa, a company subsequently merged into Ternium Mexico.

The outstanding balance of the facility refinanced amounted to USD 1.0 billion. As part of the refinancing, the final maturity date of bank loans in a principal amount of USD 0.8 billion was extended to July 23, 2014 (with the extended loans being payable in four consecutive and equal semi-annual installments commencing on January 26, 2013), and the applicable margin structure for the extended loans was amended. On July 26, 2012, Ternium Mexico will repay the remaining USD 0.2 billion principal amount of the loans that was not refinanced.

 

41


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

25 Contingencies, commitments and restrictions on the distribution of profits

Ternium is involved in litigation arising from time to time in the ordinary course of business. The Company recorded a provision for those cases in which there is a probable cash outflow and the outcome can be reliably estimated. Based on management’s assessment and the advice of legal counsel, it is not anticipated that the ultimate resolution of existing litigation would be material to Ternium’s consolidated financial position, results of operations or liquidity.

 

(i)

Tax claims

 

(a)

Siderar. AFIP – Income tax claim for fiscal years 1995 to 1999

The Administración Federal de Ingresos Públicos (“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 18.7 million as of December 31, 2011.

The Company appealed these assessments before the National Tax Court, as in the view of its legal and tax advisors, there are reasons that would likely result in a favorable ruling for the Company.

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. The ruling was appealed both by the Company and the AFIP.

On June 10, 2010 the Company was notified of a ruling issued by the Court of Appeals in federal administrative law which mainly resulted in favor of the Company. The ruling was appealed both by the Company and the AFIP.

Based on the above, the Company recognized a provision amounting to USD 2.0 million as of December 31, 2011 as management considers there could be a potential cash outflow.

 

(b)

Ternium Mexico. SAT – Income tax claim for fiscal year 2004

On January 26, 2012, the Mexican tax authorities notified Ternium Mexico and its subsidiary Acerus S.A. de C.V. of a tax assessment that challenges the value attributed by a predecessor of Acerus to a capital reduction made in 2004 (i.e., prior to the Company’s investment in Ternium Mexico’s predecessor Grupo Imsa in 2007) and assesses an income tax deficiency. The tax authorities assert that the capital reduction should have been valued at a price significantly higher than the value attributed at the time by the shareholder. The proposed assessment represents an estimated contingency of MXN 4,092 Million (approximately USD 293 million) at December 31, 2011, in taxes and penalties. The Company will appeal this assessment before the Mexican tax authorities and ultimately the tax courts and believes that it is not probable that the ultimate resolution of the matter will result in an obligation. Accordingly, no provision was recorded in these Consolidated Financial Statements.

(ii) Commitments

The following are Ternium’s main off-balance sheet commitments:

(a) 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. The amount of this outsourcing agreement totals USD 93.6 million and is due to terminate in 2018.

(b) Siderar, within the investment plan to increase its production capacity, has entered into several commitments to acquire new production equipment for a total consideration of USD 117.3 million.

(c) Siderar is a party to a long-term contract with Air Liquide Argentina S.A. for the supply of oxygen, nitrogen and argon. The agreement requires Siderar to take or pay minimum daily amounts of these gases for an aggregate amount of USD 59.0 million to satisfy Siderar’s current production needs through 2021, and to make incremental purchases of these gases for an aggregate amount of USD 116.1 million to satisfy the requirements through 2025 of a new separation facility to be constructed as part of Siderar’s expansion plan. As a result of the several global crisis that began in 2008 and the uncertainties surrounding the evolution of steel demand in the domestic and global markets, the parties engaged in discussions for the renegotiation of the contract. In February 2011, Siderar and Air Liquide Argentina reached agreement on the terms of the renegotiation; the obligations of the parties under the agreement related to the new separation facility were suspended through March 31, 2012, and Siderar agreed to purchase from Air Liquide Argentina certain equipment for an aggregate amount of approximately USD 21.4 million (as of December 31, 2011, Siderar paid advances in an amount of USD 12.6 million). If Siderar were to resume its expansion plan on or prior to March 31, 2012, Air Liquide Argentina would be required to repurchase that equipment, and all of the parties’ obligations under the contract would be reinstated; otherwise, all rights and obligations relating to the new separation plant and the related supply of gases would terminate automatically on March 31, 2012, and Siderar would be required to pay to Air Liquide Argentina an aggregate amount currently estimated at USD 12.0 million.

 

42


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

25 Contingencies, commitments and restrictions on the distribution of profits (continued)

 

(d) Siderar assumed fixed commitments for the purchase of raw materials for a total amount of USD 948.4 million to be expended during the next 3 years.

(e) The production process of Ternium Mexico’s (former Hylsa’s plants) 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 Energía, S.A., for the supply to four of Mexico’s plants of a contracted electrical demand of 111.2 MW, for a contracted amount of USD 0.9 billion, which is due to terminate in 2027. There are no penalties if consumption is lower in 30 MW per year. This contract effectively started on April 30, 2002, and currently supplies approximately 26% of Ternium Mexico’s electricity needs.

(f) Several Ternium Mexico’s subsidiaries which have facilities throughout the Mexican territory are parties to a long term energy purchase agreement for approximately 90 MW of electricity as purchased capacity with Tractebel Energía de Monterrey, S. de R.L. de C.V., distributed among each plant defined as a capacity user. Each capacity user is committed to pay Tractebel for the purchased capacity and for the net energy delivered. Ternium Mexico is required to provide its best estimate of its expected nomination for capacity and energy under the specific limits and timelines. The monthly payments are calculated considering the capacity charges, energy charges, back-up power charges, and transmission charges, less any steam credits. The contracted amount is of USD 221 million and the contract will terminate in 2018.

