Form 6-K
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

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

the Securities Exchange Act of 1934

As of 4/30/2015

 

 

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

 

 

 


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The attached material is being furnished to the Securities and Exchange Commission (“Commission”) pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange Act of 1934, as amended.

As part of its regular reviews of Ternium’s filings of financial statements, the Staff of the Commission has issued comments regarding the carrying value of Ternium’s investment in Usiminas, including seeking explanations on Ternium’s value in use calculations and on the differences between value in use and certain fair value indicators. After receiving the Staff’s comments, Ternium provided additional information to the Staff supporting the Company’s accounting treatment of the Usiminas investment under IFRS as of September 30, 2014, and Ternium had further discussions with members of the Staff.

Discussions with the Staff continue. Ternium believes that its accounting of the Usiminas investment is in accordance with IFRS; however, if it is determined after the conclusion of this process that an additional impairment of the investment in Usiminas should be recorded in 2014, Ternium could be required to restate its financial statements for the year ended December 31, 2014. A restatement of the 2014 financial statements could also result in a restatement of the financial statements for the first quarter of 2015.

The value of Ternium’s investment in Usiminas, which was determined by the application of IFRS and tested for impairment using the value in use calculation as per IAS 36, amounted to USD 1,301.5 million as of September 30, 2014, USD 1,390.7 million as of December 31, 2014 and USD 1,020.0 million as of March 31, 2015. The increase in the carrying value from September 30, 2014 to December 31, 2014 was related with the acquisition of additional Usiminas shares from PREVI at a price of BRL12 (approximately USD4.8) per ordinary share pursuant to an October 2, 2014 agreement.

On or before May 1, 2015, the Company will file Form 12b-25 with the Commission, disclosing that the Company was unable to file on April 30, 2015 its Annual Report on Form 20-F for the fiscal year ended December 31, 2014 (the “2014 Form 20-F”), because the Company is continuing to work to resolve the Staff’s outstanding comments noted above.

For more information on the carrying value of the Usiminas investment, see note 9 to Ternium’s consolidated financial statements as of March 31, 2015, which have been furnished today to the Commission under Form 6-K.

Attached hereto is substantially all the information the Company currently expects it would include in its Annual Report on Form 20-F when that report is filed with the Commission, except it does not include any report by the Company’s independent registered public accounting firm or any of the documents that will be filed as exhibits to the Form 20-F. Also, it does not reflect any adjustments to the financial statements or other disclosure that may be required upon resolution of the discussions with the Commission Staff referred to above.


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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: April 30, 2015


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TABLE OF CONTENTS

 

PART I

     4   

Item 1. Identity of Directors, Senior Management and Advisers

     4   

Item 2. Offer Statistics and Expected Timetable

     4   

Item 3. Key Information

     4   

Item 4. Information on the Company

     19   

Item 4A. Unresolved Staff Comments

     55   

Item 5. Operating and Financial Review and Prospects

     55   

Item 6. Directors, Senior Management and Employees

     73   

Item 7. Major Shareholders and Related Party Transactions

     82   

Item 8. Financial Information

     84   

Item 9. The Offer and Listing

     86   

Item 10. Additional Information

     88   

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     99   

Item 12. Description of Securities Other Than Equity Securities

     101   

PART II

     102   

Item 13. Defaults, Dividend Arrearages and Delinquencies

     102   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     102   

Item 15. Controls and Procedures

     103   

Item 16A. Audit Committee Financial Expert

     103   

Item 16B. Code of Ethics

     103   

Item 16C. Principal Accountant Fees and Services

     104   

Item 16D. Exemptions from the Listing Standards for Audit Committees

     105   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     105   

Item 16F. Change in Registrant’s Certifying Accountant

     106   

Item 16G. Corporate Governance

     106   

Item 16H. Mine Safety Disclosure

     107   

PART III

     107   

Item 17. Financial Statements

     107   

Item 18. Financial Statements

     108   

 

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CERTAIN DEFINED TERMS

In this annual report, unless otherwise specified or if the context so requires:

 

 

References to the “Company” refer exclusively to Ternium S.A., a Luxembourg public limited liability company (société anonyme);

 

 

References in this annual report to “Ternium,” “we,” “us” or “our” refer to Ternium S.A. and its consolidated subsidiaries;

 

 

References to the “Ternium companies” are to the Company’s manufacturing subsidiaries, namely Ternium México S.A. de C.V., or “Ternium Mexico”, a Mexican corporation, Siderar S.A.I.C., or “Siderar”, an Argentine corporation, Ferrasa S.A.S., or “Ferrasa”, a Colombian corporation, Ternium Internacional Guatemala S.A., or “Ternium Guatemala”, a Guatemalan corporation, Ternium USA Inc., or “Ternium USA”, a Delaware corporation, Las Encinas S.A. de C.V., or “Las Encinas”, a Mexican corporation, and Consorcio Minero Benito Juárez Peña Colorada S.A. de C.V., or “Consorcio Peña Colorada”, a Mexican corporation, and their respective subsidiaries;

 

 

References to “Tenaris” are to Tenaris S.A., a Luxembourg public limited liability company (société anonyme) and a significant shareholder of the Company;

 

 

References to “San Faustin” are to San Faustin S.A., a Luxembourg corporation and the Company’s indirect controlling shareholder;

 

 

References to the “Ternium commercial network” or “Ternium Internacional” are to an international group of companies wholly owned by Ternium that market and provide worldwide distribution services for products offered primarily by Ternium;

 

 

References to “Exiros” comprise Exiros B.V., a Netherlands corporation, and its subsidiaries under the brand “Exiros”;

 

 

References to “Tecpetrol” refer to Tecpetrol International S.A., a wholly-owned subsidiary of San Faustin;

 

 

References to “Tenigal” refer to Tenigal S.R.L. de C.V., a Mexican company in which Ternium holds a 51% ownership and Nippon Steel & Sumitomo Metal Corporation holds the remaining 49%;

 

 

References to “Usiminas” refer to Usinas Siderúrgicas de Minas Gerais S.A.—USIMINAS, a Brazilian corporation in which we own 32.9% of the ordinary shares. For further information on our investment in Usiminas, see note 3 to our consolidated financial statements included elsewhere in this annual report;

 

 

References to “ADSs” are to the American Depositary Shares, which are evidenced by American Depositary Receipts, or ADRs;

 

 

References to “finished steel products” when used in connection with production capacity are to finished steel products and semi-finished steel products intended to be sold to third parties;

 

 

References to “tons” are to metric tons; one metric ton is equal to 1,000 kilograms, 2,204.62 pounds or 1.102 U.S. (short) tons; and

 

 

References to “billions” are to thousands of millions, or 1,000,000,000.

 

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PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION

Accounting Principles

We prepare our consolidated financial statements in conformity with International Financial Reporting Standards, or “IFRS”, as issued by the International Accounting Standards Board, or “IASB”, and adopted by the European Union (“EU”). IFRS differ in certain significant respects from generally accepted accounting principles in the United States, commonly referred to as U.S. GAAP.

Currencies

In this annual report, unless otherwise specified or the context otherwise requires:

 

 

“dollars,” “U.S. dollars,” “USD” or “US$” each refers to the United States of America dollar;

 

 

“Mexican pesos” or “MXN” each refers to the Mexican peso;

 

 

“Argentine pesos” or “ARP” each refers to the Argentine peso; and

 

 

“Brazilian reais” or “BRL” each refers to the Brazilian real.

On December 31, 2014, the U.S. dollar sell exchange rate in Mexico (as published by Banco de México, or the Mexican Bank) was MXN14.7414=USD1.0000, the U.S. dollar sell exchange rate in Argentina (as published by Banco Central de la República Argentina, or the Argentine Central Bank) was ARP8.551=USD1.0000, and the U.S. dollar sell exchange rate in Brazil (as published by Banco Central do Brasil, or the Brazilian Central Bank) was BRL2.6562=USD1.0000. Those rates may differ from the actual rates used in preparation of the Company’s consolidated financial statements. We do not represent that any of these currencies could have been or could be converted into U.S. dollars or that U.S. dollars could have been or could be converted into any of these currencies.

Rounding; Comparability of Data

Certain monetary amounts, percentages and other figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

Industry Data

Unless otherwise indicated, industry data and statistics (including historical information, estimates or forecasts) in this annual report are contained in or derived from internal or industry sources believed by Ternium to be reliable. Industry data and statistics are inherently predictive and are not necessarily reflective of actual industry conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods and (iii) different assumptions were applied in compiling the data. Such data and statistics have not been independently verified, and the Company makes no representation as to the accuracy or completeness of such data or any assumptions relied upon therein.

Our Internet Site is Not Part of this Annual Report

We maintain an Internet site at www.ternium.com. Information contained in or otherwise accessible through this website is not a part of this annual report. All references in this annual report to this Internet site are inactive textual references to this URL, or “uniform resource locator” and are for your informational reference only. We assume no responsibility for the information contained on this website.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This annual report and any other oral or written statements made by us to the public may contain “forward-looking statements” within the meaning of and subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This annual report contains forward-looking statements, including with respect to certain of our plans and current goals and expectations relating to Ternium’s future financial condition and performance.

Sections of this annual report that by their nature contain forward-looking statements include, but are not limited to, Item 3. “Key Information,” Item 4. “Information on the Company,” Item 5. “Operating and Financial Review and Prospects” and Item 11. “Quantitative and Qualitative Disclosures about Market Risk.”

We use words such as “aim,” “will continue,” “will likely result,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “should,” “will pursue,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and words and terms of similar substance to identify forward-looking statements, but they are not the only way we identify such statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These factors include the risks related to our business discussed under Item 3. “Key Information—D. Risk Factors,” and among them, the following:

 

 

uncertainties about the behavior of steel consumers in the markets in which Ternium operates and sells its products;

 

 

changes in the pricing environments in the countries in which Ternium operates;

 

 

the impact in the markets in which Ternium operates of existing and new competitors whose presence may affect Ternium’s customer mix, revenues and profitability;

 

 

increases in the prices of raw materials, other inputs or energy or difficulties in acquiring raw materials or other inputs or energy supply cut-offs;

 

 

the policies of, and the economic, political and social developments and conditions in, the countries in which Ternium owns facilities or other countries which have an impact on Ternium’s business activities or investments;

 

 

inflation or deflation and foreign exchange rates in the countries in which Ternium operates;

 

 

volatility in interest rates;

 

 

the performance of the financial markets globally and in the countries in which Ternium operates;

 

 

the performance of our investment in Usiminas (including the operating and financial performance of Usiminas, and changes in the value of the Brazilian real versus the U.S. dollar) and the uncertainties associated with the ongoing controversies relating to our acquisition of Usiminas shares in October 2014 as well as the controversy that has arisen within Usiminas’ control group. See Item 8 “Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” and Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas”;

 

 

changes in domestic and foreign laws and regulations, including changes relating to tax, trade and foreign exchange matters;

 

 

regional or general changes in asset valuations;

 

 

uncertainties as to the result of our iron ore exploration activities or the successful exploitation of our mines;

 

 

our ability to successfully implement our business strategy or to grow through acquisitions, greenfield and brownfield projects, joint ventures and other investments; and

 

 

other factors or trends affecting the steel and mining industries generally and our financial condition in particular.

 

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By their nature, certain disclosures relating to these and other risks are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses that may affect Ternium’s financial condition and results of operations could differ materially from those that have been estimated. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

A. Selected Financial Data

The selected consolidated financial data set forth below have been derived from our consolidated financial statements for each of the years and at the dates indicated herein. Our consolidated financial statements were prepared in accordance with IFRS, and were audited by PricewaterhouseCoopers, société coopérative (formerly PricewaterhouseCoopers S.à r.l.), Cabinet de révision agréé, or “PwC Luxembourg”, an independent registered public accounting firm that is a member firm of the PwC International Ltd. network.

For a discussion of the currencies used in this annual report, exchange rates and accounting principles affecting the financial information contained in this annual report, see “Presentation of Certain Financial and Other Information—Accounting Principles” and “Currencies.”

 

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In thousands of U.S. dollars    For the year ended December 31,  
(except number of shares and per share data)    2014     2013     2012 (1)     2011 (1)(2)     2010 (1)(2)  

Selected consolidated income statement data

          

Net sales

     8,726,057        8,530,012        8,608,054        9,122,832        7,339,901   

Cost of sales

     (6,925,169     (6,600,292     (6,866,379     (7,016,322     (5,560,201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,800,888        1,929,720        1,741,675        2,106,510        1,779,700   

Selling, general and administrative expenses

     (816,478     (843,311     (809,181     (839,362     (738,304

Other operating income (expenses), net

     71,751        23,014        (11,881     (11,495     2,162   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,056,161        1,109,423        920,613        1,255,653        1,043,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance expense

     (117,866     (132,113     (150,302     (105,570     (71,228

Finance income

     5,715        (2,358     11,400        26,190        24,024   

Other financial income (expenses), net

     42,701        (1,004     17,270        (221,042     176,441   

Equity in (losses) earnings of non-consolidated companies

     (34,218     (31,609     (346,833     10,137        12,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     952,493        942,339        452,148        965,368        1,185,662   

Income tax expense

     (363,708     (349,426     (261,227     (312,555     (406,191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     588,785        592,913        190,921        652,813        779,470   

Attributable to:

          

Owners of the parent

     452,404        455,425        142,043        517,668        622,076   

Non-controlling interest

     136,381        137,488        48,878        135,145        157,394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     588,785        592,913        190,921        652,813        779,470   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     414,797        377,133        370,855        395,988        374,201   

Weighted average number of shares outstanding (3)

     1,963,076,776        1,963,076,776        1,963,076,776        1,968,327,917        2,004,743,442   

Basic earnings per share (in USD per share) (4) (5)

     0.23        0.23        0.07        0.26        0.31   

Dividends per share (in USD per share)

     0.090 (6)      0.075        0.065        0.075        0.075   

 

(1) Starting on January 1, 2013, Consorcio Peña Colorada and Exiros have been proportionally consolidated. Comparative amounts for the years ended December 31, 2012, 2011 and 2010 show them as investments in non-consolidated companies and their results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement.
(2) Ternium changed prospectively the functional currency of its Mexican subsidiaries to the U.S. dollar, effective as of January 1, 2012. For the periods ended December 31, 2011 and 2010 the functional currency for the Company’s Mexican subsidiaries was the Mexican peso.
(3) Of the 2,004,743,442 shares issued as of December 31, 2014, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc., repurchased from Usiminas on February 15, 2011. Such shares were not considered outstanding for purposes of the calculation of the weighted average number of shares.
(4) International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as shown in the income statement includes the portion attributable to non-controlling interest. Basic earnings per share, however, continue to be calculated on the basis of income attributable solely to the owners of the parent.
(5) Diluted earnings per share (expressed in USD per share), equals basic earnings per share.
(6) Reflects dividend proposal for the year ended December 31, 2014, which has been submitted to the shareholders for a vote at the annual general shareholders’ meeting to be held on May 6, 2015.

 

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In thousands U.S. dollars    At December 31,  
(except number of shares and per share data)    2014      2013      2012      2011      2010  

Selected consolidated balance sheet data

              

Non-current assets

     6,905,672         7,153,162         7,211,371         5,195,688         5,600,608   

Property, plant and equipment, net

     4,481,027         4,708,895         4,438,117         3,969,187         4,203,685   

Other non-current assets (1)

     2,424,645         2,444,267         2,773,254         1,226,501         1,396,923   

Current assets

     3,348,869         3,219,462         3,655,628         5,547,374         5,499,306   

Cash and cash equivalents

     213,303         307,218         560,307         2,158,044         1,779,294   

Other current assets (2)

     3,120,810         2,894,474         3,083,303         3,378,956         3,710,050   

Non-current assets classified as held for sale

     14,756         17,770         12,018         10,374         9,961   

Total assets

     10,254,541         10,372,624         10,866,999         10,743,062         11,099,914   

Capital and reserves attributable to the owners of the parent (3)

     5,284,959         5,340,035         5,369,183         5,711,495         5,833,246   

Non-controlling interest

     973,523         998,009         1,065,730         1,077,055         1,127,526   

Non-current liabilities

     1,904,673         2,185,421         2,306,640         1,975,129         2,583,032   

Borrowings

     900,611         1,204,880         1,302,753         948,495         1,426,574   

Deferred tax liabilities

     611,126         605,883         657,211         719,061         847,044   

Other non-current liabilities

     392,936         374,658         346,676         307,573         309,414   

Current liabilities

     2,091,386         1,849,159         2,125,446         1,979,383         1,556,110   

Borrowings

     1,264,208         797,944         1,121,610         1,047,641         513,083   

Other current liabilities

     827,178         1,051,215         1,003,836         931,742         1,043,028   

Total liabilities

     3,996,059         4,034,580         4,432,086         3,954,512         4,139,142   

Total equity and liabilities

     10,254,541         10,372,624         10,866,999         10,743,062         11,099,914   

Number of shares (3)

     1,963,076,776         1,963,076,776         1,963,076,776         1,963,076,776         2,004,743,442   

 

(1) As of December 31, 2014, 2013, 2012, 2011 and 2010, includes goodwill mainly related to the acquisition of our Mexican subsidiaries for a total amount of USD662.3 million, USD662.3 million, USD663.8 million, USD663.8 million and USD750.1 million, respectively.
(2) As of December 31, 2014, 2013, 2012, 2011 and 2010, includes financial assets with maturity of more than three months for a total amount of USD150.0 million, USD169.5 million, USD160.8 million, USD281.7 million and USD848.4 million, respectively.
(3) The Company’s share capital as of December 31, 2014, 2013, 2012, 2011 and 2010 was represented by 2,004,743,442 shares, par value USD1.00 per share, for a total amount of USD2,004.7 million. Of the 2,004,743,442 shares, as of December 31, 2014, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc., repurchased from Usiminas on February 15, 2011.

 

B. Capitalization and Indebtedness

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

D. Risk Factors

You should carefully consider the risks and uncertainties described below, together with all other information contained in this annual report, before making any investment decision. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition and results of operations, which could in turn affect the price of the Company’s shares and ADSs.

Risks Relating to the Steel Industry

A downturn in the global economy would cause a reduction in worldwide demand for steel and would have a material adverse effect on the steel industry and Ternium.

Ternium’s activities and results are affected by international economic conditions, as well as by national and regional economic conditions in the markets where Ternium operates and/or sells its products. A downturn in the global economy would reduce demand for steel products. This would have a negative effect on Ternium’s business and results of operations.

If global macroeconomic conditions deteriorate, the outlook for steel producers would be adversely affected. In particular, a recession or depression in the developed economies (such as the global downturn experienced in 2008 and 2009 and the latest European crisis), or slower growth or recessionary conditions in emerging economies that are substantial consumers of steel (such as China and India,

 

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as well as emerging Asian markets, the Middle East, Latin America and the Commonwealth of Independent States regions) would exact a heavy toll on the steel industry, and would depress demand for our products and adversely affect our business and results of operations. The current slowdown in the Chinese economy has had and may continue to have adverse effects on the steel industry, and, accordingly, may adversely affect our business and results of operations.

A protracted fall in steel prices would have a material adverse effect on the results of Ternium, as could price volatility.

Steel prices are volatile and are sensitive to trends in cyclical industries, such as the construction, automotive, appliance and machinery industries, which are significant markets for Ternium’s products. For example, steel prices in the international markets, which had been rising quickly during the first half of 2008, fell sharply beginning in the second half of 2008 as a result of collapsing demand and the resulting excess capacity in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and write-downs of finished steel products and raw material inventories. Historically, the length and nature of business cycles affecting the steel industry has been unpredictable. A downturn in steel prices would materially and adversely affect Ternium’s revenues and profitability.

A sudden increase in exports from China could have a significant impact on international steel prices and adversely affect Ternium’s profitability.

China is now the largest worldwide steel producing country, accounting for close to half of the worldwide steel production. Due to the size of the Chinese steel market, a significant slowdown or reduction in steel consumption in that market could cause a sizable increase in the volume of steel offered in the international steel markets, exerting a downward pressure on sales and margins of steel companies operating in other markets and regions, including Ternium. For example, exports of steel products from China to Latin America, which represent approximately 10% of the region’s steel consumption, reached 8 million tons in 2014, a 56% increase year-over-year, reflecting a combination of excess steel capacity and a slight decrease in steel consumption in China.

Excess capacity may hamper the steel industry’s ability to sustain adequate profitability.

In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered, especially on downturn cycles, from substantial over-capacity. Currently, as a result of the 2008 global downturn, the latest European crisis and the increase in steel industry production capacity in recent years, there are signs of excess capacity in all steel markets, which is impacting the profitability of the steel industry. Accordingly, it is possible that the industry’s excess capacity will result in an extended period of depressed margins and industry weakness.

Sales may fall as a result of fluctuations in industry inventory levels.

Inventory levels of steel products held by companies that purchase Ternium’s products can vary significantly from period to period. These fluctuations can temporarily affect the demand for Ternium’s products, as customers draw from existing inventory during periods of low investment in construction and the other industry sectors that purchase Ternium’s products and accumulate inventory during periods of high investment and, as a result, these companies may not purchase additional steel products or maintain their current purchasing volume. Accordingly, Ternium may not be able to increase or maintain its current levels of sales volumes or prices.

Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability.

Like other manufacturers of steel-related products, Ternium’s operations require substantial amounts of raw materials, energy and other inputs from domestic and foreign suppliers. In particular, the Ternium companies consume large quantities of iron ore, scrap, ferroalloys, electricity, coal, natural gas, oxygen and other gases in operating their blast and electric arc furnaces. In addition, Ternium is a large consumer of slabs, which are used as inputs in the production process. The prices of these raw materials, slabs, energy and other inputs can be volatile. Also, the availability and price of a significant portion of such raw materials, slabs, energy and other inputs Ternium requires are subject to market conditions and government regulation affecting supply and demand. For example, shortages of natural gas in Argentina and the consequent supply restrictions imposed by the government could lead to higher costs of production and eventually to production cutbacks at Siderar’s facilities in Argentina. Similarly, in Mexico, existing constraints in natural gas transportation capacity have led to increased imports of liquefied natural gas, which, from April 1, 2013, resulted in increased natural gas transportation costs and, thus, higher steel production costs. In the past, Ternium has usually been able to procure sufficient supplies of raw materials, slabs, energy and other inputs to meet its production needs; however, it could be unable to procure adequate supplies in the future. Any protracted interruption, discontinuation or other disruption of the supply of principal inputs to the Ternium companies (including as a result of strikes, lockouts or other problems) would result in lost sales and

 

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would have a material adverse effect on Ternium’s business and results of operations. For further information related to raw materials, energy and other inputs requirements, see Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

The Ternium companies depend on a limited number of key suppliers.

The Ternium companies depend on certain key suppliers for their requirements of some of their principal inputs, including Vale for iron ore and ArcelorMittal for slabs. In general, there is a trend in the industry towards consolidation among suppliers of iron ore and other raw materials. The Ternium companies have entered into long-term contracts for the supply of some (but not all) of their principal inputs and it is expected that they will maintain and, depending on the circumstances, renew these contracts. However, if any of the key suppliers fails to deliver or there is a failure to renew these contracts, the Ternium companies could face limited access to some raw materials, slabs, rolled steel products, energy or other inputs, or higher costs and delays resulting from the need to obtain their input requirements from other suppliers.

Intense competition could cause Ternium to lose its share in certain markets and adversely affect its sales and revenues.

The market for Ternium’s steel products is highly competitive, particularly with respect to price, quality and service. In both the global and regional markets, Ternium competes against other global and local producers of steel products, which in some cases have greater financial and operating resources. Competition from larger steel manufacturers could result in declining margins and reductions in sales volumes and revenues.

Ternium’s larger competitors could use their resources against Ternium in a variety of ways, including by making additional acquisitions, implementing modernization programs, expanding their production capacity, investing more aggressively in product development, and displacing demand for Ternium’s products in certain markets. To the extent that these producers become more efficient, Ternium could confront stronger competition and could fail to preserve its current share of the relevant geographic or product markets. In addition, there has been a trend in recent years toward steel industry consolidation among Ternium’s competitors, and current smaller competitors in the steel market could become larger competitors in the future. For example, in June 2006, Mittal Steel and Arcelor merged to create the world’s largest steel company, ArcelorMittal, and in October 2012 Nippon Steel Corporation and Sumitomo Metal Industries merged to form Nippon Steel & Sumitomo Metal Corporation, or NSSMC, the world’s second largest steel company. Regional players in Ternium’s markets have also experienced consolidation through acquisitions. For further information, see Item 4. “Information on the Company—B. Business Overview—Competition.”

Moreover, competition from alternative materials (including aluminum, wood, concrete, plastic and ceramics) could adversely affect the demand for, and consequently the market prices of, certain steel products and, accordingly, could affect Ternium’s sales volumes and revenues.

Competition in the global and regional markets could also be affected by antidumping and countervailing duties imposed on some producers in major steel markets and by the removal of barriers to imported products in those countries where the Ternium companies direct their sales. For further information, see Item 4. “Information on the Company—B. Business Overview—Regulations—Trade regulations.”

Risks Relating to our Business

If Ternium does not successfully implement its business strategy, its opportunities for growth and its competitive position could be adversely affected.

Ternium plans to continue implementing its business strategy of enhancing its position as a competitive steel producer, focusing on higher margin value-added products, pursuing strategic growth opportunities, implementing Ternium’s best practices in acquired and new businesses, providing services to a wider range of customers in the local and export markets, and improving utilization levels of our plants, increasing efficiency and further reducing production costs. Any of these components or Ternium’s overall business strategy could be delayed or abandoned or could cost more than anticipated, any of which could impact its competitive position and reduce its revenue and profitability. For example, Ternium could fail to develop its projects and/or to make acquisitions to increase its steel production capacity, or may lose market share in its regional markets. Even if Ternium successfully implements its business strategy, it may not yield the desired goals.

Future acquisitions or other significant investments could have an adverse impact on Ternium’s operations or profits, and Ternium may not realize the benefits it expects from these business decisions.

A key element of Ternium’s business strategy is to identify and pursue growth-enhancing opportunities, and as part of that strategy we regularly consider acquisitions, greenfield and brownfield projects and other significant investments. However, any growth project

 

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will depend upon market and financing conditions. We must necessarily base any assessment of potential acquisitions or other investments on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Furthermore, we may fail to find suitable acquisition targets or fail to consummate our acquisitions under favorable conditions.

In the past, Ternium acquired interests in various companies, including Hylsamex, one of the main steel producers in Mexico; Grupo Imsa, a leading steel processor with operations in Mexico, the United States and Guatemala; and Ferrasa, a Colombian steel producer and processor. Ternium has also formed, together with Nippon Steel (currently, NSSMC), Tenigal for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automobile market. In 2012, Ternium acquired a participation in the control group of Usiminas, the largest flat steel producer in Brazil, and in 2014, Ternium acquired a significant additional stake in that company. Our acquisitions or other investments may not perform in accordance with our expectations and could have an adverse impact on our operations and profits. Furthermore, we may be unable to successfully integrate any acquired businesses into our operations, realize expected synergies or accomplish the business objectives that were foreseen at the time of deciding any such investment. Moreover, we may also acquire, as part of future acquisitions, assets unrelated to our business, and we may not be able to integrate them or sell them under favorable terms and conditions. These risks, and the fact that integration of any acquired businesses will require a significant amount of time and resources of Ternium’s management and employees, could have an adverse impact on Ternium’s ongoing business and could have a material adverse effect on its business, financial condition and results of operations.

Ternium may be required to record a significant charge to earnings if it must reassess its goodwill, other amortizable intangible assets, or investments in non-consolidated companies.

In accordance with IFRS, management must test for impairment all of Ternium’s assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets subject to testing include goodwill, intangible assets and investments in non-consolidated companies. In addition, management must test for impairment goodwill at least once a year whether or not there are indicators of impairment. IFRS requires us to recognize a non-cash charge in an amount equal to any impairment.

We recorded significant goodwill in connection with the acquisition of our Mexican subsidiaries, as well as in our investments in non-consolidated companies in connection with our acquisition of a participation in Usiminas. We performed several impairment tests on our investment in Usiminas and, as of December 31, 2012, December 31, 2014 and March 31, 2015, wrote it down by USD275.3 million, USD196.4 million and USD109.7 million, respectively, as described further below.

As of December 31, 2014, goodwill in connection with our Mexican subsidiaries amounted to USD662.3 million and, following the write-downs of our investment in Usiminas recorded as of December 31, 2012 and December 31, 2014, our investment in non-consolidated companies as of December 31, 2014 amounted to USD1.4 billion. As of March 31, 2015, following the write-down of our investment in Usiminas recorded as of March 31, 2015, our investments in non-consolidated companies amounted to USD1.0 billion. For further information on the Usiminas impairment risk and its implications, see “—If Usiminas is not able to successfully implement its business strategy, or the business conditions in Brazil or in the global steel and mining industries were to be worse than we expected, the Company may be required to record a significant charge to earnings in the form of an impairment to its investment in Usiminas, which could have a material adverse effect on Ternium’s results, financial condition or net worth”, for further information on the Usiminas impairment test performed on March 31, 2015, see Item 5 “Operating and Financial Review and Prospects— G. Recent Developments—March 31, 2015 Impairment of Usiminas Investment” and for a discussion of the SEC’s review process in connection with the impairment of our investment in Usiminas, see Item 4A. “Unresolved Staff Comments”.

If Ternium’s management determines in the future that the goodwill from our acquisitions or our investments in non-consolidated companies are impaired, Ternium will be required to recognize a non-cash charge against earnings, which could materially adversely affect Ternium’s results of operations and net worth.

If Usiminas is not able to successfully implement its business strategy, or the business conditions in Brazil or in the global steel and mining industries were to be worse than we expected, the Company may be required to record a significant charge to earnings in the form of an impairment to its investment in Usiminas, which could have a material adverse effect on Ternium’s results,  financial condition or net worth.

On January 16, 2012, Ternium, together with its subsidiary Siderar, acquired a participation in the control group of Usiminas, the largest flat steel producer in Brazil, for a total consideration of USD2.2 billion. On October 30, 2014, Ternium acquired additional ordinary shares of Usiminas for a total consideration of USD249.0 million. Ternium owns approximately 32.9% of Usiminas’ ordinary shares, holds 35.6% of the voting rights within Usiminas’ control group and has a 16.8% participation in Usiminas’ results. For further information on the Usiminas transactions, see note 3 to our consolidated financial statements included elsewhere in this annual report.

Between 2012 and until September 2014, Usiminas improved its performance and results of operations as a result of the implementation of certain changes in its strategy and business practices. However, results deteriorated during the fourth quarter of 2014 as Brazilian steel-intensive industrial sectors such as the capital goods, durable goods, vehicles and machinery and equipment sectors were adversely affected by low investments, weak consumption, strong imports and high inventories. Further changes to Usiminas’ strategy and business practices may be required in the future in order to recover profitability, and we cannot assure you that

 

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such changes will be successful. Under the shareholders agreement governing the rights of the members of Usiminas’ control group, Ternium cannot, without the consensus of one or more of the other shareholder groups party to that agreement, cause the control group to adopt any decision at Usiminas’ shareholders’ meetings or cause the directors nominated by the control group to adopt any decision at Usiminas’ board of directors’ meetings (see Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas”). Accordingly, Ternium cannot, without the consensus of such other shareholder group or groups, implement any change to Usiminas’ business strategy, and therefore any necessary changes may fail to be implemented. In addition, a controversy has arisen within the Usiminas control group with respect to the governance of Usiminas and the rules applicable to the appointment of senior managers, which may make it more difficult to reach consensus within the control group. For further information related to the controversy within the Usiminas control group, see Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas.”

The Company reviews periodically the recoverability of its investment in Usiminas. To determine the recoverable value, the Company estimates the value in use of the investment by calculating the present value of the expected cash flows. There is a significant interaction among the principal assumptions made in estimating Usiminas cash flow projections, which include iron ore and steel prices, foreign exchange and interest rates, Brazilian GDP and steel consumption in the Brazilian market.

Many of the above mentioned drivers of the estimated recoverable value of Usiminas have exhibited a high degree of volatility in the past and may continue to do so in the future, as they are affected by fluctuations in Brazil’s macro-economic variables. Brazil has experienced from time to time varying degrees of economic, political, social and regulatory developments, including fluctuating prices of commodities, fluctuating trade balances, inflation, devaluation, civil unrest, tax increases, changes (including retroactive changes) in the enforcement or interpretation of tax laws and other retroactive tax claims or challenges, and changes in laws or regulations, creating uncertainty regarding the country’s future macro-economic environment. Furthermore, the business conditions in Brazil or the global steel and mining industries could turn out to be worse than those we expected when assessing the value of our investment in Usiminas, which could in turn modify our expectations for the financial return on our investment in Usiminas. For example, as of December 31, 2014 and March 31, 2015, Ternium wrote down its investment in Usiminas by USD196.4 million and USD109.7 million, respectively. The impairment performed on December 31, 2014 was mainly due to expectations of a weaker industrial environment in Brazil, and consequently lower steel demand, as a result of worsening economic activity, as well as a significant additional downturn in international prices of iron ore and steel, leading to diminished cash flow expectations. For further information on the Usiminas impairment test performed on March 31, 2015, see Item 5 “Operating and Financial Review and Prospects—G. Recent Developments—March 31, 2015 Impairment of Usiminas Investment” and for a discussion of the SEC’s review process in connection with the impairment of our investment in Usiminas, see Item 4A. “Unresolved Staff Comments”.