(g) Grupo Imsa (now Ternium Mexico), together with Grupo Marcegaglia, Duferco International Investment Holding and Donkuk Steel Mill Co., were parties to a ten-year steel slab off-take framework agreement with Corus UK Limited (now Tata Steel UK Limited) dated as of December 16, 2004, which was supplemented by bilateral off-take agreements. Under the agreements, the off-takers could be required to purchase, in the aggregate, approximately 78% of the steel slab production of Corus’ former Teesside facility in the North East of England, of which Grupo Imsa’s share was 15.38%, or approximately 0.5 million tons per year, of the total production.

In addition, the off-takers were required to make, in the aggregate and according to their respective pro rata shares, significant payments to Corus to finance capital expenditures. In December 2007, all of Grupo Imsa’s rights and obligations under this contract were assigned to Ternium Procurement S.A. (formerly known as Alvory S.A.).

On April 7, 2009, Ternium Procurement S.A., together with the other off-takers, declared the early termination of the off-take framework agreement and their respective off-take agreements with Corus pursuant to a provision allowing the off-takers to terminate the agreements upon the occurrence of certain events specified in the off-take framework agreement. Corus initially denied the occurrence of the alleged termination event, stated that it would pursue specific performance and initiated an arbitration proceeding against the off-takers and Ternium Mexico (as guarantor of Ternium Procurement’s obligations) seeking damages arising out of the alleged wrongful termination of the off-take agreements, which damages Corus did not quantify but stated that would exceed USD 150 million (approximately USD 29.7 million in the case of Ternium Procurement), the maximum aggregate cap on liability that the off-takers would have under the off-take framework agreement (a limitation that Corus disputed). In addition, Corus threatened to submit to arbitration further claims in tort against the off-takers, and also threatened to submit such claims against certain third-parties to such agreements, including the Company. The off-takers and Ternium Mexico, in turn, denied Corus’ claims and brought counterclaims against Corus which, in the aggregate, would also be greater than USD 150 million.

On May 12, 2009, Corus, by a letter from its lawyers, alleged that the off-takers’s termination notice amounted to a repudiatory breach of the agreements and stated that it accepted that the agreements had come to an end and that it would no longer pursue a claim for specific performance in the arbitration; the claim for damages, for all losses caused by the alleged off-takers’ wrongful repudiation of the agreements, however, would be maintained. On July 9, 2009, Corus submitted an amended request for arbitration adding tortious claims against the off-takers and adding to its claims the payment of punitive or exemplary damages.

On December 21, 2010, the arbitration tribunal issued a partial final award where it held that the off-takers had invalidly terminated the off-take agreements. The tribunal also held that the maximum aggregate USD 150 million liability cap (out of which approximately USD 29.7 million corresponds to Ternium Procurement) provided in the off-take framework agreement applied to all of Corus’s claims against the off-takers, including tort as well as contract claims. The tribunal formally admitted new claims and counterclaims into the arbitration proceedings on April 10, 2011.

On April 15, 2011, the arbitration tribunal issued a second partial final award where it held that the off-takers should pay to the claimant GBP 1.6 million for its reasonable legal and other costs incurred before the first partial final award. The off-takers paid that amount around mid May. In addition, on May 27, 2011, the off-takers paid to Tata an aggregate amount of USD 16.3 million (of which Ternium Procurement paid USD 3.2 million) as indemnification for one of its claims under the arbitration proceedings.

On June 16, 2011, Tata, the off-takers and Ternium Mexico settled the dispute, and the off-takers, in exchange for a full release and discharge of each of them and their respective representatives and affiliates, from all claims and disputes that Tata may have against any of them in relation to the off-take framework agreement and its related agreements, agreed to pay to Tata an aggregate amount of USD 124 million (including the USD16.3 million previously paid) and authorized their agent under the off-take agreements to transfer to Tata UK£1.8 million and EUR 0.5 million which had been received by the agent from the off-takers under the off-take framework agreement before the early termination of such agreement. Ternium Procurement paid to Tata its share of the settlement amount (i.e., USD21.3 million) on June 17, 2011.

 

43


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

25 Contingencies, commitments and restrictions on the distribution of profits (continued)

 

On June 21, 2011, Tata notified the arbitration tribunal that the arbitration proceedings were withdrawn. On July 8, 2011 and as a consequence of the settlement reached among the parties, the tribunal declared the termination of the arbitration proceedings.

 

(iii)

Restrictions on the distribution of profits

Under Luxembourg law, at least 5% of net income per year calculated in accordance with Luxembourg law and regulations must be allocated to a reserve until such reserve has reached an amount equal to 10% of the share capital. At December 31, 2011, this reserve reached the above-mentioned threshold.

As of December 31, 2011, Ternium may pay dividends up to USD 6.1 billion in accordance with Luxembourg law and regulations.

Shareholders’ equity under Luxembourg law and regulations comprises the following captions:

 

September 30,
       At December 31,
2011
 

Share capital

       2,004,743   

Legal reserve

       200,474   

Non distributable reserves

       1,414,122   

Accumulated profit at January 1, 2011 (1)

       6,153,015   

Loss for the year

       (20,029
    

 

 

 

Total shareholders’ equity under Luxembourg GAAP

       9,752,325   
    

 

 

 

 

(1)

As a result of the repurchase of its own shares from Usiminas on February 15, 2011 (see Note 30), the Company is required under applicable Luxembourg law to create a new non-distributable reserve in the amount of USD 150 million.

26 Earnings per share

As of December 31, 2011, the capital was USD 2,004,743,442 represented by 2,004,743,442 shares, each having a nominal value of USD 1.00 each.

For fiscal years 2011, 2010 and 2009, the weighted average of shares outstanding totaled 1,968,327,917, 2,004,743,442 and 2,004,743,442 shares, respectively. See note 30.

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.

 

September 30, September 30, September 30,
       2011        2010        2009  

Profit from continuing operations attributable to equity holders of the Company

       513,541           622,076           305,830   

Profit from discontinued operations attributable to equity holders of the Company

       —             —             411,570   

Weighted average number of ordinary shares in issue

       1,968,327,917           2,004,743,442           2,004,743,442   

Basic and diluted earnings per share from continuing operations attributable to equity holders of the Company (USD per share)

       0.26           0.31           0.15   

Basic and diluted earnings per share from discontinued operations attributable to equity holders of the Company (USD per share)

       —             —             0.21   

 

44


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

27 Discontinued operations — Nationalization of Sidor

On March 31, 2008, Ternium S.A. (the “Company”) controlled approximately 59.7% of Sidor, while Corporación Venezolana de Guayana, or CVG (a Venezuelan governmental entity), and Banco de Desarrollo Económico y Social de Venezuela, or BANDES (a bank owned by the Venezuelan government), held approximately 20.4% of Sidor and certain Sidor employees and former employees held the remaining 19.9% interest.

Further to several threats of nationalization and various adverse interferences with management in preceding years, on April 8, 2008, the Venezuelan government announced its intention to take control over Sidor. On April 29, 2008, the National Assembly of Venezuela passed a resolution declaring that the shares of Sidor, together with all of its assets, were of public and social interest, and authorizing the Venezuelan government to take any action it deemed appropriate in connection with any such assets, including expropriation. Subsequently, Decree Law 6058 of the President of Venezuela dated April 30, 2008, ordered that Sidor and its subsidiaries and associated companies be transformed into state-owned enterprises (“empresas del Estado”), with the government owning not less than 60% of their share capital. On July 12, 2008, Venezuela, acting through CVG, assumed operational control and complete responsibility for Sidor’s operations, and Sidor’s Board of Directors ceased to function. However, negotiations between the Venezuelan government and the Company regarding the terms of the compensation continued over several months, and the Company retained formal title over the Sidor shares during that period.

On May 7, 2009, the Company completed the transfer of its entire 59.7% interest in Sidor to CVG. The Company agreed to receive an aggregate amount of USD 1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid USD 400 million in cash at closing. The balance was divided in two tranches: the first tranche of USD 945 million was scheduled to be paid in six equal quarterly installments beginning in August 2009 until November 2010, while the second tranche would be due in November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level. Under the agreements with CVG and Venezuela, in the event of non-compliance by CVG with its payment obligations, the Company reserved the rights and remedies that it had prior to the transfer of the Sidor shares in relation to any claim against Venezuela, subject to certain limitations, including that the Company may not claim an amount exceeding the outstanding balance due from CVG.

CVG made all payments required to be made under the agreements governing the transfer of Sidor to Venezuela except for the payment due on November 8, 2010. On December 18, 2010, Ternium reached an agreement with CVG, on the rescheduling of the unpaid balance, which amounted to USD 257.4 million. As provided in the refinancing agreement, CVG paid USD 7.0 million to Ternium in January 2011, and CVG is required to pay the remainder in five quarterly installments, beginning on February 15, 2011 and ending on February 15, 2012. As security for the payment of the outstanding balance, Ternium received, duly endorsed in its favor, promissory notes issued by Energía Argentina S.A. (“Enarsa”) and Compañía Administradora del Mercado Mayorista Eléctrico S.A. (“Cammesa”) (both companies owned by the Argentine government) to PDVSA Petróleo S.A. (a company owned by the Venezuelan government). While the first three installments were paid, the final two installments were not paid when due, and, as of the date of these financial statements, a total principal amount of USD 130.3 million remains outstanding. Ternium is pursuing the payment of the outstanding amounts and has reserved all of its rights under contracts, investment treaties and Venezuelan and international law with respect to such amounts.

In the years ended December 31, 2011, 2010 and 2009, the Company recorded gains in the amount of USD 11.4 million, USD 61.0 million and USD 136.0 million, respectively. These gains are included in “Interest income – Sidor financial asset” in the Income Statement and represent the accretion income over the receivable held against CVG. In addition, the Company recorded a gain related to the disposal of Sidor of USD 428,023, net of income tax, during the year ended December 31, 2009.

28 Related party transactions

As of December 31, 2011, Techint owned 62.02% of the Company’s share capital, Tenaris held 11.46% and Inverban S.A. owned 0.33%, of the Company’s share capital. Each of Techint, Tenaris and Inverban were controlled by San Faustin S.A., a Luxembourg company (“San Faustin”). Rocca & Partners Stichting Administratiekantoor Aandelen San Faustin (“RP STAK”), a Dutch private foundation (Stichting), held shares in San Faustin sufficient in number to control San Faustin. No person or group of persons controls RP STAK.

For commitments with Related Parties see Note 25.