As of March 31, 2015 the value of the investment in Usiminas, which is equal to its recoverable value estimation, was USD1,020.0 million. The closing price of the Usiminas’ ordinary shares as quoted on the São Paulo stock exchange, BM&FBOVESPA S.A – Bolsa de Valores, Mercadorias e Futuros on March 31, 2015, was BRL21.50 (approximately USD 6.70) per share, giving Ternium’s ownership stake a market value of approximately USD1,113.4 million as of that date. Since the acquisition of its investment in Usiminas, Ternium has reduced the carrying value of the investment by 59% through impairment charges, currency translation adjustments due to the devaluation of the Brazilian currency against the US dollar, and the results of the company.

Ternium reviews the economic policies of Brazil and the expectations relating to the BRL against USD exchange rate on an ongoing basis and will continue to evaluate their impact in the drivers used for calculating the recoverable value of Ternium’s investment in Usiminas. These matters could lead to further reductions in the carrying value of Ternium’s investment in Usiminas, either through currency translation adjustments or impairment charges. Any further write-downs to Ternium’s investment in Usiminas could have a material adverse effect on Ternium’s results of operations or net worth.

Labor disputes at Ternium’s operating subsidiaries could result in work stoppages and disruptions to Ternium’s operations.

A substantial majority of Ternium’s employees at its manufacturing subsidiaries are represented by labor unions and are covered by collective bargaining or similar agreements, which are subject to periodic renegotiation. Strikes or work stoppages could occur prior to or during the negotiations leading to new collective bargaining agreements, during wage and benefits negotiations or, occasionally, during other periods for other reasons. Ternium could also suffer plant stoppages or strikes if it were to implement cost reduction plans.

From time to time, Ternium takes measures in order to become more competitive in Mexico, Argentina and Colombia; none of the measures taken in the past have resulted in significant labor unrest. However, we cannot assure that this situation will remain stable or that future measures will not result in labor actions against us. Any future stoppage, strike, disruption of operations or new collective bargaining agreements could result in lost sales and could increase Ternium’s costs, thereby affecting our results of operations. For more information on labor relations and collective bargaining agreements, see Item 6. “Directors, Senior Management and Employees—D. Employees.”

 

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Ternium’s related party transactions with companies controlled by San Faustin may not always be on terms as favorable as those that could be obtained from unaffiliated third parties.

Some of Ternium’s sales and purchases are made to and from other companies controlled by San Faustin. These sales and purchases are primarily made in the ordinary course of business, and we believe that they are made on terms no less favorable than those we could obtain from unaffiliated third parties. Ternium will continue to engage in related party transactions in the future, and these transactions may not be on terms as favorable as those that could be obtained from unaffiliated third parties. For information concerning the principal transactions between Ternium and related parties see Item 7. “Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

Changes in exchange rates or any limitation in the ability of the Ternium Companies, including associates, to hedge against exchange rate fluctuations could adversely affect Ternium’s business and results.

The operations of the Ternium companies expose them to the effects of changes in foreign currency exchange rates and changes in foreign exchange regulations. A significant portion of Ternium’s sales are carried out in currencies other than the U.S. dollar. As a result of this foreign currency exposure, exchange rate fluctuations impact the Ternium companies’ results and net worth as reported in their income statements and statements of financial position in the form of both translation risk and transaction risk. In the ordinary course of business, the Ternium companies enter from time to time into exchange rate derivatives agreements to manage their exposure to exchange rate changes. Future regulatory or financial restrictions in the countries where Ternium operates may affect its ability to mitigate its exposure to exchange rate fluctuations, and thus cause an adverse impact on Ternium’s results of operations, financial condition or cash flows. For information concerning the effect of the changes in exchange rates on Ternium’s business and results, see Item 5. “Operating and Financial Review and Prospects—Overview.”

Risks Relating to our Mining Activities

Mining is one of Ternium’s two reporting segments, and iron ore is one of the principal raw materials used by Ternium’s operating subsidiaries in its steelmaking segment. Ternium has equity interests in two iron ore mining companies in Mexico: a 100% interest in Las Encinas and a 50% interest in Consorcio Peña Colorada. In addition, Ternium may seek to expand its mining activities in the future depending upon, among other factors, market conditions and strategic needs. Our present and future mining activities are or would be subject to particular risks, as follows:

Required governmental concessions could be subject to changes or termination, and permits and rights of use and occupancy could be difficult to obtain or maintain, all of which could adversely affect our mining activities and operating costs.

Our mining activities are subject to specific regulations and depend on concessions and authorizations granted by governmental authorities. Amendments to applicable laws and regulations in Mexico may change the terms pursuant to which we are required to pursue our exploration, mining and ore processing activities. For example, on January 1, 2014 a comprehensive tax reform became effective in Mexico, including the enactment of new taxes and royalties over mining activities, which in the case of Ternium’s iron ore mining subsidiaries resulted in a 7.5% royalty on mining profits, calculated on a special tax basis. Additional changes to Mexican laws and regulations may result in new taxes or royalties or require modifications to the processes and technologies used in our mining activities, leading to unexpected capital expenditures and higher costs. If the relevant government authority determines that we are not in compliance with our obligations as concessionaires, it may terminate our concession.

Furthermore, in order to explore or exploit mines it is necessary to obtain the right of use and occupancy of the land where the mines are situated. Even though government regulations frequently establish provisions intended to facilitate the establishment of such rights, in some cases it may be difficult to reach and maintain agreements with the landowners or such agreements may be excessively onerous. If we are unable to establish use and occupancy rights on acceptable terms, our mining activities may be compromised. For example, during 2014, Consorcio Peña Colorada’s shareholders approved the investments required to increase the processing capacity of its crushing, grinding and concentration facilities, aimed at increasing the facility’s processing capacity. If Consorcio Peña Colorada is unable to obtain the relevant environmental permits, this expansion project could be compromised. For further information on the Consorcio Peña Colorada project see Item 4. “Information on the Company—B. Business Overview—Mining—Consorcio Peña Colorada.”

Our reserve estimates may differ materially from mineral quantities that we may be able to actually recover, or our estimates of mine life may prove inaccurate; and market price fluctuations and changes in operating and capital costs may render certain ore reserves uneconomical to mine in the future or cause us to revise our reserve estimates.

Ternium’s reserves are estimated quantities of ore that it has determined can be economically mined and processed under present and anticipated conditions to extract their mineral content. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of mineral production, including factors beyond our control. Reserve calculations involve estimating deposits of minerals that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment.

 

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Reserve estimates also depend on assumptions relating to the economic viability of extraction, which are established through the application of a life of mine plan for each operation or project providing a positive net present value on a forward-looking basis, using forecasts of operating and capital costs based on historical performance, with forward adjustments based on planned process improvements, changes in production volumes and in fixed and variable proportions of costs, and forecasted fluctuations in costs of raw material, supplies, energy and wages. These forecasts and projections involve assumptions and estimations that, although we believe are reasonable at the time of estimating our reserves, may change in the future and may fail to anticipate geological or other environmental factors or events that could make it difficult or unprofitable to mine certain ore deposits.

In addition, our reserve estimates are of in-place material after adjustments for mining depletion and mining losses and recoveries, with no adjustments made for metal losses due to processing. As a result, no assurance can be given that the indicated amount of ore will be recovered from our reserves, or that it will be recovered at the anticipated rates, or that extracted ore will be converted into saleable production over the mine life at levels consistent with our reserve estimates. Reserve estimates may vary from those included in this annual report, and results of mining and production subsequent to the date of an estimate may lead to future revisions of estimates.

Estimates of mine life may require revisions based on actual production figures, changes in reserve estimates and other factors. For example, fluctuations in the market prices of minerals, reduced recovery rates or increased operating and capital costs due to inflation, exchange rates, mining duties or other factors could affect our mine life projections. To the extent that market price fluctuations or changes in our operating and capital costs increase our costs to explore, locate, extract and process iron ore, we may be required to revise our reserve estimates if certain ore reserves become uneconomical to mine in the future.

Our exploration activities are subject to uncertainties as to the results of such exploration; even if the exploration activities lead to the discovery of ore deposits, the effective exploitation of such deposits remains subject to several risks.

Exploration activities are highly speculative, involve substantial risks and may be unproductive. We may incur substantial costs for exploration which do not yield the expected results. The failure to find sufficient and adequate reserves could adversely affect our business. In addition, even if ore deposits are discovered, our ability to pursue exploitation activities may be delayed for a long time during which market conditions may vary. Significant resources and time need to be invested in order to establish ore resources through exploration, define the appropriate processes that shall be undertaken, obtain environmental licenses, concessions and permits (including water usage permits), acquire land, build the necessary facilities and infrastructure for greenfield projects and obtain the ore or extract the metals from the ore. If a project does not turn out to be economically feasible by the time we are able to exploit it, we may incur substantial write-offs.

Our expected costs and capital expenditure requirements for exploration or exploitation activities may vary significantly and affect our financial condition and expected results of operations.

We may be subject to increased costs or delays relating to the acquisition of adequate equipment for the exploration and exploitation of ore deposits. We may also fail to obtain any necessary permits, or experience significant delays in connection with the issuance of such permits. Moreover, we may face increasing costs or capital expenditure requirements related to several factors, including diminished iron ore reserve grades, deeper pits and operational sections of our mines, iron ore deposits within the pit area that are more difficult to locate or extract and increased energy supply requirements that may be difficult to obtain. Adverse mining conditions and other situations related to the operation of the mine, whether permanent or temporary, may lead to a significant increase in our planned capital expenditures and our costs, as well as affect our ability to produce the expected quantities of mineral. If this occurs, our financial condition and expected results of operations may also be negatively affected.

Difficulties in relationships with local communities may adversely affect our mining activities and results of operations.

Communities living or owning land near areas where we operate may take actions to oppose and interfere with our mining activities. Although we make significant efforts to maintain good relationships with such communities, actions taken by them (or by interest groups within those communities) may hamper our ability to conduct our mining activities as planned, request the government to revoke or cancel our concessions or environmental or other permits, prevent us from fulfilling agreements reached with the government in connection with our mining activities, or significantly increase the cost of exploring and/or exploiting the mines, thereby adversely affecting our business and results of operations. For example, in Aquila, Mexico, in 2011, 2012 and 2013, members of certain native communities blocked roads demanding higher compensation for the use of land for mining activities (and these actions prevented Ternium from transporting iron ore from the mines to the pelletizing facilities for periods of time that on some occasions ultimately resulted in a technical stoppage of the mining activities in Aquila). Moreover, in 2013, local communities initiated legal actions aimed at the cancellation of certain permits granted to Las Encinas and to Consorcio Peña Colorada. Although management believes that those legal actions are not likely to succeed, Mexican legislation affords judges the power to preemptively suspend environmental or other permits or concessions, or to take certain other measures, in order to protect the ejidos (land jointly

 

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owned by native communities) until a legal action is resolved. An adverse legal decision suspending or cancelling our permits could adversely impact our mining activities and results of operations.

Risks Relating to the Structure of the Company

As a holding company, the Company’s ability to pay cash dividends depends on the results of operations and financial condition of its subsidiaries and could be restricted by legal, contractual or other limitations.

The Company conducts all its operations through subsidiaries. Dividends or other intercompany transfers of funds from those subsidiaries are the Company’s primary source of funds to pay its expenses, debt service and dividends and to repurchase shares or ADSs. The Company does not and will not conduct operations at the holding company level.

The ability of the Company’s subsidiaries to pay dividends and make other payments to the Company will depend on their results of operations and financial condition and could be restricted by, among other things, applicable corporate and other laws and regulations, including those imposing foreign exchange controls or restrictions on the repatriation of capital or the making of dividend payments, and agreements and commitments of such subsidiaries. If earnings and cash flows of the Company’s operating subsidiaries are substantially reduced, the Company may not be in a position to meet its operational needs or to pay dividends. In addition, the Company’s ability to pay dividends is subject to legal and other requirements and restrictions in effect at the holding company level. For example, the Company may only pay dividends out of net profits, retained earnings and distributable reserves and premiums, each as defined and calculated in accordance with Luxembourg laws and regulations.

The Company’s controlling shareholder may be able to take actions that do not reflect the will or best interests of other shareholders.

As of March 31, 2015, San Faustin beneficially owned 62.02% of our outstanding voting shares and Tenaris, which is also controlled by San Faustin, also held 11.46% of our outstanding voting shares. Rocca & Partners Stichting Administratiekantoor Aandelen San Faustin, or RP STAK, controls a significant portion of the voting power of San Faustin and has the ability to influence matters affecting, or submitted to a vote of, the shareholders of San Faustin. As a result, RP STAK is indirectly able to elect a substantial majority of the members of the Company’s board of directors and has the power to determine the outcome of most actions requiring shareholder approval, including, subject to the requirements of Luxembourg law, the payment of dividends. The decisions of the controlling shareholder may not reflect the will or best interests of other shareholders. For example, the Company’s articles of association permit the board of directors to waive, limit or suppress preemptive rights in certain cases. Accordingly, our controlling shareholder may cause our board of directors to approve an issuance of shares for consideration without preemptive rights, thereby diluting the minority interest in the Company. See “—Risk Factors—Risks Relating to our ADSs—Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases” and Item 7. “Major Shareholders and Related Party Transactions—A. Major Shareholders.”

Non-controlling interests in our subsidiaries could delay or impede our ability to complete our strategy.

We do not own one hundred percent of the interests in certain of our subsidiaries.

As of March 31, 2015, approximately 26.03% of Siderar is held by Administración Nacional de la Seguridad Social, or ANSeS, Argentina’s governmental social security agency, approximately 11.68% is publicly held, and approximately 1.34% is held by certain Siderar employees. ANSeS became a significant shareholder of Siderar in the last quarter of 2008 as a result of the nationalization of Argentina’s private pension system, which caused assets under administration of Argentina’s private pension funds—including significant interests in publicly traded companies, such as Siderar, held by such funds—to be transferred to ANSeS.

Ternium holds a 51% ownership interest in Tenigal, and NSSMC holds the remaining 49%. We also have a participation in the control group of Usiminas. For further information on the Usiminas investment, see Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas”.

The existence of non-controlling interests in these companies could prevent Ternium from taking actions that, while beneficial to Ternium, might not be beneficial to each relevant subsidiary, considered separately. As a result, we could be delayed or impeded in the full implementation of our strategy or the maximization of Ternium’s competitive strengths.

 

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Risks Relating to the Countries in Which We Operate

Negative economic, political and regulatory developments in certain markets where Ternium has a significant portion of its operations and assets could hurt Ternium’s shipment volumes or prices, increase its costs or disrupt its manufacturing operations, thereby adversely affecting its results of operations and financial condition.

The results of Ternium’s operations are subject to the risks of doing business in emerging markets, principally in Mexico and Argentina and to a lesser extent in Colombia, and have been, and could in the future be, affected from time to time to varying degrees by economic, political, social and regulatory developments, such as nationalization, expropriation or forced divestiture of assets; restrictions on production, domestic sales, imports and exports; interruptions to essential energy inputs; restrictions on the exchange or transfer of currency, repatriation of capital, or payment of dividends, debt principal or interest, or other contractual obligations; inflation; devaluation; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of our facilities; direct and indirect price controls; tax increases, changes (including retroactive) in the enforcement or interpretation of tax laws and other retroactive tax claims or challenges; changes in laws or regulations; cancellation of contract rights; and delays or denial of governmental approvals. Both the likelihood of such occurrences and their overall effect upon Ternium vary greatly from country to country and are not predictable. Realization of these risks could have an adverse impact on the results of operations and financial condition of Ternium’s subsidiaries located in the affected country and, depending on their materiality, on the results of operations and financial condition of Ternium as a whole.

Mexico

Ternium has significant manufacturing operations and assets located in Mexico and a majority of its sales are made to customers in this country. The majority of Ternium’s revenues from its Mexican operations, therefore, are related to market conditions in Mexico and to changes in its economic activity. Ternium’s business could be materially and adversely affected by economic, political and regulatory developments in Mexico.

Economic and social conditions and government policies in Mexico could negatively impact Ternium’s business and results of operations.

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. Furthermore, the Mexican national economy tends to reflect changes in the economic environment in the United States. If problems such as deterioration in Mexico’s economic conditions reemerge (for example, as a result of lower revenues due to oil price decline) or there is a future re-emergence of social instability, political unrest, reduction in government spending or other adverse social developments, foreign exchange and financial markets may exhibit continued volatility, which, depending on its severity and duration, could adversely affect the business, results of operations, financial condition or liquidity of Ternium. Moreover, adverse economic conditions in Mexico could result in, among other things, higher interest rates accompanied by reduced opportunities for refunding or refinancing, reduced domestic consumption of Ternium’s products, decreased operating results and delays in the completion of ongoing and future capital expenditures.