 

45


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

28 Related party transactions (continued)

 

The following transactions were carried out with related parties:

 

September 30, September 30, September 30,
       Year ended December 31,  
       2011        2010        2009  

(i) Transactions

              

(a) Sales of goods and services

              

Sales of goods to other related parties

       167,786           172,337           40,915   

Sales of services to associated parties

       109           65           76   

Sales of services to other related parties

       1,682           1,763           562   
    

 

 

      

 

 

      

 

 

 
       169,577           174,165           41,553   
    

 

 

      

 

 

      

 

 

 

(b) Purchases of goods and services

              

Purchases of goods from other related parties

       58,219           49,735           34,834   

Purchases of services from associated parties

       42,762           38,939           31,403   

Purchases of services from other related parties

       129,844           114,377           91,404   
    

 

 

      

 

 

      

 

 

 
       230,825           203,051           157,641   
    

 

 

      

 

 

      

 

 

 

(c) Financial results

              

Income with associated parties

       95           78           581   

Income with other related parties

       —             —             118   

Expenses with other related parties

       —             —             (29
    

 

 

      

 

 

      

 

 

 
       95           78           670   
    

 

 

      

 

 

      

 

 

 

(d) Dividends

              

Dividends received from associated parties

       —             302           —     
    

 

 

      

 

 

      

 

 

 

 

(ii)

Year-end balances

 

September 30, September 30,
       At December 31,  
       2011      2010  

a) Arising from sales/purchases of goods/services and other transactions

       

Receivables from associated parties

       97         368   

Receivables from other related parties

       30,723         11,424   

Advances to suppliers with other related parties

       1,245         2,101   

Payables to associated parties

       (2,576      (1,953

Payables to other related parties

       (50,265      (42,048
    

 

 

    

 

 

 
       (20,776      (30,108
    

 

 

    

 

 

 

(b) Other investments

       

Time deposit

       —           18,086   
    

 

 

    

 

 

 
       —           18,086   
    

 

 

    

 

 

 

(iii) Officers and Directors’ compensation

During the year ended December 31, 2011 the cash compensation of Officers and Directors amounted to USD 12,853. In addition, Officers received 824,000 Units for a total amount of USD 2,366 in connection with the incentive retention program mentioned in note 4 (n) (3).

29 Investments in Mexico

On October 4, 2010, Ternium and Nippon Steel Corporation signed a definitive agreement to form an operation in Mexico for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automobile market. The company was established in November 2010 and operates under the name of Tenigal, S.R.L. de C.V. Ternium and Nippon Steel hold 51% and 49% participations in Tenigal, respectively.

Tenigal plans to build a hot-dip galvanizing plant in the vicinity of Monterrey City (equivalent to the state-of-the-art equipment now in operation at Nippon Steel’s steelworks in Japan) with a production capacity of 400,000 metric tons per year. Ternium expects that construction of the facility would require a total investment of approximately USD 350 million. The plant is currently expected to commence production of high-grade and high-quality galvanized and galvannealed automotive steel sheets, including outer-panel and high-strength qualities, in 2013. Tenigal is expected to serve the requirements of the growing automotive industry in Mexico, including those of the Japanese car makers.

In addition, Ternium Mexico plans to construct new pickling, cold-rolling, annealing and tempering lines at the same site. Part of the output from these lines will be used to supply the Tenigal plant. Ternium expects that construction of these lines would require a total investment of approximately USD 700 million. As of December 31, 2011, the amount invested in property, plant and equipment totaled USD 40.5 million.

 

46


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

30 Repurchase of Shares from Usiminas concurrently with secondary public offering

On January 31, 2011, Ternium entered into a transaction and registration rights agreement with its 14.3% shareholder Usinas Siderúrgicas de Minas Gerais S.A. – Usiminas (“Usiminas”) and Techint Holdings S.à.r.l. (“Techint”). The transaction and registration rights agreement provided, among other things, for a SEC-registered underwritten public offering of up to all of Ternium shares held by Usiminas (less the number of shares that Ternium and Techint agreed to purchase as discussed below) in the form of ADSs listed on the New York Stock Exchange. Neither Ternium nor Techint offered to sell any Ternium shares or ADSs in the public offering.

On February 9, 2011, Ternium and Techint, following the pricing of the underwritten public offering mentioned above, entered into purchase agreements with Usiminas relating to their concurrent purchase transactions of Ternium shares. Under these agreements, on February 15, 2011, Ternium and Techint purchased from Usiminas 41,666,666 and 27,777,780 Ternium shares for a total consideration of USD 150 million and USD 100 million, respectively. In connection with the sale of Ternium’s shares by Usiminas, Ternium collected a USD 10.2 million fee, included in “Other operating income (expenses), net” and was reimbursed of all expenses relating to the offering and concurrent purchase.

Following consummation of these transactions, Techint owns directly 62.02% of the Company’s share capital and Tenaris holds directly 11.46% of the Company’s share capital (both including treasury shares) and Usiminas will no longer own any Ternium shares. In addition, the two members of Ternium’s Board of Directors nominated by Usiminas resigned from the Ternium board.

Related to the dividends distributed on June 9, 2011, and as these treasury shares are held by one of Ternium’s subsidiaries, the dividends attributable to these treasury shares amounting to USD 3.1 million were included in equity as less dividend paid.

31 Other required disclosures

 

(a)

Statement of comprehensive income

 

September 30, September 30, September 30, September 30,
       Cash flow hedges      Currency
translation
adjustment
 
       Gross amount      Income Tax      Total     

At December 31, 2009

       (46,693      14,009         (32,684      (715,372

(Decrease) / Increase

       (19,334      5,800         (13,534      35,915   

Reclassification to income statement

       34,063         (10,219      23,844         —     
    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010

       (31,964      9,590         (22,374      (679,457
    

 

 

    

 

 

    

 

 

    

 

 

 

(Decrease) / Increase

       (8,861      197         (8,663      (433,633

Reclassification to income statement

       22,994         (6,898      16,096         —     
    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

       (17,831      2,889         (14,941      (1,113,090
    

 

 

    

 

 

    

 

 

    

 

 

 

(b) Statement of cash flows

 

September 30, September 30, September 30,
       At December 31,  
       2011      2010      2009  

(i) Changes in working capital (1)

          

Inventories

       (413,321      (497,430      429,122   

Receivables and others

       (12,113      30,052         115,252   

Trade receivables

       (116,856      (179,308      193,677   

Other liabilities

       25,332         63,062         (67,778

Trade payables

       119,152         135,651         (35,094
    

 

 

    

 

 

    

 

 

 
       (397,806      (447,973      635,179   
    

 

 

    

 

 

    

 

 

 

(ii) Income tax accrual less payments

          

Tax accrued (Note 11)

       315,974         406,657         91,314   

Taxes paid

       (571,919      (179,837      (140,656
    

 

 

    

 

 

    

 

 

 
       (255,945      226,820         (49,342
    

 

 

    

 

 

    

 

 

 

(iii) Interest accruals less payments

          

Interest accrued

       105,570         70,771         105,655   

Interest paid

       (62,523      (70,830      (94,949
    

 

 

    

 

 

    

 

 

 
       43,047         (59      10,706   
    

 

 

    

 

 

    

 

 

 

 

(1)

Changes in working capital are shown net of the effect of exchange rate changes.

 

47


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

32 Recently issued accounting pronouncements

(i) International Accounting Standard 19 (amended 2011), “Employee benefits”

In June 2011, the IASB issued IAS 19 (amended 2011), “Employee benefits”, which makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. IAS 19 (amended 2011) must be applied for annual periods beginning on or after 1 January 2013.

(ii) International Accounting Standard 1 (amended 2011), “Presentation of financial statements”

In June 2011, the IASB issued IAS 1 (amended 2011), “Presentation of financial statements”. The amendment requires entities to separate items presented in Other Comprehensive Income into two groups, based on whether or not they may be recycled to profit or loss in the future. IAS 1 (amended 2011) must be applied for annual periods beginning on or after 1 July 2012.

(iii) International Financial Reporting Standard 9 (amended 2011), “Financial Instruments”

In November 2009, the IASB issued IFRS 9 “Financial Instruments” which establishes principles for the financial reporting of financial assets by simplifying their classification and measurement. This interpretation is applicable for annual periods beginning on or after 1 January 2015. Earlier application is not permitted for entities that prepare financial statements in accordance with IFRS as adopted by the EU, since the interpretation is not yet adopted by the EU.

(iv) International Financial Reporting Standard 10, “Consolidated financial statements”

In May 2011, the IASB issued IFRS 10, “Consolidated financial statements”. IFRS 10 replaces all of the guidance on control and consolidation in IAS 27 and SIC-12. IFRS 10 must be applied for annual periods beginning on or after 1 January 2013.

 

(v)

International Financial Reporting Standard 11, “Joint arrangements”

In May 2011, the IASB issued IFRS 11, “Joint arrangements”. IFRS 11 sets out the core principle that a party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations in accordance with that defined type of joint arrangement. IFRS 11 must be applied for annual periods beginning on or after 1 January 2013.

(vi) International Financial Reporting Standard 12, “Disclosures of interest in other entities”

In May 2011, the IASB issued IFRS 12, “Disclosures of interest in other entities”. This standard includes the disclosure requirements for all forms of interest in other entities. IFRS 12 must be applied for annual periods beginning on or after 1 January 2013.

(vii) International Financial Reporting Standard 13, “Fair value measurement”

In May 2011, the IASB issued IFRS 13, “Fair value measurement”. IFRS 13 explains how to measure fair value and aims to enhance fair value disclosures. IFRS 13 must be applied for annual periods beginning on or after 1 January 2013.

(viii) IFRIC Interpretation 20, “Stripping costs in the production phase of a surface mine”

In October 2011, the IFRIC issued IFRIC Interpretation 20, “Stripping costs in the production phase of a surface mine”. IFRIC addresses the recognition of production stripping costs as an asset and the measurement of the stripping activity asset. IFRIC 20 must be applied for annual periods beginning on or after 1 January 2013.

These standards, amendments to standards and interpretations are not effective for the financial year beginning January 1, 2011 and have not been early adopted.

The Company’s management is currently assessing the potential impact that the application of these standards may have 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: market risk (including the effects of changes in foreign currency exchange rates, interest rates and commodities prices), credit risk and liquidity risk.

Ternium’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance. Ternium’s subsidiaries may use derivative financial instruments to hedge certain risk exposures.

 

48


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

33 Financial risk management (continued)

1.1) Market Risk

(i) Foreign exchange rate risk

Ternium operates and sells its products in different countries, and as a result is exposed to foreign exchange rate volatility. In addition, the Company entered into several borrowings that contain covenants providing for the compliance with certain financial ratios, including ratios measured in currencies other that the U.S. dollar. This situation exposes Ternium to a risk of non-compliance derived from volatility in foreign exchange rates. Ternium’s subsidiaries may use derivative contracts in order to hedge their exposure to exchange rate risk derived from their trade and financial operations.