Regulatory changes in Mexico could adversely impact our results of operations and net results.

Mexico has recently experienced a period of economic reform. In December 2012, new labor regulations became effective in Mexico. The most relevant aspects of those regulations were a reassessment of the status of third-party workers, changes in rest periods, and an increase in the amounts of fines and penalties applicable for violations of the regulations. In addition, in 2014 a comprehensive tax reform became effective in Mexico. Among other things, the reform maintained the corporate income tax at 30% (eliminating the scheduled reduction to 29% in 2014 and 28% in 2015); repealed the tax consolidation regime, limiting Ternium’s ability to perform fiscal consolidation among its Mexican subsidiaries beginning as of January 1, 2014; introduced a 10% withholding tax on dividend distributions; and created a new royalty over mining activities, which in the case of Ternium’s iron ore mining subsidiaries resulted in a 7.5% royalty on mining profits calculated on a special tax basis. These measures resulted in a deferred tax loss of USD22.3 million in Ternium’s 2013 results. Any additional new changes to Mexican regulations, including regulations imposing new obligations that may be issued as part of the energy reform agenda, could adversely impact our results of operations and net results.

Violence and crime in Mexico could negatively impact Ternium’s business and operations.

In recent years there have been high incidences of violence and crime related to drug trafficking in Mexico, especially in the Monterrey areas, where our main facilities are located, and in Michoacán, where some of our mining facilities are located. Security issues could affect our day-to-day operations and could also result in an economic slowdown, reducing domestic demand for our products and thereby having an adverse effect on our business. A deterioration of the security situation could result in significant obstacles or additional costs to the implementation of our growth plans in Mexico, including delays in the completion of capital expenditures.

 

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Argentina

Approximately 14% of Ternium’s consolidated net assets are located in Argentina and a significant portion of its sales are made in Argentina through its subsidiary, Siderar. Most of Siderar’s sales revenue is affected by market conditions in Argentina and changes in Argentina’s gross domestic product, or GDP, and per capita disposable income. Accordingly, Siderar’s business could be materially and adversely affected by economic, political, social, fiscal and regulatory developments in Argentina. For more information on Ternium’s sales in Argentina, see Item 4. “Information on the Company—B. Business Overview—Sales—Southern Region.”

Economic and political instability in Argentina, which on several occasions resulted in economic uncertainties and recession, may occur in the future, thereby adversely affecting our business, financial condition and results.

Our business and results of operations in Argentina depend on macroeconomic conditions, among other factors. Domestic sales of Siderar were severely affected by Argentina’s political and economic crisis in 2001-2002. Steel shipments to the Argentine domestic market were again disrupted during the 2008-2009 downturn in the global economy. More recently, steel shipments to the Argentine domestic market stagnated starting in 2012, as economic growth in Argentina slowed down significantly.

The Argentine economy is currently facing significant challenges. Inflation is high, as further discussed below, leading to increasing labor unrest. In addition, the economy has been affected by supply constraints and capital investment in general has declined significantly due to, among other factors, political, economic and financial uncertainties and government actions, including price and foreign exchange controls, import restrictions, export taxes, an increased level of government intervention in, or limitations to, the conduct of business in the private sector, and other measures affecting investor confidence. For example, in February 2011, the Argentine government imposed controls on the price of steel products sold in Argentina, including products sold by Siderar, and required that sales of steel products be invoiced in Argentine pesos. Although Ternium believes that price controls are illegal under Argentine law and these measures were ultimately revoked, other price controls or similar measures could be imposed in the future. Inflation and declining capital investment may affect growth and, accordingly, cause demand for our local subsidiary’s products in the domestic market to drop.

Furthermore, certain bondholders that did not participate in Argentina’s restructurings of a substantial portion of its sovereign indebtedness following the Argentine default in 2002, which took place in 2005 and 2010, have sued Argentina for full payment. This litigation has effectively limited Argentina’s access to international capital markets. A lack of financial alternatives could impair Argentina’s ability to sustain the economy’s activity level and foster economic growth.

Economic conditions in Argentina have deteriorated rapidly in the past and may deteriorate rapidly in the future. The Argentine economy may not continue to grow and economic instability may increase. Our business and results of operations in Argentina could be adversely affected by rapidly changing economic conditions in Argentina or by the Argentine government’s policy response to such conditions.

Inflation may undermine economic growth in Argentina and impact our costs, thereby adversely affecting our results of operations and financial position.

In the past, inflation has undermined the Argentine economy and the government’s ability to stimulate economic growth. Beginning in 2004, inflation indicators began showing significant year-over-year increases, signaling a trend characteristic of an inflationary economy. The pace of inflation has increased rapidly and significantly over the last few years. Since 2007 Argentina’s official inflation data published by the Instituto Nacional de Estadística y Censos, or INDEC, Argentina’s national statistics institute, have been subject to changes in calculation; following the implementation of such changes, the official inflation figures have been consistently disputed by independent economists. For example, the annual inflation rates based on consumer data published by INDEC (IPC GBA) during the period 2008-2013 were in all cases below 11%, while private estimates, on average, refer to annual rates of inflation significantly higher than those published by INDEC. On February 1, 2012, the International Monetary Fund’s executive board approved a decision that called on Argentina to implement specific measures to address the quality of the official data reported to the International Monetary Fund. In February 2014, INDEC stopped issuing the IPC GBA index and replaced it with a new national consumer price index (IPCNu) based on a different methodology. Under the IPCNu, consumer price index rose 23.9% in 2014. As of the date of this annual report, the International Monetary Fund’s executive board has not issued a final assessment regarding the compliance of the IPCNu index with the requirements imposed by its February 1, 2012 decision.

Sustained high inflation in Argentina could negatively impact our results of operations and financial position as peso-denominated costs (mainly labor-related costs) at Siderar increase, thereby affecting its cost-competitiveness and adversely affecting its margins. In addition, a high inflation economy could undermine Argentina’s foreign competitiveness in international markets and negatively affect the economy’s activity and employment levels. Argentine inflation rate volatility makes it impossible to estimate with reasonable certainty the extent to which activity levels and results of operations of Siderar could be affected by inflation in the future.

 

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The Argentine government has increased taxes on Argentine companies and could further increase the fiscal burden in the future, which could adversely affect our results of operations, net results and financial condition.

Since 1992, the Argentine government has not permitted the application of an inflation adjustment on the value of fixed assets for tax purposes. As a result of the substantial devaluation of the Argentine peso against the U.S. dollar and significant inflation over the last decade, the amounts that the Argentine tax authorities permit Siderar to deduct as depreciation for its past investments in plant, property and equipment have been substantially reduced in real terms, thus creating artificial gains for tax purposes which result in effective tax rates which are higher than statutory tax rates. In addition, provincial taxes on Siderar’s sales have increased over the last few years. More recently, in October 2013 the Argentine government enacted a new 10% withholding tax on dividend distributions in Argentina. This measure resulted in a deferred tax loss of USD24.0 million in Ternium’s 2013 results. If the Argentine government continues to increase the tax burden on Siderar’s operations, Ternium’s results of operations, net results and financial condition could be adversely affected.

Argentine exchange controls could prevent Ternium from paying dividends or other amounts from cash generated by Siderar’s operations.

In the past, the Argentine government and the Argentine Central Bank introduced several rules and regulations to reduce volatility in the ARS/USD exchange rate, and implemented formal and informal restrictions on capital inflows into Argentina and capital outflows from Argentina. In addition, Siderar is currently required to repatriate U.S. dollars collected in connection with exports from Argentina (including U.S. dollars obtained through advance payment and pre-financing facilities) into Argentina and convert them into Argentine pesos at the relevant exchange rate applicable on the date of repatriation. Since the last quarter of 2011, the Argentine government tightened its controls on transactions that would represent capital outflows from Argentina, prohibiting the purchase of foreign currency for saving purposes and limiting formally or informally the ability of Argentine companies to transfer funds (including in connection with the purchase of goods or services, or the payment of interest, dividends or royalties) outside of Argentina. The existing controls, and any additional restrictions of this kind that may be imposed in the future, could expose Ternium to the risk of losses arising from fluctuations in the exchange rate or affect Ternium’s ability to finance its investments and operations in Argentina or impair Ternium’s ability to convert and transfer outside Argentina funds generated by Siderar, for example, to fund the payment of dividends or to undertake investments and other activities that require offshore payments. For additional information on Argentina’s current exchange controls and restrictions, see Item 10. “Additional Information—D. Exchange Controls.”

Restrictions on the imports of key steelmaking inputs for Siderar’s operations in Argentina could adversely affect Siderar’s  production and, as a result, revenues and negatively impact Ternium’s results of operations.

Some of Siderar’s key steelmaking inputs, including iron ore and coking coal, are imported into Argentina. The Argentine government has implemented significant import restrictions, which may affect the availability of key steelmaking inputs for our operations in Argentina. All payments on imports of goods and services must be approved by the Argentine federal tax authority and other authorities, such as the Secretary of Commerce. The authorization criteria for such imports have not been determined in the applicable regulations. Among other factors, fluctuations in Siderar’s export levels may impact our ability to obtain the necessary approvals. Such import restrictions could delay imports and, if sustained, adversely affect our business, operations and growth projects in Argentina. In addition, they could affect Siderar’s exports from Argentina, considering that foreign countries may adopt and implement counter-measures. For additional information on current Argentina’s current exchange controls and restrictions, see Item 10. “Additional Information—D. Exchange Controls.”

Restrictions or an increase of the costs on the supply of energy to Siderar’s operations in Argentina could curtail Siderar’s  production and negatively impact Ternium’s results of operations.

In recent years, there has been an insufficient level of investment in natural gas and electricity supply and transport capacity in Argentina, coupled with a substantial increase in demand for natural gas and electricity. This in turn resulted in shortages of natural gas and electricity to residential and industrial users including Siderar during periods of high demand. Such shortages may, in the future, result in significant price increases for gas and electricity. Siderar’s operations experienced constraints in their natural gas supply requirements and interruptions in their electricity supply at peak hours on many occasions. If demand for natural gas and electricity increases and a matching increase in natural gas and electricity supply and transport capacity fails to materialize on a timely basis, Siderar’s production in Argentina (or that of its main customers and suppliers) could be curtailed, and Siderar’s sales and revenues could decline. In addition, the Argentine government announced a cut-off in the government’s subsidies to the price of the natural gas and electricity on several occasions. An increase in Siderar’s energy costs may adversely affect Siderar’s results of operations. See “—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability” above.

Colombia

Ternium has manufacturing operations and assets located in Colombia and some of its sales are made in Colombia. The majority of Ternium’s revenues from its Colombian operations, therefore, are affected by market conditions in Colombia and to changes in Colombia’s GDP, and per capita disposable income. In addition, Colombia has experienced internal security issues and political

 

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tensions with some of its neighboring countries, in particular Venezuela and Ecuador, which have had or could have a negative effect on the Colombian economy. Accordingly, Ternium’s business could be adversely affected by economic, political and regulatory developments in Colombia.

Certain Regulatory Risks and Litigation Risks

International trade actions or regulations and trade-related legal proceedings could adversely affect Ternium’s sales, revenues and overall business.

International trade-related legal actions and restrictions pose a constant risk for Ternium’s international operations and sales throughout the world. We purchase steel products, including significant quantities of steel slabs, for our operations in Mexico (which we obtain from various suppliers in Mexico and overseas), and we also purchase steel products for our operations in Colombia (which we obtain from our subsidiaries overseas and from various suppliers in Colombia and overseas). Steel products are, subject to certain conditions, imported under zero or low import duties. In the future, the Mexican or Colombian governments may increase the applicable duties or impose restrictions in the quantities allowed to be imported.

Increased trade liberalization has reduced certain of Ternium’s imported input costs and increased Ternium’s access to many foreign markets. However, greater trade liberalization in its domestic markets is increasing competition for Ternium in such markets. In recent years, as a consequence of the global downturn and the economic slowdown in China, the number of antidumping and countervailing actions limiting trade has increased substantially. Accordingly, producers from certain countries find themselves excluded from certain markets and in need to find alternatives for their products. As a result, Ternium’s domestic market share could be eroded in the face of foreign imports, and Ternium’s increased exports to foreign markets where import barriers have been reduced may not completely offset domestic market share losses resulting from increased foreign competition.

Countries can impose restrictive import duties and other restrictions on imports under various national trade laws. The timing and nature of the imposition of trade-related restrictions potentially affecting Ternium’s exports are unpredictable. Trade restrictions on Ternium’s exports could adversely affect Ternium’s ability to sell products abroad and, as a result, Ternium’s profit margins, financial condition and overall business could suffer. One significant source of trade restrictions results from countries’ imposition of so-called “antidumping” and “countervailing” duties, as well as “safeguard measures.” These duties can severely limit or altogether impede an exporter’s ability to export to relevant markets. In several of Ternium’s export destinations, such as the United States or Europe, safeguard duties and other protective measures have been imposed against a broad array of steel imports in certain periods of excess global production capacity, as is currently the case. Furthermore, certain domestic producers have filed antidumping and/or countervailing duty actions against particular steel imports. Some of these actions have led to restrictions on Ternium’s exports of certain types of steel products to certain steel markets. As domestic producers’ filing of such actions is largely unpredictable, additional antidumping duties, countervailing duties or other such import restrictions could be imposed in the future, limiting Ternium’s export sales to and potential growth in those markets. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade regulations.”

The cost of complying with environmental regulations and potential environmental and product liabilities may increase our operating costs and negatively impact our business, financial condition, results of operations and prospects.

Our steelmaking and mining activities are subject to a wide range of local, provincial and national laws, regulations, permit requirements and decrees relating to the protection of human health and the environment, including laws and regulations relating to hazardous materials and radioactive materials and environmental protection governing air emissions, water discharges and waste management due to the risks inherent in the industries in which we operate. Laws and regulations protecting the environment have become increasingly complex and more stringent in recent years, leading to higher costs of compliance.

Environmental laws and regulations may, in some cases, impose strict liability rendering a person liable for damages to natural resources or threats to public health and safety without regard to negligence or fault. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. These laws and regulations may expose us to liability for the conduct of, or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed.

Compliance with applicable requirements and the adoption of new requirements could have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. The ultimate impact of complying with environmental laws and regulations is not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred from potential environmental liabilities, could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations.

 

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Some of the activities for which Ternium supplies products, such as canning for consumption, construction and the automotive industry, are subject to inherent risks that could result in death, personal injury, property damage or environmental pollution, and subject us to potential product liability risks that could extend to being held liable for the damages produced by such products. Furthermore, Ternium’s products are also sold to, and used in, certain safety-critical appliances. Actual or claimed defects in our products may give rise to claims against us for losses suffered by our customers and expose us to claims for damages. The insurance we maintain may not be adequate or available to protect us in the event of a claim, its coverage may be limited, canceled or otherwise terminated, or the amount of our insurance may be less than the related impact on enterprise value after a loss.

Risks Relating to our ADSs

The market price for our ADSs could be highly volatile.

Volatility in the price of our ADSs may be caused by factors within or outside of our control and may be unrelated or disproportionate to Ternium’s operating results. In particular, announcements of potentially adverse developments, such as proposed regulatory changes, new government investigations or the commencement or threat of litigation against Ternium, as well as announcements of transactions, investments, or changes in strategies or business plans of Ternium or its competitors, could adversely affect the trading price of our ADSs, regardless of the likely outcome of those developments. Broad market and industry factors could adversely affect the market price of our ADSs, regardless of its actual operating performance. As an example of this volatility, the price of our ADSs closed at USD45.18 on June 2, 2008, and fell to a low of USD4.55 on November 20, 2008. In 2009 and 2010, the price of our ADSs generally recovered to a high closing price of USD43.26 on January 5, 2011, but then fell to a 2011 low of USD15.54 on November 29, 2011. The price of our ADSs was generally in the range of USD17.6 to USD24.9 in 2012, in the range of USD19.2 to USD31.3 in 2013 and in the range of USD16.2 to USD32.2 in 2014. See Item 9 “The Offer and Listing—A. Offer and Listing Details.”

Furthermore, the trading price of our ADSs could suffer as a result of developments in emerging markets. Although the Company is organized as a Luxembourg corporation, almost all of its assets and operations are located in Latin America. Financial and securities markets for companies with a substantial portion of their assets and operations in Latin America are, to varying degrees, influenced by political, economic and market conditions in emerging market countries. Although market conditions are different in each country, investor reaction to developments in one country can have significant effects on the securities of issuers with assets or operations in other emerging markets, including Mexico, Argentina and Colombia. See “—Risks Relating to the Countries in Which We Operate.”