Ternium general policy is to minimize the negative impact of fluctuations in the value of other currencies with respect to the U.S. dollar. Ternium’s subsidiaries monitor their net operating cash flows in currencies other than the U.S. dollar, and analyze potential hedging according to market conditions. This hedging can be carried out by netting operational positions or by financial derivatives. However, regulatory or legal restrictions in the countries in which Ternium’s subsidiaries operate, could limit the possibility of the Company carrying out its hedging policy.

Ternium has foreign operations, whose net assets are exposed to foreign currency translation risk, some of which may impact net income. The fact that some subsidiaries have measurement currencies other than the U.S. dollar may, at times, distort the results of the hedging efforts as reported under IFRS.

The following table shows a breakdown of Ternium’s assessed financial position exposure to currency risk as of December 31, 2011. These balances include intercompany positions where the intervening parties have different functional currencies.

 

September 30, September 30, September 30, September 30,
USD million      Functional Currency  

Exposure to

     USD      MXN      ARS        COP  

US dollar (USD)

       (n/a      (1,708.2      214.0           (93.1

EU euro (EUR)

       6.3         (3.5      13.5           —     

Other currencies

       (0.1      —           —             —     

We estimate that if the Argentine peso, Mexican peso and Colombian peso had weakened by 1% against the US dollar with all other variables held constant, total pre-tax income for the year would have been USD 16.3 million lower (USD 17.2 million lower as of December 31, 2010), as a result of foreign exchange gains/losses on translation of US dollar-denominated financial position, mainly trade receivables, borrowings and trade payables. This effect would have been offset by the change in the currency translation adjustment recorded in equity.

Considering the same variation of the currencies against the US dollar of all net investments in foreign operations amounting to USD 3.8 billion, the currency translation adjustment included in total equity would have been USD 37.2 million lower (USD 38.8 million lower as of December 31, 2010), arising from the adjustment on translation of the equity related to the Mexican peso, the Argentine peso and the Colombian peso.

(ii) Interest rate risk

Ternium manages its exposure to interest rate volatility through its financing alternatives and hedging instruments. Borrowings issued at variable rates expose the Company to the risk of increased interest expense in the event of a raise in market interest rates, while borrowings issued at fixed rates expose the Company to a variation in its fair value. The Company’s interest-rate risk mainly arises from long-term borrowings that bear variable-rate interest that is partially fixed through different derivative transactions, such as swaps and structures with options. The Company’s general policy is to maintain a balance between instruments exposed to fixed and variable rates; which can be modified according to long term market conditions.

Ternium’s nominal weighted average interest rate for its debt instruments, which also includes the effect of derivative financial instruments, was 3.42% and 3.29% for 2011 and 2010, respectively. These rates were calculated using the rates set for each instrument in its corresponding currency and weighted using the dollar-equivalent outstanding principal amount of each instrument as of December 31, 2011 and 2010, respectively.

Ternium’s total variable interest rate debt amounted to USD 1,505 million (75.6% of total borrowings) at December 31, 2011 and USD 1,925 million (99.3 % of total borrowings) at December 31, 2010.

If interest rates on the aggregate average notional of US dollar denominated borrowings held during 2011, excluding borrowings with derivatives contracts mentioned in Note 23(a), had been 100 basis points higher with all other variables held constant, total pre-tax income for the year ended December 31, 2011 would have been USD 12.1 million lower (USD 10.3 million lower as of December 31, 2010).

 

49


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

33 Financial risk management (continued)

 

(iii) Commodity price risk

In the ordinary course of its operations, Ternium purchases raw materials (such as iron ore, coal and slabs) and other commodities (including electricity and gas). Commodity prices are generally volatile as a result of several factors, including those affecting supply and demand, political, social and economic conditions, and other circumstances. Ternium monitors its exposure to commodity price volatility on a regular basis and applies customary commodity price risk management strategies. For further information on long-term commitments, see note 25(ii).

1.2) Credit risk

Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. Ternium’s subsidiaries have credit guidelines in place to ensure that derivative and treasury counterparties are limited to high credit quality financial institutions.

Ternium has no significant concentrations of credit risk from customers. No single customer accounts for more than five percent of Ternium’s sales. Ternium’s subsidiaries have policies in place to ensure that sales are made to customers with an appropriate credit history, and that credit insurances, letters of credit or other instruments are requested to reduce credit risk whenever deemed necessary. The subsidiaries maintain allowances for potential credit losses. The utilization of credit limits is regularly monitored.

Trade and other receivables are carried at face value less allowance for doubtful accounts, if applicable. This amount does not differ significantly from fair value. The other receivables do not contain significant impaired assets.

As of December 31, 2011, trade receivables total USD 742.5 million. These trade receivables are collateralized by guarantees under letter of credit and other bank guarantees of USD 7.1 million, credit insurance of USD 471.6 million and other guarantees of USD 19.3 million.

As of December 31, 2011, trade receivables of USD 667.0 million were fully performing.

As of December 31, 2011, trade receivables of USD 58.9 million were past due. These trade receivables as of December 31, 2011, are past due less than 3 months.

The amount of the allowance for doubtful accounts was USD 16.1 million as of December 31, 2011.