In deciding whether to purchase, hold or sell our ADSs, you may not be able to access as much information about us as you would in the case of a U.S. company.

There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States, and Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as state corporation laws in the United States. Furthermore, IFRS differ in certain material aspects from the accounting standards used in the United States.

Holders of our ADSs may not be able to exercise, or may encounter difficulties in the exercise of, certain rights afforded to shareholders.

Certain shareholders rights under Luxembourg law, including the right to vote, to receive dividends and distributions, to bring actions, to examine the books and records and to exercise appraisal rights may not be available to holders of ADSs, or may be subject to restrictions and special procedures for their exercise, as holders of ADSs only have those rights that are expressly granted to them in the deposit agreement. The Bank of New York Mellon, or BNY Mellon, as depositary, through its custodian agent, is the registered shareholder of the deposited shares underlying the ADSs and therefore only the depositary can exercise the shareholders rights in connection with the deposited shares. For example, if we make a distribution in the form of securities, the depositary is allowed, at its discretion, to sell that right to acquire those securities on your behalf and to instead distribute the net proceeds to you. Also, under certain circumstances, such as our failure to provide the depositary with voting materials on a timely basis, you may not be able to vote by giving instructions to the depositary. In the circumstances specified in the deposit agreement, if the depositary does not receive voting instructions from the holder of ADSs or the instructions are not in proper form, then the depositary shall deem such holder to have instructed the depositary to give, and the depositary shall give, a proxy to a person designated by the Company with respect to that amount of shares underlying such ADSs to vote that amount of shares underlying such ADSs in favor of any proposals or recommendations of the Company (including any recommendation by the Company to vote that amount of shares underlying such

 

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ADSs on any issue in accordance with the majority shareholders’ vote on that issue) as determined by the appointed proxy. No instruction shall be deemed given and no proxy shall be given with respect to any matter as to which the Company informs the depositary that (x) it does not wish such proxy given, (y) substantial opposition exists, or (z) the matter materially and adversely affects the rights of the holders of ADSs.

Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases.

Pursuant to Luxembourg corporate law, existing shareholders of the Company are generally entitled to preemptive subscription rights in the event of capital increases and issues of shares against cash contributions. Under the Company’s articles of association, the board of directors is authorized to waive, limit or suppress such preemptive subscription rights until July 15, 2015, and the renewal of such authorization will be submitted for consideration by the Company’s general extraordinary meeting of shareholders to be held on May 6, 2015 or any adjournment thereof. The Company, however, may issue shares without preemptive rights only if the newly issued shares are issued:

 

 

for, within, in conjunction with or related to, an initial public offering of the shares of the Company on one or more regulated markets (in one or more instances);

 

 

for consideration other than cash;

 

 

upon conversion of convertible bonds or other instruments convertible into shares of the Company; provided, however, that the preemptive subscription rights of the then existing shareholders shall apply in connection with any issuance of convertible bonds or other instruments convertible into shares of the Company for cash; or

 

 

subject to a certain maximum percentage, as compensation to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates, including without limitation the direct issuance of shares or the issuance of shares upon exercise of options, rights convertible into shares or similar instruments convertible or exchangeable into shares issued or created to provide compensation or incentives to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates.

For further details, see Item 10. “Additional Information—B. Memorandum and Articles of Association.”

Furthermore, holders of our shares and ADSs in the United States may, in any event, not be able to exercise any preemptive rights, if granted, for shares unless those shares are registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) with respect to those rights or an exemption from registration is available. We intend to evaluate, at the time of any rights offering, the costs and potential liabilities associated with the exercise by holders of shares and ADSs of the preemptive rights for shares, and any other factors we consider appropriate at the time, and then to make a decision as to whether to register additional shares. We may decide not to register any additional shares, requiring a sale by the depositary of the holders’ rights and a distribution of the proceeds thereof. Should the depositary not be permitted or otherwise be unable to sell preemptive rights, the rights may be allowed to lapse with no consideration to be received by the holders of the ADSs.

It may be difficult to obtain or enforce judgments against the Company in U.S. courts or courts outside of the United States.

The Company is a public limited liability company (société anonyme) organized under the laws of Luxembourg, and most of its assets are located outside of the United States. Furthermore, most of the Company’s directors and officers named in this annual report reside outside the United States. As a result, investors may not be able to effect service of process within the United States upon the Company or its directors or officers or to enforce against the Company or them in U.S. courts judgments predicated upon the civil liability provisions of U.S. federal securities law. Likewise, it may be difficult for a U.S. investor to bring an original action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against the Company, its directors or its officers. There is also uncertainty with regard to the enforceability of original actions in courts outside the United States of civil liabilities predicated upon the civil liability provisions of U.S. federal securities laws. Furthermore, the enforceability in courts outside the United States of judgments entered by U.S. courts predicated upon the civil liability provisions of U.S. federal securities law will be subject to compliance with procedural requirements under applicable local law, including the condition that the judgment does not violate the public policy of the applicable jurisdiction.

Item 4. Information on the Company

Overview

Ternium is a leading steel producer in Latin America. We manufacture and process a broad range of value-added steel products, including galvanized and electro-galvanized sheets, pre-painted sheets, tinplate, welded pipes, hot-rolled flat products, cold-rolled

 

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products, bars and wire rods as well as slitted and cut-to-length offerings through our service centers. Our customers range from large global companies to small businesses operating in the construction, automotive, home appliances, capital goods, container, food and energy industries.

With approximately 16,900 employees and an annual production capacity of 11.0 million tons of finished steel products and 4.0 million tons of iron ore pellets (most of which are used in our steelmaking activities) as of December 31, 2014, Ternium has production facilities located in Mexico, Argentina, Colombia, the southern United States and Guatemala, iron ore mines in Mexico, and a network of service and distribution centers throughout Latin America that provide it with a strong position from which to serve its core markets. In addition, Ternium participates in the control group of Usiminas, a leading steel company in the Brazilian steel market. Our proximity to local steel consuming markets enable us to differentiate from our competitors by offering valuable services to our customer base across Latin America. Our favorable access to iron ore sources and proprietary iron ore mines in Mexico provide reduced logistics costs, and our diversified steel production technology enables us to adapt to fluctuating input-cost conditions.

Ternium primarily sells its steel products in the regional markets of the Americas. Ternium provides specialized products and delivery services, mainly to customers in Mexico, Argentina, Colombia and various Central American countries, through its network of manufacturing facilities and service centers. We believe that Ternium is the leading supplier of flat steel products in Mexico and Argentina, a significant supplier of steel products in Colombia and in various other countries in Latin America, and a competitive player in the international steel market for steel products. Through its network of commercial offices in several countries in Latin America, the United States and Spain, Ternium maintains an international presence that allows it to reach customers outside its local markets, achieve improved effectiveness in the supply of its products and in the procurement of semi-finished steel, and maintain a fluid commercial relationship with its customers by providing continuous services and assistance.

In 2014, 56.1% of Ternium’s net sales of steel products were made to Mexico, 30.5% to the Southern Region (which is comprised of sales to customers in Argentina, Bolivia, Chile, Paraguay and Uruguay), and 13.4% to other markets (including major shipment destinations, such as Colombia, the United States and Central America, as well as other international destinations). In 2014, Ternium’s net sales were USD8.7 billion, operating income was USD1.1 billion, and net income attributable to equity holders was USD452.4 million.

 

A. History and Development of the Company

The Company

Our legal and commercial name is Ternium S.A. The Company was organized as a public limited liability company (société anonyme) under the laws of the Grand-Duchy of Luxembourg on December 22, 2003. Our Luxembourg office is located at 29, Avenue de la Porte-Neuve – 3rd floor, L-2227 Luxembourg, telephone number +352 2668 3152. Our agent for U.S. federal securities law purposes is Ternium International U.S.A. Corporation, located at 2200 West Loop South, Suite 945, Houston, TX 77027, United States.

Ternium

Ternium’s origins began in September 1961 with the founding of Propulsora Siderúrgica, or Propulsora, by San Faustin’s predecessor in Argentina. Propulsora began its operations as a producer of cold-rolled coils in December 1969 and in the early 1990s began to evolve through a series of strategic investments aimed at transforming Propulsora into an integrated steel producer. In 1993, Propulsora merged with Aceros Paraná S.A. (a company formed by the Argentine government in connection with the privatization of Somisa, at that time the main integrated producer of flat steel in Argentina) and three other affiliated steel industry companies. After the merger, Propulsora changed its name to Siderar S.A.I.C. San Faustin held a controlling interest in Siderar, with the remainder being held mainly by Usiminas, certain former employees of Somisa, and the public.

In December 1997, a consortium formed by San Faustin, Siderar, Usiminas, Hylsamex and Sivensa won the bid in the privatization of a controlling interest in Sidor, the largest steel company in Venezuela.

As part of a multiple-step corporate reorganization in 2005, San Faustin reorganized its investments in steel manufacturing, processing and distribution businesses by contributing its controlling interests in Siderar, Sidor and Ternium Internacional to the Company, and Usiminas and Sivensa exchanged their interests in Siderar and Sidor for shares of the Company. In 2005, we acquired, together with Siderar, an indirect 99.3% interest in the Mexican company Hylsamex and its subsidiaries.

On January 11, 2006, the Company launched an initial public offering of 24,844,720 ADSs, each representing 10 shares of the Company, in the United States, and subsequently granted the underwriters of the Company’s initial public offering an option to purchase up to 3,726,708 additional ADSs to cover over-allotments in the sale of the ADSs.

 

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On December 28, 2006, we acquired an additional 4.85% interest in Siderar from CVRD Internacional S.A, thereby increasing our ownership in Siderar to 60.93%.

On April 29, 2007, the Company entered into an agreement with Grupo Imsa and Grupo Imsa’s controlling shareholders pursuant to which Grupo Imsa came under our control on July 26, 2007. Under the agreement, the Company, through a wholly owned subsidiary, made a cash tender offer under applicable Mexican law for all of the issued and outstanding share capital of Grupo Imsa, which resulted in the acquisition of 25,133,856 shares, representing 9.3% of the issued and outstanding capital of Grupo Imsa. Concurrently with the consummation of the tender offer, on July 26, 2007, all the shares of Grupo Imsa that were not tendered into the tender offer (including the shares owned by Grupo Imsa’s majority shareholders), representing 90.7% of Grupo Imsa’s issued and outstanding share capital, were redeemed for cash pursuant to a capital reduction effected at the same price per share. Following this capital reduction, we became the sole shareholder of Grupo Imsa.

In 2007, Grupo Imsa was renamed Ternium Mexico and, effective March 31, 2008, Hylsamex merged with and into Ternium Mexico. In connection with this merger, Siderar became a shareholder of Ternium Mexico with a 28.7% interest.

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. On May 11, 2008, the President of Venezuela issued Decree Law 6058 ordering that Sidor and its subsidiaries and associated companies were transformed into state-owned enterprises (“empresas del Estado”), with Venezuela owning not less than 60% of their share capital. On May 7, 2009, Ternium completed the transfer of its entire 59.7% interest in Sidor to Corporación Venezolana de Guayana, or CVG, a Venezuelan state-owned entity.

On August 25, 2010, Ternium completed the acquisition of a 54% ownership interest in Ferrasa and, on April 7, 2015, Ternium acquired the remaining 46% minority interest. Ferrasa has a 100% ownership interest in Siderúrgica de Caldas S.A.S., Figuraciones S.A.S. and Perfilamos del Cauca S.A.S., all of which are also Colombian companies. Through this investment, Ternium expanded its business and commercial presence in Colombia.

In November 2010, Ternium and NSSMC established Tenigal, with each company holding 51% and 49% participations, respectively. Tenigal completed the construction of a hot dip galvanizing plant in the vicinity of Monterrey City, Mexico, which commenced production in the third quarter of 2013. Tenigal was designed to produce high grade and high quality galvanized and galvannealed automotive steel sheets, including outer panel and high strength qualities.

On January 16, 2012, the Company’s wholly-owned Luxembourg subsidiary Ternium Investments S.à r.l., or “Ternium Investments”, Siderar and its wholly-owned subsidiary Prosid Investments S.A. or “Prosid”, and Confab Industrial S.A., a subsidiary of Tenaris, or “TenarisConfab,” joined the existing control group of Usiminas, a leading steel company in the Brazilian flat steel market, through the acquisition of 84.7, 30.0, and 25.0 million ordinary shares, respectively, and formed the so called Ternium/Tenaris (T/T) Group. Ternium Investments, Siderar (and Prosid) and TenarisConfab entered into an amended and restated Usiminas shareholders agreement with NSSMC, Mitsubishi and Metal One (comprising the so-called “Nippon Group”) and Previdência Usiminas or “CEU”, Usiminas’ employee pension fund. The shareholders agreement governs the rights and obligations of Ternium Investments, Siderar (and Prosid) and TenarisConfab within the Usiminas control group.

On October 30, 2014, Ternium Investments acquired 51.4 million additional ordinary shares of Usiminas from Caixa de Previdência dos Funcionários do Banco do Brasil - PREVI. Following this transaction, Ternium, through its subsidiaries Ternium Investments, Siderar and Prosid, owns 166.1 million ordinary shares of Usiminas, representing 32.9% of Usiminas’ ordinary shares (and a 16.8% participation in Usiminas’ results). Of these, 114.7 million ordinary shares are subject to the shareholders agreement that governs the rights and obligations of the members of Usiminas’ control group (representing a 35.6% interest within that group), while the 51.4 million shares acquired in October 2014 as described above are not subject to the shareholders agreement, although during the term of that agreement Ternium is required to vote such shares in accordance with the control group’s decisions. For further information on the Usiminas investment, see note 3 to our consolidated financial statements included elsewhere in this annual report.

For information on Ternium’s capital expenditures, see “B. Business Overview—Capital Expenditure Program.”

 

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B. Business Overview

Our Business Strategy

Our main strategic objective is to enhance shareholder value by strengthening Ternium’s position as a competitive producer of steel products, in a manner consistent with minority shareholders’ rights, while further consolidating Ternium’s position as a leading steel producer in Latin America and a strong competitor in the Americas. The main elements of this strategy are:

 

 

Focus on higher margin value-added products. We intend to continue to shift Ternium’s sales mix towards higher margin value-added products, such as cold-rolled sheets and coated and tailor-made products, and services, such as just-in-time delivery and inventory management;

 

 

Pursue strategic growth opportunities. We have a history of strategically growing our businesses through acquisitions and joint ventures. In addition to strongly pursuing organic growth, we intend to identify and actively pursue growth-enhancing strategic opportunities to consolidate Ternium’s presence in its main markets and expand it to the rest of Latin America, increase its upstream integration, expand its offerings of value-added products, increase its steel production, and increase its distribution capabilities. For a description of some of the risks associated with Ternium’s growth strategy, see Item 3. “Key Information—D. Risk Factors—Risks Relating to our Business—Future acquisitions or other significant investments could have an adverse impact on Ternium’s operations or profits, and Ternium may not realize the benefits it expects from these business decisions.”

 

 

Implement Ternium’s best practices. We believe that the implementation of Ternium’s managerial, commercial and production best practices in acquired and new businesses should generate benefits and savings;

 

 

Maximize the benefits arising from Ternium’s broad distribution network. We intend to maximize the benefits arising from Ternium’s broad network of distribution, sales and marketing services to reach customers in major steel markets with a comprehensive range of value-added products and services and to continue to expand its customer base and improve its product mix; and

 

 

Enhance Ternium’s position as a competitive steel producer. We are focused on improving utilization levels of our plants, increasing efficiency and further reducing production costs from levels that we already consider to be among the most competitive in the steel industry through, among other measures, capital investments and further integration of our facilities.

Our Products

The Ternium companies produce mainly finished and semi-finished steel products and iron ore, which are sold either directly to steel manufacturers, steel processors or end-users, after different value-adding processes.

In the steel segment, steel products include slabs, billets and round bars (steel in its basic, semi-finished state), hot-rolled coils and sheets, bars and stirrups, wire rods, cold-rolled coils and sheets, tin plate, hot dipped galvanized and electrogalvanized sheets and pre-painted sheets, steel pipes and tubular products, beams, roll formed products, and other products. Galvanized and pre-painted sheets can be further processed into a variety of corrugated sheets, trapezoidal sheets and other tailor-made products to serve Ternium’s customer requirements.

In the mining segment, iron ore is sold as concentrates (fines) and pellets.

Steel products

Slabs, billets and round bars: these products are semi-finished steel forms with dimensions suitable for its processing into specific product types. Slabs are processed into hot-rolled flat products. The use of slabs is determined by their dimensions and by their chemical and metallurgical characteristics. Billets are processed into long steel products, such as wire rods, bars and other shapes. Round bars are processed into seamless tubes.