The carrying amounts of the Company’s trade and other receivables as of December 31, 2011, are denominated in the following currencies:

 

September 30,

Currency

     USD
million
 

US dollar (USD)

       553.1   

EU euro (EUR)

       28.7   

Argentine peso (ARS)

       22.2   

Mexican peso (MXN)

       263.4   

Colombian peso (COP)

       104.2   

Other currencies

       0.7   
    

 

 

 
       972.3   
    

 

 

 

1.3) Liquidity risk

Management maintains sufficient cash and marketable securities and credit facilities to finance normal operations. Management monitors rolling forecasts of the group’s liquidity reserve on the basis of expected cash flow.

The Company has negotiated additional credit facilities in its Argentine subsidiaries and renegotiated a part of an existing credit facility in Mexico (see note 24).

The table below analyses financial liabilities into relevant maturity groups based on the remaining period at the date of the statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

 

September 30, September 30, September 30, September 30, September 30,

USD million

     2012        2013        2014        2015        Thereafter  

Borrowings

       1,041.5           401.8           422.6           24.5           99.6   

Interests to be accrued (1)

       91.3           47.1           29.5           18.0           8.9   

Trade payables and other liabilities

       653.3           5.0           3.1           3.1           11.5   

Derivatives financial instruments

       29.9           —             —             —             —     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

       1,816.1           453.9           455.2           45.6           120.1   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1)

These amounts do not include the effect of derivative financial instruments.

 

50


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

33 Financial risk management (continued)

As of December 31, 2011 total cash and cash equivalents and other current investments less borrowings amounted to USD 450.2 million.

1.4) Capital risk

Ternium seeks to maintain an adequate debt/equity ratio considering the industry and the markets where it operates. The year-end ratio debt over debt plus equity is 0.23 and 0.22 as of December 31, 2011 and 2010, respectively. The Company does not have to comply with regulatory capital adequacy requirements as known in the financial services industry.

2) Financial instruments by category and fair value hierarchy level

The accounting policies for financial instruments have been applied to the line items below. According to the scope and definitions set out in IFRS 7 and IAS 32, employers’ rights and obligations under employee benefit plans, and non financial assets and liabilities such as advanced payments and income tax payables, are not included.

 

September 30, September 30, September 30,

At December 31, 2011 (in USD thousands)

     Loans and
receivables
       Assets at fair
value  through
profit and loss
       Total  

(i) Assets as per statement of financial position

              

Receivables

       38,467           —             38,467   

Derivative financial instruments

       —             50           50   

Trade receivables

       742,528           —             742,528   

Other investments

       46,535           249,041           295,576   

Cash and cash equivalents

       26,345           2,132,246           2,158,591   
    

 

 

      

 

 

      

 

 

 

Total

       853,875           2,381,337           3,235,212   
    

 

 

      

 

 

      

 

 

 

At December 31, 2011 (in USD thousands)

     Derivatives        Other financial
liabilities
       Total  

(ii) Liabilities as per statement of financial position

              

Other liabilities

       —             31,418           31,418   

Trade payables

       —             644,641           644,641   

Derivative financial instruments

       29,902           —             29,902   

Borrowings

       —             1,990,045           1,990,045   
    

 

 

      

 

 

      

 

 

 

Total

       29,902           2,666,104           2,696,006   
    

 

 

      

 

 

      

 

 

 

At December 31, 2010 (in USD thousands)

     Loans and
receivables
       Assets at fair
value through
profit and loss
       Total  

(i) Assets as per statement of financial position

              

Receivables

       38,693           —             38,693   

Derivative financial instruments

       —             212           212   

Trade receivables

       663,502           —             663,502   

Other investments

       23,864           859,849           883,713   

Cash and cash equivalents

       113,342           1,666,073           1,779,416   
    

 

 

      

 

 

      

 

 

 

Total

       839,401           2,526,134           3,365,536   
    

 

 

      

 

 

      

 

 

 

At December 31, 2010 (in USD thousands)

     Derivatives        Other financial
liabilities
       Total  

(ii) Liabilities as per statement of financial position

              

Other liabilities

       —             28,682           28,682   

Trade payables

       —             541,709           541,709   

Derivative financial instruments

       54,777           —             54,777   

Borrowings

       —             1,939,657           1,939,657   
    

 

 

      

 

 

      

 

 

 

Total

       54,777           2,510,048           2,564,825   
    

 

 

      

 

 

      

 

 

 

 

51


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

33 Financial risk management (continued)

 

Fair Value by Hierarchy

Following the requirements contained in paragraph 27B of IFRS 7, Ternium categorizes each class of financial instrument measured at fair value in the statement of financial position into three levels, depending on the significance of the judgment associated with the inputs used in making the fair value measurements. Level 1 comprises financial assets and financial liabilities whose fair values have been determined on the basis of quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 includes financial assets and financial liabilities for which fair values have been estimated using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 comprises financial instruments for which inputs to estimate fair value of the assets or liabilities are not based on observable market data (unobservable inputs).