Hot-rolled products: hot-rolled flat products are used by a variety of industrial consumers in applications such as the manufacturing of wheels, auto parts, pipes, gas cylinders and containers. They are also directly used for the construction of buildings, bridges and railroad cars, and for the chassis of trucks and automobiles. Hot-rolled flat products can be supplied as coils or as sheets cut to a specific length. These products also serve as inputs for the production of cold-rolled products. Merchant bars include specific shape features, such as rounds, flats, angles, squares and channels, which are used by customers to manufacture a wide variety of products such as furniture, stair railings and farm equipment. Reinforcing bars (rebars) and stirrups, obtained from the mechanical transformation of rebars, are used to strengthen concrete highways, bridges and buildings. Rods are commonly drawn into wire products or used to make bolts and nails. Wire rod can be produced in different qualities according to customers’ demands.

 

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Cold-rolled products: cold-rolled products are applied mainly to the automotive, home appliance and capital goods industries, as well as to galvanizers, drummers, distributors and service centers. Cold-rolled coils are sold as coils or cut into sheets or blanks to meet customers’ needs. These products also serve as inputs for the production of coated products.

Coated products: galvanized sheets are produced by adding a layer of zinc to cold-rolled coils, which are afterwards cut into sheets. Galvanized sheets are used in the automotive, construction and home appliances industries. Galvanized coils can also be further processed with a color coating to produce pre-painted sheets, resulting in a product that is mainly sold for building coverings, manufacturing of ceiling systems, panels, air conditioning ducts, refrigerators, air conditioners, washing machines and several other uses. Ternium also offers, under the trademark Zintroalum in Mexico and Cincalum in Argentina, a distinctive type of galvanized product with coating composition that contains approximately 55% aluminum and 44% zinc to improve product performance for the construction industry, including rural, industrial and marine sites. Tinplate, given its resistance to corrosion and its mechanical and chemical characteristics, is mainly sold to the packaging industry for food canning, sprays and paint containers. Tinplate is produced by coating cold-rolled coils with a layer of tin.

Roll-formed and tubular products: these products include tubes for general use, structural tubes, tubes for mechanical applications, conduction tubes, conduction electrical tubes and oil tubes. Tubular products, uncoated or galvanized, have applications in several sectors including home accessories, furniture, scaffolding, automotive, bicycles, hospital equipment, posts for wire mesh garden and poultry tools, handrails, guard-rails, agricultural machinery, industrial equipment, conduction of water, air, gas, oil, high-pressure liquids and special fluids and internal building electrical installations. Beams, including C and Z section steel profiles (purlings) and tubular section beams, are obtained by roll-forming of steel strips and have applications in window frames, stilts, mainstays, crossbeams, building structures, supports, guides and crossbars for installing windows, doors, frames and boards. Other products include insulated panels, roofing and cladding, roof tiles and steel decks. Obtained from the mechanical transformation of flat steel, uncoated, galvanized or pre-painted, these products are used mainly in the construction industry in warehouses, commercial and industrial refrigeration installations, grain storage, poultry and porcine confinement facilities, roofing and side walls for buildings, and terraces and mezzanine floorings.

Other steel products: these products include pre-engineered metal building systems, which are steel construction systems designed for use in low-rise non-residential buildings, and are constructed from the mechanical transformation of flat steel such as frames, secondary steel members, roofs and walls panels, as well as finishing and accessories; and pig iron, a semifinished product obtained in the blast furnace that is mostly used as metallic charge in the steel shop for the production of crude steel, and also marketed to other steel producers and to manufacturers of iron-based cast products.

Within each of the basic product categories, there is a range of different “items” of varying qualities and prices that are produced either to meet the particular requirements of end users or sold as commodity items.

Iron ore products

Concentrates (fines) and pellets: these products are raw materials used for the production of steel. Iron ore concentrates are iron ore fines with high iron content. Iron ore pellets are produced from iron ore concentrates. Ternium ships most of the pellets to its own steel manufacturing operations and it also markets the surplus portion of its iron ore pellets and concentrates, if any, to other steel manufacturers.

Production Facilities and Processes

Ternium has steel production facilities, service centers, distribution centers, or DCs, and mining operations in Mexico, steel production facilities and service centers in the Southern Region, and steel production facilities, service centers and DCs in other markets, specifically Colombia, the United States and Central America.

Ternium’s aggregate production capacity of finished steel products as of December 31, 20141, calculated based on management estimates of standard productivity, product mix allocations, the maximum number of possible working shifts and a continued flow of supplies to the production process, was approximately 11.0 million tons, of which 7.2 million tons correspond to facilities located in Mexico, 2.9 million tons correspond to facilities located in the Southern Region and 0.9 million tons correspond to facilities located in other markets. Ternium’s aggregate production capacity of iron ore pellets as of December 31, 2014, was 4.0 million tons. Such iron ore products are mainly sold inter-company for the production of steel products by our steel segment.

 

1  The capacity information as of December 31, 2014, excludes our service center in Panama, sold on January 20, 2015, and our service center in Honduras, permanently closed in the first quarter of 2015. Our customers in Honduras are now served from other facilities. For more information related to the sale of our service center in Panama, see Item 5 “Operating and Financial Review and Prospects—G. Recent Developments”.

 

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Steel production facilities, service centers and distribution centers

The assets described in this section are owned by Ternium’s operating subsidiaries. The following table provides an overview, by type of asset, of Ternium’s production capacity as of December 31, 20141:

 

             Capacity (thousand tons per year) 2  

Production asset

   Quantity      Mexico      Argentina      Other      Total  

Coke Plant

     4            1,100            1,100   

Sinter Plant

     1            1,480            1,480   

Direct Reduced Iron Plant

     3         2,710               2,710   

Blast Furnace

     2            3,220            3,220   

Electric Arc Furnace

     5         4,010            190         4,200   

Basic Oxygen Furnace

     3            3,500            3,500   

Vacuum Degassing

     2         840         1,200            2,040   

Thin Slab Continuous Caster

     1         2,330               2,330   

Slab Continuous Caster

     2            5,630            5,630   

Billet Continuous Caster

     3         1,600            190         1,790   

Hot-rolling Mill (flat products)

     4         5,990         2,850            8,840   

Skin — Pass Mill

     4         2,630         990            3,620   

Hot-rolling Mill (long products)

     4         1,110            200         1,310   

Pickling Line

     9         5,150         1,910            7,060   

Cold-Rolling Mill (Tandem or Reversing)

     10         3,620         1,840            5,460   

Electrolytic Cleaning

     5         1,940         230            2,170   

Annealing Line

     5         1,590         1,330            2,920   

Temper Mill

     7         2,040         2,020            4,060   

Tension-Leveling / Inspection Line

     9         1,130         1,150            2,280   

Electro-Tinplating line

     1            160            160   

Hot Dip Galvanizing Line

     13         1,810         600         380         2,790   

Electro-Galvanizing Line

     1            110            110   

Color-Coating Line

     8         620         120         190         930   

Slitter

     33         1,990         420         310         2,720   

Cut to length

     36         570         1,000         190         1,760   

Roll forming Line

     35         510         460         230         1,200   

Panel Line

     4         80               80   

Profile Line

     16         180            110         290   

Tube Line

     21         540         190         60         790   

Wire drawing Lines

     14               100         100   

Wire Mesh Lines

     2               40         40   

Rebar Processing Lines3

     41               180         180   

 

1 

The capacity information as of December 31, 2014, excludes our service center in Panama, sold on January 20, 2015, and our service center in Honduras, permanently closed in the first quarter of 2015. Our customers in Honduras are now served from other facilities. For more information related to the sale of our service center in Panama, see Item 5 “Operating and Financial Review and Prospects—G. Recent Developments”.

2 

In this annual report annual production capacity is calculated based on management estimates of standard productivity, product mix allocations, the maximum number of possible working shifts and a continued flow of supplies to the production process.

3 

Includes shears, straighteners, stirrup benders and shaping centers.

Mexico. Ternium has twelve steel production and/or processing units in Mexico, consisting of three integrated steel-making plants (two of which produce long steel products and one of which produces flat steel products and includes two steel service centers), five downstream flat steel processing plants, combining hot-rolling, cold-rolling and/or coating facilities (two of which include steel service centers), and four steel service centers. In addition, Ternium has ten distribution centers in this region, aimed at serving customers mainly in the construction sector.

 

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The following table sets forth key items of information regarding Ternium’s principal production locations and production units:

 

Unit

  

Country

  

Type of Plant

  

Location

           

Integrated

  

Downstream

  

Service

Center

  

Distribution

Center

     
Guerrero    Mexico    X       X       San Nicolás d.l.G., Nuevo León
Norte    Mexico    X             Apodaca, Nuevo León
Puebla    Mexico    X             Puebla, Puebla
Juventud    Mexico       X    X       San Nicolás d.l.G., Nuevo León
Churubusco    Mexico       X    X       Monterrey, Nuevo León
Monclova    Mexico       X          Monclova, Coahuila
Universidad    Mexico       X          San Nicolás d.l.G., Nuevo León
Pesquería    Mexico       X          Pesquería, Nuevo León
Apodaca Industrial    Mexico          X       Apodaca, Nuevo León
Apodaca Comercial    Mexico          X       Apodaca, Nuevo León
Varco-Pruden    Mexico          X       Ciénaga de Flores, Nuevo León
San Luis    Mexico          X       San Luis, San Luis Potosí
DC Chihuahua    Mexico             X    Chihuahua, Chihuahua
DC BC    Mexico             X    Tijuana, Baja California
DC Norte    Mexico             X    Escobedo, Nuevo León
DC Puebla    Mexico             X    Puebla, Puebla
DC Guadalajara    Mexico             X    Guadalajara, Jalisco
DC Mexico    Mexico             X    Tultitlán, Estado De México
DC Culiacán    Mexico             X    Culiacán, Sinaloa
DC Veracruz    Mexico             X    Veracruz, Veracruz
DC Mérida    Mexico             X    Mérida, Yucatán
DC Tuxtla    Mexico             X    Tuxtla Gtz, Chiapas

Guerrero unit: located in the metropolitan area of Monterrey, Nuevo León, Mexico, the Guerrero unit produces hot-rolled and cold-rolled coils for the industrial, construction and home appliance sectors and for further processing in other Ternium Mexico’s units. It also produces slitted and cut-to-length products for the industrial sector, and profiles and tubes for the industrial and construction sectors. This unit includes two steel service centers, a slab-rolling mill, and an integrated facility based on direct reduced iron, or DRI, mini-mill steelmaking and thin-slab casting/rolling mill technologies that uses iron ore pellets and steel scrap as main raw materials. The facility sources all of the iron ore from Ternium Mexico’s mining operations and the electricity and natural gas from the Mexican grid. In addition, the facility sources its net requirements of slabs from Mexican and international producers. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

Ternium made progress in several projects under the Guerrero investment plan launched in 2013 encompassing industrial safety, environmental sustainability, maintenance and facility overhaul. During 2014, civil works started in a number of projects in the iron ore reduction facilities, the steel shop and the cold-rolling mills, and engineering studies started for additional projects in the mentioned facilities. These capital expenditure programs aim at implementing the world’s most stringent environmental and safety norms at Ternium’s Guerrero unit in Mexico. For more information on Ternium’s environmental and safety projects see “—B. Business Overview—Capital Expenditure Program.”

Norte unit: located in Nuevo León, Mexico, the Norte unit produces billets and rebar for the construction industry. It is an integrated facility based on mini-mill steelmaking technology that uses steel scrap as its main raw material. The facility sources electricity from the Mexican grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

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Puebla unit: located in Puebla, Mexico, the Puebla unit produces rebar, wire rod and round bar mainly for the construction and industrial sectors, including high-carbon, low-carbon and micro-alloyed wire rod. It is an integrated facility based on DRI and mini-mill steelmaking technologies that uses iron ore pellets and steel scrap as main raw materials. The facility sources all of the iron ore from Ternium Mexico’s mining operations and the electricity and natural gas from the Mexican grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

Juventud unit: located in Nuevo León, Mexico, the Juventud unit produces galvanized and color coated coils for the construction, home appliance and other industries and has a steel service center that produces slitted and roll-formed products, panels and tubes for the construction and industrial sectors. This plant processes hot-rolled and cold-rolled coils received from Ternium Mexico’s units in Nuevo León.

Churubusco unit: located in Nuevo León, Mexico, the Churubusco unit produces hot-rolled and cold-rolled coils for the industrial, construction and home appliance sectors and for further processing in other Ternium Mexico’s units. It also produces slitted and cut-to-length products for the industrial sector. The facility sources its requirements of slabs from other Mexican producers and from the international markets. Ternium’s procurement policy for slabs is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

Monclova unit: located in Coahuila, Mexico, the Monclova unit produces galvanized and color coated sheets for the home appliance industry. This plant processes cold-rolled coils mainly received from Ternium Mexico’s units in Nuevo León.

Universidad unit: located in Nuevo León, Mexico, and across the street from the Guerrero unit, the Universidad unit produces galvanized and color coated coils for the construction, home appliance and industrial sectors. This plant, which also has a cold-rolling mill, processes hot-rolled coils received from Ternium Mexico’s units in Nuevo León.

Pesquería industrial center: located in Nuevo León, Mexico, the Pesquería industrial center produces cold-rolled and galvanized coils for the automotive industry, among other industrial sectors. The cold-rolling mill processes hot-rolled coils sourced from Ternium Mexico’s Churubusco and Guerrero units, and third parties. Tenigal purchases hot-rolled coils mainly from NSSMC; hot-rolled coils are processed at the Pesquería cold-rolling mill and then used in the production of galvanized products.

Apodaca Industrial unit: located in Nuevo León, Mexico, the Apodaca Industrial unit is a steel service center that produces slitted and cut-to-length products for industrial customers. This plant processes coated coils mainly received from Ternium Mexico’s units in Nuevo León.

Apodaca Comercial unit: located in Nuevo León, Mexico, the Apodaca Comercial unit is a steel service center that produces slitted and roll-formed products, profiles and tubes for the construction industry. This plant processes coated coils mainly received from Ternium Mexico’s units in Nuevo León.

Varco-Pruden unit: located in Nuevo León, Mexico, the Varco-Pruden unit produces metal building systems for commercial construction. This plant processes heavy plates procured from the local and international markets and coils received from Ternium Mexico’s units in Nuevo León.

San Luis unit: located in San Luis Potosí, Mexico, the San Luis unit is a steel service center that produces slitted and cut-to-length products for the home appliance and other industries. This plant processes coated coils received from Ternium Mexico’s units in Nuevo León.

Southern Region. Ternium has eight steel production and/or processing units in this region, located in Argentina, consisting of one integrated flat steel-making plant, four downstream flat steel processing plants, comprising cold-rolling, coating or tube making facilities (three of which include steel service centers), and three steel service centers.

 

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The following table set forth key items of information regarding Ternium’s principal production locations and production units:

 

Unit

  

Country

  

Type of Plant

  

Location

         

Integrated

  

Downstream

  

Service

Center

  

Distribution

Center

    

San Nicolás

   Argentina    X             Ramallo, Buenos Aires

Canning

   Argentina       X    X       Canning, Buenos Aires

Haedo

   Argentina       X    X       Haedo, Buenos Aires

Florencio Varela

   Argentina       X    X       Florencio Varela, Buenos Aires

Ensenada

   Argentina       X          Ensenada, Buenos Aires

Rosario

   Argentina          X       Rosario, Santa Fe

Serviacero III

   Argentina          X       Ramallo, Buenos Aires

Sidercrom

   Argentina          X       Ramallo, Buenos Aires

San Nicolás unit: located in the Province of Buenos Aires, Argentina, the San Nicolás unit produces hot-rolled, cold-rolled and tinplate coils for the construction, industrial and packaging sectors and for further processing in other Siderar units. The San Nicolás unit includes an integrated facility based on blast furnace and basic oxygen furnace technologies, supplemented with a sinter plant, coking batteries, a by-product plant and a power plant. It uses metallurgical coal and iron ore lumps, pellets and fines as main raw materials. The facility sources all of its coal and iron ore needs from the international markets, shipped to its own port on the banks of the Paraná river. It sources the natural gas from the Argentine grid, produces most of its electricity needs in its own power plant and sources its net requirements of electricity from the Argentine grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview— Raw Materials, Slabs, Energy and Other Inputs.”

Canning and Haedo units: located in the Province of Buenos Aires, Argentina, the Canning and Haedo units produce galvanized sheets, slitted and roll-formed products and profiles for the construction and home appliance sectors. In addition, the Canning facility produces color coated sheets for such markets. Both plants process cold-rolled coils received from Siderar’s San Nicolás and Ensenada units.