 

September 30, September 30, September 30,
       Fair value measurement at December 31,
2011 (in USD thousand):
 

Description

     Total        Level 1        Level 2  

Financial assets at fair value through profit or loss

              

Cash and cash equivalents

       2,132,246           1,971,564           160,682   

Other investments

       249,041           213,655           35,386   

Derivatives financial instruments

       50           —             50   
    

 

 

      

 

 

      

 

 

 

Total assets

       2,381,338           2,185,219           196,118   
    

 

 

      

 

 

      

 

 

 

Financial liabilities at fair value through profit or loss

              

Derivatives financial instruments

       29,902           —             29,902   
    

 

 

      

 

 

      

 

 

 

Total liabilities

       29,902           —             29,902   
    

 

 

      

 

 

      

 

 

 
       Fair value measurement at December 31,
2010 (in USD thousand):
 

Description

     Total        Level 1        Level 2  

Financial assets at fair value through profit or loss

              

Cash and cash equivalents

       1,666,073           1,531,082           134,991   

Other investments

       859,849           811,824           48,025   

Derivatives financial instruments

       212           —             212   
    

 

 

      

 

 

      

 

 

 

Total assets

       2,526,134           2,342,906           183,228   
    

 

 

      

 

 

      

 

 

 

Financial liabilities at fair value through profit or loss

              

Derivatives financial instruments

       54,777           —             54,777   
    

 

 

      

 

 

      

 

 

 

Total liabilities

       54,777           —             54,777   
    

 

 

      

 

 

      

 

 

 

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy and there were no financial assets and liabilities considered as Level 3.

3) Accounting for derivative financial instruments and hedging activities

Derivative financial instruments are initially recognized in the statement of financial position at cost and subsequently measured at fair value. Changes in fair value are disclosed under “Other financial income (expenses), net” line item in the income statement. Ternium does not hedge its net investments in foreign entities.

Ternium designates certain derivatives as hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. These transactions are classified as cash flow hedges (mainly interest rate swaps, collars and commodities contracts). The effective portion of the fair value of derivatives that are designated and qualify as cash flow hedges is recognized within other comprehensive income. Amounts accumulated in other comprehensive income are recognized in the income statement in the same period than any offsetting losses and gains on the hedged item. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. The fair value of Ternium derivative financial instruments (asset or liability) continues to be reflected on the statement of financial position.

For transactions designated and qualifying for hedge accounting, Ternium documents at inception the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. At December 31, 2011, the effective portion of designated cash flow hedges amounts to USD 14.9 million (net of taxes for USD 2.9 million) and is included as “Cash flow hedges” line item in the statement of comprehensive income.

 

52


TERNIUM S.A.

Notes to the Consolidated Financial Statements (Contd.)

 

33 Financial risk management (continued)

 

The fair values of various derivative instruments used for hedging purposes are disclosed in Note 23. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.

Changes in the fair value of any derivative instruments that do not qualify for hedge accounting under IAS 39 are recognized immediately in the income statement.

4) Fair value estimation

The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

For the purpose of estimating the fair value of financial assets and liabilities with maturities of less than one year, the Company uses the market value less any estimated credit adjustments. For other investments, the Company uses quoted market prices.

As most borrowings 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 year end.

34 Subsequent events—Share purchase agreement of Usiminas

On November 27, 2011, the Company’s wholly-owned Luxembourg subsidiary Ternium Investments S.àr.l., together with the Company’s Argentine majority-owned subsidiary Siderar S.A.I.C. (and Siderar’s wholly-owned Uruguayan subsidiary Prosid Investments S.C.A.), and Confab Industrial S.A., a majority-owned Brazilian subsidiary of Tenaris S.A. (“TenarisConfab”), entered into share purchase agreements with Camargo Corrêa, Votorantim and Caixa dos Empregados da Usiminas (Usiminas employee pension fund, or CEU) for the acquisition of 139.7 million ordinary shares of Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS (“Usiminas”), representing 27.7% (out of which 22.7% corresponds to Ternium) of Usiminas’ voting capital, at a price of BRL 36.0 (approximately USD 19.0) per ordinary share. Ternium Investments and Siderar financed their BRL 4.1 billion share (approximately USD 2.2 billion) with cash on hand and, in the case of Ternium Investments, a USD 700 million syndicated term loan.

Upon closing of the transaction on January 16, 2012, Ternium Investments, Siderar and TenarisConfab joined Usiminas’ existing control group through the acquisition of 84.7, 30.0, and 25.0 million ordinary shares, respectively. In addition, Nippon Steel acquired from CEU 8.5 million ordinary shares. In addition, Ternium Investments, Siderar and Prosid entered into an amended and restated Usiminas shareholders’ agreement with Nippon Steel, Mitsubishi, Metal One and CEU, governing Ternium Investments, Siderar (and Prosid) and TenarisConfab’s rights within the Usiminas control group; most decisions in that control group are subject for its approval to a 65% majority of the control group shares. As a result of these transactions, the control group, which holds 322.7 million ordinary shares representing the majority of Usiminas’ voting rights, is now formed as follows: Nippon Group 46.1%, Ternium/Tenaris Group 43.3% (out of which 35.6% corresponds to Ternium), and CEU 10.6%. The rights of Ternium Investments, Siderar (and Prosid) and TenarisConfab within the Ternium/Tenaris Group are governed under a separate shareholders agreement.

Following the closing of the transaction, Messrs. Daniel Novegil, Roberto Vidigal and Alcides Morgante were appointed as members of Usiminas’ Board of Directors, together with their alternates, to replace the Board members nominated by Camargo Correa and Votorantim. In addition, Usiminas’ Board of Directors appointed Julián Eguren, previously a senior executive with Ternium, as Chief Executive Officer (Diretor-Presidente) of Usiminas.

With strategically located facilities near the main consumers of steel in Brazil and iron ore mines in the Serra Azul region, Usiminas is organized under four main business units: Mining, Steel, Steel Processing and Capital Goods. In 2010, Usiminas had net sales of BRL 13.0 billion (approximately USD 7.4 billion).

Pablo Brizzio

Chief Financial Officer

 

53