Florencio Varela unit: located in the Province of Buenos Aires, Argentina, the Florencio Varela unit produces electrogalvanized sheets, blanks and slitted products for the automotive, construction and other industries. This plant processes cold-rolled coils received from Siderar’s San Nicolás and Ensenada units.

Ensenada unit: located in the Province of Buenos Aires, Argentina, the Ensenada unit produces cold-rolled coils for the construction and industrial sectors and for further processing in Siderar’s own facilities. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

Rosario unit: located in the Province of Santa Fe, Argentina, the Rosario unit is a steel service center that produces tubes for the construction industry. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

Serviacero III unit: located in the Province of Buenos Aires, Argentina, the Serviacero III unit is a steel service center that produces cut-to-length products for the construction and industrial sectors. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

Sidercrom unit: located in the Province of Buenos Aires, Argentina, the Sidercrom unit is a steel service center that produces cut-to-length and slitted products for the packaging sector. This plant processes tinplate coils received from Siderar’s San Nicolás unit.

Other Markets. Ternium has thirteen steel production and/or processing units in Colombia, Central America and the United States, consisting of one integrated long steel-making plant, two downstream flat steel processing plants, comprising coating facilities (one of which includes a steel service center), and ten steel service centers. In addition, Ternium has four steel retail distribution centers aimed at serving customers mainly in the construction sector.

 

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The following table set forth key items of information regarding Ternium’s principal production locations and production units:

 

Unit

  

Country

  

Type of Plant

  

Location

          Integrated    Downstream    Service
Center
   Distribution
Center
    

Shreveport

   USA       X          Shreveport, Louisiana

Manizales Acasa

   Colombia    X             Manizales, Caldas

Barranquilla

   Colombia          X       Malambo, Atlántico

Itagüí

   Colombia          X       Itaguí, Antioquía

Cali Perfilamos

   Colombia          X       Puerto Tejada, Cauca

Bogotá

   Colombia          X       Bogotá, Cundinamarca

Cali Ferrasa

   Colombia          X       Cali, Valle del Cauca

Montería

   Colombia          X       Montería, Córdoba

Manizales Ferrasa

   Colombia          X       Manizales, Caldas

DC Medellín

   Colombia             X    Medellín, Antioquía

Villa Nueva

   Guatemala       X    X       Villa Nueva, Guatemala

DC Norte

   Guatemala             X    Guatemala, Guatemala

DC Occidente

   Guatemala             X    Mazatenango, Suchitepéquez

San Salvador

   El Salvador          X       San Salvador, San Salvador

DC San Miguel

   El Salvador             X    San Miguel, San Miguel

Managua

   Nicaragua          X       Managua, Managua

Heredia

   Costa Rica          X       Heredia, Heredia

Shreveport unit: located in Louisiana, United States, the Shreveport unit produces galvanized and color coated sheets. It processes cold-rolled coils procured in the international markets.

Manizales Acasa unit: located in Caldas, Colombia, the Manizales Acasa unit produces billets and rebar for the construction industry. It is an integrated facility based on mini-mill steelmaking technology that uses steel scrap as its main raw material. The facility sources all of its scrap and electricity needs from local suppliers. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

Barranquilla unit: located in Atlántico, Colombia, the Barranquilla unit is a steel service center that produces slitted, cut-to-length, drawn wire, wire mesh and customized rebar-based products for the construction industry. This plant processes wire rod purchased in the international market and rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets. Hot-rolled and cold-rolled coils are received mainly from Ternium Mexico’s units in Nuevo León.

Itagüí unit: located in Antioquía, Colombia, the Itagüí unit is a steel service center that produces drawn wire, wire mesh and customized rebar-based products for the construction industry. This plant processes wire rod purchased in the international markets and rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets.

Cali Perfilamos unit: located in Cauca, Colombia, the Cali Perfilamos unit is a steel service center that produces profiles, tubes and structural beams for the construction industry. This plant processes hot-rolled and cold-rolled coils received mainly from Ternium Mexico’s units in Nuevo León and purchased in the international markets.

Bogotá, Cali Ferrasa, Montería and Manizales Ferrasa: the Bogotá unit in Cundinamarca, Colombia, the Cali Ferrasa unit in Valle del Cauca, Colombia, the Montería unit in Córdoba, Colombia and the Manizales Ferrasa unit in Caldas, Colombia, are steel service centers that produce customized rebar-based products for the construction industry. These plants process rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets.

Villa Nueva unit: located in Guatemala, Guatemala, the Villa Nueva unit produces galvanized sheets for the construction industry and for further processing in other Ternium Mexico’s units in Central America. It also has a steel service center that produces slitted, roll-formed and cut-to-length products, and profiles for the construction industry. This plant processes hot-rolled, cold-rolled and coated coils received from Ternium Mexico’s units in the Nuevo León area and from the international markets.

 

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San Salvador and Managua units: the San Salvador unit in San Salvador, El Salvador, and the Managua unit in Managua, Nicaragua, are steel service centers that produce roll-formed products for the construction industry. These plants process coated coils received mainly from Ternium Mexico’s Villa Nueva unit.

Heredia unit: located in Heredia, Costa Rica, the Heredia unit is a steel service center that produces roll-formed products and profiles for the construction industry. This plant processes hot-rolled, cold-rolled and coated coils received from Ternium Mexico’s units in Nuevo León and from the Villa Nueva unit.

Mining Production Facilities

Ternium has iron ore production facilities in Mexico. We have a 100% interest in Las Encinas, and a 50% interest in Consorcio Peña Colorada, and conduct our mining activities through these companies. Most of our iron ore production is consumed internally and small quantities are sold to third parties. The following table provides an overview of Ternium’s active mining operations:

 

Company

  

Location

  

Type of Mine

Las Encinas    Aquila, Michoacán    Open pit
Las Encinas    El Chilillo, Jalisco    Open pit
Consorcio Peña Colorada    Minatitlán, Colima    Open pit

In addition, Las Encinas owns two other mines, El Encino and Cerro Nahuatl, which are substantially exhausted.

The following table provides an overview, by type of facility, of Ternium’s production capacity as of December 31, 2014:

 

     Las Encinas      Consorcio Peña Colorada (1)  

Production facility

   Quantity      Capacity (2)      Quantity      Capacity (2)  

Crushing Plant

     2         5,300         1         11,000   

Concentration Plant (3)

     1         3,500         1         10,000   

Pelletizing Line

     1         1,900         2         4,100   

 

(1) Figures correspond to total capacity. Ternium has a 50% interest in Consorcio Peña Colorada.
(2) In thousands of tons per year. Crushing capacity for Las Encinas includes crushing lines located in Aquila and in El Encino.
(3) The concentration plant capacity figures refer to the plants’ iron ore processing capacity. The plants’ actual iron ore concentrate production depends on the iron ore grade of the processed material.

Las Encinas

Las Encinas produces iron ore pellets and magnetite concentrate in Mexico. At present, Las Encinas operates the Aquila open pit mine located in Michoacán and the El Chilillo open pit mine located in Jalisco.

The Las Encinas facilities include two crushing plants (located close to each of the Aquila and El Encino mines), and a concentration and pelletizing plant located in Alzada, Colima, approximately 160 kilometers from Aquila. Its major processing facilities (crushing, concentration and pelletizing facilities) include two primary crushers and a dry cobbing plant in Aquila, and horizontal and vertical ball mills and several stages of magnetic separation in Alzada. The iron ore pre-concentrate is transported from Aquila to a transfer station at Tecoman, Colima, by truck and from Tecoman to Alzada by rail and truck for processing in the concentration plant. The iron ore extracted from El Chilillo is transported by truck to El Encino to be processed in our crushing facility. The crushed iron ore is transported from El Encino to Alzada by cableway or by truck for processing in the concentration plant. In addition, El Encino may receive, from time to time, magnetite iron ore purchased by Las Encinas from other local concessionaires. The iron ore pellets produced in Alzada are transported by rail to Ternium Mexico’s integrated facilities in Monterrey and Puebla. The Aquila and El Encino operations and the Alzada facilities receive electrical power from the Comisión Federal de Electricidad, or CFE, the Mexican state-owned electric utility.

 

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Active mines

At the Aquila site, Las Encinas holds mining rights for the extraction of iron ore over 73 hectares. The Aquila operations (including an open pit mine and crushing facilities) stand on 383 hectares, which are leased to Las Encinas by the local community of San Miguel de Aquila. The lease agreement allows Las Encinas to perform all mining activities, including the extraction of iron ore, necessary to exploit the ore located in the 73 hectares granted to Las Encinas by the Mexican federal authorities until the permanent closure of the mine. Las Encinas has operated this mine since 1998.

Aquila is a mine composed predominantly of magnetite with a hematite roof and sulphides and silicates gangue. The form of mineralization is massive and disseminated (mineralized hornfels, endoeskarn), with mineralized gaps. The mine site is hosted along a large failure line and between the contact of an intrusive diorite and limestone, and the shape of the deposit is slightly amorphous crossed by a countless number of dams and mainly controlled by geological structures.

At the El Chilillo site, Las Encinas holds mining rights over 63 hectares. Las Encinas’ operations at that site comprise 25 hectares under a lease agreement expiring in December 2015, which is consistent with our mining plan for that mine. El Chilillo is located in Jalisco, approximately 35 kilometers away from El Encino. Las Encinas began operating this mine in 2013.

El Chilillo mine is a magmatic injection deposit. It is a north-south oriented body with average 400 meters length, 150 meters width and 25 meters thick, with a lens-shaped body of massive magnetic ore, partially oxidized in and close to surfacing areas. Gang ores associated with the iron ore are pyrite, quartz and apatite. It is surrounded mainly by andesite and andesitic rocks above and below the body, and to a lower proportion by limestone that is also founded at lens-shaped internal bodies. The entire mineralized zone is crossed by monzonitic-composed dykes.

Mines under exploration

Las Encinas holds mining rights over other areas scattered throughout Michoacán, Jalisco and Colima, Mexico. In recent years, Las Encinas has conducted exploration activities mainly in Michoacán and Jalisco and identified certain additional iron ore resources in Sierra del Alo, Jalisco. However, exploration activities have decreased significantly as a result of the current price and the expected medium-term price of iron ore.

Las Encinas is pursuing the environmental permits required to conduct mining activities at the Las Palomas iron ore deposit in Jalisco. Permits required for the mine’s first-stage operations are expected to be obtained during 2015. Upon obtaining of the full set of permits, Las Encinas iron ore reserves are expected to increase by approximately 15 million tons on a run-of-mine basis. In the future, Las Encinas may continue pursuing the development of small to mid-sized mining operations similar to El Chilillo and Las Palomas, as a way to diversify its sources of iron ore and to make effective use of its mining rights in the region.

Exhausted mines

The El Encino open pit and underground mine was operated until 2011. The El Encino core reserves were exhausted and the mine’s operations have been suspended. Ternium is currently evaluating the steps required to proceed with its permanent closure, but no date for such closure has been scheduled. The crushing and transfer facilities at El Encino are still in operation and will remain active to receive, process and transfer to the Alzada pelletizing plant iron ore from El Chilillo’s operations and iron ore that Las Encinas buys from time to time from other local concessionaires.

The Cerro Nahuatl open pit mine located in Colima, Mexico, operated until 2008. The Cerro Nahuatl core reserves were exhausted in 2011 and the mine’s operation has been suspended. Ternium is currently evaluating the steps required to proceed with its permanent closure.

Consorcio Peña Colorada

Consorcio Peña Colorada produces iron ore pellets and magnetite concentrate in Mexico, and Consorcio Peña Colorada is a company owned 50% by Ternium and 50% by ArcelorMittal. Consorcio Peña Colorada operates the Peña Colorada open pit mine as well as a concentrating facility and a two-line pelletizing facility. Consorcio Peña Colorada owns part of the property where its mine and processing facilities stand, and leases 1,202 hectares adjacent to mine that are used to deposit material removed as part of the regular short term and long term life of mine plan.

Consorcio Peña Colorada has operated since 1974 and holds mining rights over 39,813 hectares. The Peña Colorada mine is a complex polyphase iron ore deposit. Several magmatic and hydrothermal events produced iron mineralization, garnet-rich rocks (granatites) as skarns or skarnoids, and late dikes and faults that crosscut the mineralized bodies. The main mineralization events are a massive ore body, a disseminated ore body, a layered barren exoskarn/skarnoid, a polymictic breccia, mineralized conglomerates and late andesitic dikes.

 

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The concentration plant is located at the mine in Minatitlán, Colima, and the pelletizing plant is located near the Manzanillo seaport on the Pacific coast in Colima, 50 kilometers from Minatitlán. Consorcio Peña Colorada’s major processing facilities include a primary crusher, a dry cobbing plant, one autogenous mill, horizontal and vertical ball mills, several stages of magnetic separation and two pelletizing lines. The concentrate is sent as a pulp through a pipeline from the mine and mineral processing plant in Minatitlán to the pelletizing plant in Manzanillo. The Peña Colorada mine and the pelletizing plant receive electrical power from the CFE.

Effective as of January 2013, Ternium and Consorcio Peña Colorada entered into an amendment to the agreement for the allocation of its production. As a result of such amendment, Ternium is required to buy from Consorcio Peña Colorada half of the mine’s production. See Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs—Mexico—Iron Ore.” Iron ore concentrate and pellets sold to Ternium are shipped by rail from the mine to Ternium’s facilities in Mexico or exported.

As the iron grade of Peña Colorada’s ore deposits is diminishing over time (and, as a result, the facility’s concentrate production is diminishing accordingly), during 2014 Consorcio Peña Colorada’s shareholders approved certain investments required to increase the processing capacity of its crushing, grinding and concentration facilities to restore iron ore concentrate production to the previous 4.5 million tons per year level at an estimated total cost of USD320 million. The project, expected to be completed during 2016, requires Consorcio Peña Colorada to obtain environmental and other permits as well as additional electrical power from CFE.

Iron ore reserves

The table below details Ternium’s estimated proven and probable iron ore reserves as of December 31, 2014. The classification of the iron ore reserve estimates as proven or probable is based on drill hole spacing and reflects the variability in the mineralization at the selected cut-off grade, the mining selectivity and the production rate and ability of the operation to blend the different ore types that may occur within each deposit. Reserves are reported as Run of Mine (ROM). Tonnage is reported on a wet metric ton basis.

 

Iron ore reserves as of    December 31, 2014 (1)      December 31,
2013 (1)
 
     Proven      Probable      Total      Total  
     Million
tons
     %
Fe
     Million
tons
     %
Fe
     Million
tons
     %
Fe
     Million
tons
     %
Fe
 

Las Encinas (2)

     23         41         —           —           23         41         28         41   

Peña Colorada (3)

     111         23         130         23         241         23         251         23   

 

(1) In Peña Colorada, proven iron ore reserve estimates are based on drill hole spacing ranging from 25m x 25m to 100m x 100m, and probable iron ore reserve estimates are based on drill hole spacing ranging from 50m x 50m to 300m x 300m. In Las Encinas, drill hole spacing may be more distanced.
(2) Includes exclusively the Aquila and the El Chilillo mines.
(3) Reported figures represent the total reserves at the Peña Colorada mine. Ternium has a 50% interest in Consorcio Peña Colorada.

The table below provides additional information on iron ore production and average estimated mine life.

 

Operations/Projects

   %
Ownership
     In
Operation
Since
     2014 Run of
Mine
Production
(Million tons)
     2014 Saleable
Production (Million
tons) (1)
     Estimated
Mine Life
(Years) (2)
 

Las Encinas (3)

     100         1970         4.9         2.1         6   

Consorcio Peña Colorada (4)

     50         1974         10.6         3.6         17   

 

(1) Saleable production is constituted of a mix of direct shipped ore (DSO), concentrate, pellet feed and pellet products which have an iron content of approximately 65% to 66%.
(2) Mine life is derived from the life of mine plans and corresponds to the duration of the mine production scheduled from ore reserve estimates only. The production varies for each operation during the mine life and as a result the mine life is not necessarily the total reserve tonnage divided by the 2014 production.

 

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(3) Includes exclusively the Aquila and the El Chilillo mines.
(4) Reported figures represent the total production of Consorcio Peña Colorada, in which Ternium has a 50% interest.

Changes in iron ore reserve estimates (2014 versus 2013)

Las Encinas’s iron ore reserve estimates as of December 31, 2014 were 23 million tons on a run-of-mine basis (with a 41% average iron grade), decreasing by 5 million tons compared to those recorded as of the end of 2013. This decrease in tonnage was due mainly to the depletion of reserves during the year.

Peña Colorada’s iron ore reserve estimates as of December 31, 2014 were 241 million tons on a run-of-mine basis (with a 23% average iron grade), decreasing by 10 million tons compared to those recorded as of the end of 2013. This decrease in tonnage was due mainly to the depletion of reserves during the year.

The estimates of proven and probable ore reserves at our mines and the estimates of the mine life included in this annual report have been prepared by Ternium’s experienced engineers and geologists. Ternium has not commissioned an independent verification of the methods and procedures used to determine reserves, nor has it commissioned independent audits on iron ore reserve estimates.

The reserve calculations were prepared in compliance with the requirements of SEC Industry Guide 7, under which:

 

 

Reserves are the part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination.

 

 

Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, working or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

 

 

Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

The demonstration of economic viability is established through the application of a life of mine plan for each operation or project providing a positive net present value on a cash-forward looking basis. Economic viability is demonstrated using forecasts of operating and capital costs based on historical performance, with forward adjustments based on planned process improvements, changes in production volumes and in fixed and variable proportions of costs, and forecasted fluctuations in costs of raw material, supplies, energy and wages. Ore reserve estimates are updated annually in order to reflect new geological information and current mine plan and business strategies. Our reserve estimates are of in-place material after adjustments for mining depletion and mining losses and recoveries, with no adjustments made for metal losses due to processing. For a description of risks relating to reserves and reserve estimates, see “Item 3D—Risk Factors—Risks Relating to our Mining Activities—Our reserve estimates may differ materially from mineral quantities that we may be able to actually recover, or our estimates of mine life may prove inaccurate; and market price fluctuations and changes in operating and capital costs may render certain ore reserves uneconomical to mine in the future or cause us to revise our reserve estimates.”

Our mineral leases are of sufficient duration (or convey a legal right to renew for sufficient duration) to enable all ore reserves on the leased properties to be mined in accordance with current production schedules. Our ore reserves may include areas where some additional approvals remain outstanding but where, based on the technical investigations we carry out as part of our mine planning process and our knowledge and experience of the approvals process, we expect that such approvals will be obtained as part of the normal course of business and within the timeframe required by the current life of mine schedule.

 

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Property, Plants and Equipment

The table below details Ternium’s mining segment property, plant and equipment value as of December 31, 2014.

 

In millions of U.S. dollars    Property, Plant and
Equipment (PPE)
 

Las Encinas

     136.5   

Consorcio Peña Colorada

     120.0   

Production process

Ternium specializes in manufacturing and processing finished steel products. In addition, Ternium extracts and processes iron ore.

Ternium’s facilities use different technologies and have different levels of integration. The basic inputs for steel production are iron ore and energy. Iron ore is used in three different formats: fines and lumps, which are purchased in the marketplace, and pellets, which are partly purchased in the marketplace and partly produced by Ternium. Ternium’s steel production processes consume energy mainly in the form of natural gas, coal and electricity.

Iron ore extraction and processing. The iron ore pellet production process begins with the sourcing of iron ore from Ternium’s own mines in Mexico. The ore is extracted from open pit mines. Extraction consists of removing waste and ore from the surface with explosives and loading and transporting it by truck to the crushing facilities where it is resized to a specified size.

After crushing, the ore goes through several grinding and concentration stages. Grinding reduces the size and changes the shape of the ore while concentration, through magnetic drums, separates the iron from the sterile material to obtain an iron ore concentrate with high iron content. This process is carried out using water as an auxiliary element. Excess water is afterwards eliminated through a filtering process, leaving only the necessary humidity for the formation of pellets using pelletizing disks. Pellets are separated according to their size and are then hardened in ovens and shipped to the steel producing facilities.

Steel production. Ternium produces semi-finished steel in the form of thin slabs, slabs, billets and round bars through the electric arc furnace and the blast furnace methods.

Under the electric arc furnace method, which is used in Mexico and Colombia, the iron metal charge is heated with other elements to obtain molten steel. The molten steel is then cast, using the continuous casting method, into billets and thin slabs. The iron metal charge in the Norte and Manizales plants is steel scrap, and the iron metal charge in the Monterrey and Puebla plants is a mix of DRI and steel scrap. The DRI results from the conversion of pellets in the DRI modules. One of Monterrey’s DRI plants includes Hytemp® technology, which permits the hot discharge of the DRI to the electric arc furnace, generating significant energy savings and improving productivity.

Under the blast furnace method, which is used in Argentina, iron ore pellets, lumps, sinter (a mixture of iron ore fines and limestone produced in our sinter plant) and coke (a solid residue obtained from the distillation of coal produced in our coking batteries) are mixed in the blast furnaces in a process that melts and reduces the iron ore, obtaining pig iron. The molten pig iron is then mixed with steel scrap and other products in a basic oxygen furnace through a process that removes impurities from the pig iron by injecting pure oxygen at high pressure into the molten metal, burning-off carbon and other elements. The molten steel is then cast using the continuous casting method, into slabs.

Steel processing. Semi-finished steel is then processed into finished products using hot-rolling, cold-rolling, coating, tubing, paneling, slitting and cut-to-length facilities among other processes. Ternium purchases semi-finished steel in the marketplace in the form of slabs, as its steel processing capacity in Mexico is higher than its steel-making capacity in the country. It may purchase hot-rolled and cold-rolled coils as well for further processing in its lines.

Thin-slabs, slabs and billets are processed in the hot-rolling mills in Mexico, Argentina and Colombia to obtain hot-rolled products using different technologies. In the case of flat products, hot-rolled coils are obtained from thin or conventional slabs. Thin slab hot-rolling, a technology Ternium uses only in Mexico, requires less energy than conventional slab hot-rolling, as it does not require a roughing section at the mill and does not need to be reheated from room temperature to reach rolling temperature. In the production of long products, which is carried out in Mexico and Colombia, billets are reheated and taken to rolling temperature. The softened steel is processed in the rolling trains to obtain wire rods and rebars as finished long products and, depending on its final use, rebars can be further processed into stirrups and other customized shapes in our service centers in Colombia and Panama.

 

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Depending on its final use, the hot-rolled coils are then tempered and/or pickled, both in Mexico and Argentina, before being sent for sale as coils or cut into steel sheets. Alternatively, the hot-rolled coils may be sent to a cold-rolling mill where they are put under a deformation process at room temperature to reduce their thickness and obtain cold-rolled coils. Cold-rolled coils can be sold in crude form to the market (full hard) or processed in the reheating ovens, annealing bays and temper lines to modify their metallurgic and physical characteristics. The tempered products can be sold as coils or sheets or further processed by adding coatings.

Cold-rolled coils can be further processed into tin plate at Siderar’s facility in Argentina (by adding a thin layer of tin), into galvanized or electrogalvanized sheets at several of Ternium’s facilities in Mexico, the United States and Guatemala and at Siderar’s facility in Argentina (by adding a thin layer of zinc to the products through different processes) or into pre-painted products. Some of these products can be further processed into slitted, cut-to-length and tailor-made products according to customers’ needs at Ternium’s service centers, which are located in several countries. In addition, coated, cold-rolled and hot-rolled coils can be further processed into tubular products, such as welded pipes, insulated panels and architectural panels, among other products.

Sales

Net Sales

Ternium is organized into two reportable segments: Steel and Mining. The Steel segment includes the sales of steel products and the Mining segment includes the sales of iron ore products, which are primarily inter-company. The Steel segment comprises three operating segments: Mexico, the Southern Region and Other Markets. For further information on our reportable operating segments, see note 5 to our consolidated financial statements included elsewhere in this annual report. Ternium primarily sells its steel products in Latin America and the United States, where it can leverage its strategically located manufacturing facilities to provide specialized products, delivery services to its customers and reduced freight costs. In addition, it sells small quantities of iron ore to third parties, as it consumes internally most of the iron ore it produces.

Our total consolidated net sales of steel and mining products amounted to USD8.7 billion in 2014, USD8.5 billion in 2013 and USD8.6 billion in 2012. For further information on our net sales of steel and mining products, see Item 5. “Operating and Financial Review and Prospects—A. Results of Operations.”

The prices of our steel products generally reflect international market prices for similar products. We adjust prices for our products periodically in response to changes in the import prices of foreign steel, export prices, and supply and demand. See Item 5. “Operating and Financial Review and Prospects—Overview.” The actual sales prices that we obtain for our products are also subject to the specifications, sizes and quantity of the products ordered.

The following table shows Ternium’s net sales by reportable operating segment, Steel and Mining, for the years indicated:

 

     For the year ended December 31,  
In millions of U.S. dollars    2014      2013      2012  

Mexico

     4,863.9         4,230.1         4,457.3   

Southern Region

     2,641.5         2,944.7         2,737.4   

Other Markets

     1,159.3         1,251.2         1,377.2   
  

 

 

    

 

 

    

 

 

 

Total steel products net sales

     8,664.8         8,426.0         8,572.0   

Other products (1)

     35.8         33.9         29.2   
  

 

 

    

 

 

    

 

 

 

Total steel segment net sales

     8,700.5         8,459.9         8,601.1   

Total mining segment net sales (2)

     313.2         386.5         190.7   

Intersegment eliminations

     (287.6      (316.4      (183.8
  

 

 

    

 

 

    

 

 

 

Total Net Sales

     8,726.1         8,530.0         8,608.1   
  

 

 

    

 

 

    

 

 

 

 

(1) The item “Other products” primarily includes pig iron and pre-engineered metal building systems.
(2) For the year ended December 31, 2012, sales from Consorcio Peña Colorada are not included in “Total mining segment net sales”. Comparative amounts for 2012 show Consorcio Peña Colorada as an investment in non-consolidated companies and its results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement.

 

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The following table shows, where applicable, Ternium’s shipment volumes by reportable operating segment, Steel and Mining, for the years indicated:

 

In thousands of tons

   For the year ended December 31,  
     2014      2013      2012  

Mexico

     5,632.2         4,984.9         4,952.4   

Southern Region

     2,510.9         2,633.1         2,444.5   

Other Markets

     1,238.5         1,370.3         1,371.2   
  

 

 

    

 

 

    

 

 

 

Total steel products sales volumes

     9,381.5         8,988.4         8,768.2   

Total mining segment sales volumes (1)

     3,857.3         4,243.0         1,862.6   

 

(1) For the year ended December 31, 2012, sales from Consorcio Peña Colorada are not included in “Total mining segment net sales”. Comparative amounts for 2012 show Consorcio Peña Colorada as an investment in non-consolidated companies and its results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement.

Steel

Mexico.

Sales to customers in Mexico accounted for 56.1% of Ternium’s net sales of steel products during 2014, 50.2% during 2013 and 52.0% during 2012. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales” and “—Fiscal Year Ended December 31, 2013 compared to Fiscal Year Ended December 31, 2012—Net Sales.”

Most of Ternium’s Mexican customers are located near its plants. Flat steel non-coated products are mainly sold in Mexico to construction companies, industrial customers in the automotive, packaging, electric motors and service center industries, as well as distributors. The principal segments in the Mexican coated steel market are construction, automotive, home appliances and manufacturing (air conditioning, lamps and furniture). Ternium serves industrial customers, who require high-quality specifications, as well as commercial customers through service centers and warehouses. Rebar and wire rod markets in Mexico are characterized by a large number of orders of small volume, and competition is largely based on price. The customer base for bar and rod products in Mexico consists primarily of independent dealers and distributors, who in turn retail the products to their customers in the construction industry. Ternium markets its tubular products mainly through Mexican independent distributors, and the balance is sold directly to industrial customers.

Southern Region.

Sales to customers in the Southern Region, which encompasses sales in Argentina, Bolivia, Chile, Paraguay and Uruguay, accounted for 30.5% of Ternium’s net sales of steel products during 2014, 34.9% during 2013 and 31.9% during 2012. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales” and “—Fiscal Year Ended December 31, 2013 compared to Fiscal Year Ended December 31, 2012—Net Sales.”

Ternium’s sales are oriented toward the construction and agriculture sectors, the automotive industry, the packaging sector (for food, paints, sprays and petrochemicals), the tube and pipe sector (related to liquids and gas transportation and distribution networks), the capital goods sector and the home appliances sector.

The customer base in the Southern Region consists primarily of independent small and medium-sized companies and distributors, which in turn process or retail products to their customers in different market sectors. In addition, Ternium serves large industrial customers, such as customers in the automotive industry, that require customized products that Ternium can produce through its service centers and finishing facilities.

Ternium’s principal customers in the region are located near Siderar’s production facilities in Argentina. Ternium’s net sales in Argentina represent approximately 28.2% of Ternium’s total net sales. We also sell a small portion of our production to customers in Bolivia, Chile, Paraguay and Uruguay.

Other Markets.

Sales to customers in other markets, which include mainly shipments to Colombia, the United States and Central America, accounted for 13.4% of Ternium’s consolidated net sales of steel products during 2014, 14.9% during 2013 and 16.1% during

 

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2012. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations-Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales” and “—Fiscal Year Ended December 31, 2013 compared to Fiscal Year Ended December 31, 2012—Net Sales.”

Customers in Colombia are served directly through Ferrasa’s facilities and through Ternium Internacional’s Bogotá commercial office. Our main markets in Colombia are the construction industry and the energy related sectors. Ternium offers a variety of customized products through its various service centers in the country.

Customers in the United States are served directly through the Shreveport plant and through Ternium Internacional’s Houston commercial office. The Gulf Coast and a large portion of the West Coast, in particular, are regions for which our Mexican facilities have distribution advantages. Our main markets in the United States are the construction industry and the energy related sectors.

Customers in Central America are served directly through Ternium Internacional Guatemala’s facilities in Guatemala, El Salvador, Nicaragua and Costa Rica. Our main market in Central America is the construction industry. Ternium offers a variety of customized products through its various service and distribution centers in the region.

Mining

Ternium’s shipments of iron ore mainly include those made by Las Encinas and 50% of those made by Consorcio Peña Colorada. Comparative amounts for 2012 show Consorcio Peña Colorada as an investment in non-consolidated companies and its results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement. Iron ore shipments are destined mainly for internal consumption within Ternium’s Steel segment and surpluses, if any, are destined for the export market. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales” and “—Fiscal Year Ended December 31, 2013 compared to Fiscal Year Ended December 31, 2012—Net Sales”.

Marketing

Steel

Our marketing strategy in our steel segment is to continue increasing higher margin value-added products and services in Ternium’s sales mix. We expect to increase Ternium’s offerings of value-added products, such as cold-rolled sheets and coated and tailor-made products, and services, such as just-in-time deliveries and inventory management. In order to do so, Ternium will increase processing capacity, will continue to work with its customers to anticipate their needs and develop customized products for particular applications, and will maintain a strategic presence in several steel markets through its network of commercial offices. A principal component of Ternium’s marketing strategy is establishing lasting and close relationships with customers. This allows Ternium to provide assistance to its customers in their use of steel products and to obtain downstream information that can be applied to future product development.

Ternium adapts its marketing strategy according to the different regions it serves. Its sales force specializes in different regional requirements, ranging from product specifications to transport logistics.

In order to increase Ternium’s participation in regional markets and improve services provided to customers, Ternium manages its exports from countries where it has manufacturing facilities through Ternium Internacional’s network of commercial offices. Ternium Internacional operates through strategically located subsidiaries, providing customers with support and services. Ternium Internacional has extensive experience promoting steel products. Its marketing expertise helps Ternium to expand its position in current markets and to develop new ones.

Mexico.

Several local and foreign steel producers direct part of their sales efforts to the Mexican market. Ternium’s steel customers in Mexico are in the construction industry, the automotive industry, the energy sector and the home appliances sector, among other industries. In Mexico, we offer customized services through our network of service and distribution centers.

Through our service centers, located in northern and central Mexico, Ternium can cut, paint or roll-form its products to specific client requirements. Customized products include metallic roofing, auto parts and cut-to-length products used in the home appliance and construction industries. Ternium has several commercial offices in the country, which provide services such as logistics, stock management and customer assistance, as well as analysis of businesses opportunities in their respective markets.

Ternium Mexico has a department focused on the development of small- and medium-sized companies in Mexico under a program created by the Techint group for the development of its local customers and suppliers (“Propymes”). The objective of

 

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the program is to improve their competitiveness, to increase their exports and to allow them to substitute imports with local products. Approximately 260 companies are part of this program in Mexico, which provides support for industrial, training, and institutional requirements of the participating companies.

Ternium’s experienced sales force specializes in the needs of each market sector and focuses on value-added products and services. In this competitive and end-user oriented market, the extensive use of well-known commercial brands allows customers to clearly recognize Ternium’s products. Ternium seeks to increase its competitive advantage by providing value-added services, including the technical assistance related to steel use and production, and developing new steel products.

Southern Region.

Ternium’s sales force in this region is oriented toward serving the specific needs of different market sectors, such as the construction industry, the automotive industry, the home appliances sector, the packaging sector (for food, paints, sprays and petrochemicals), the agricultural equipment and capital goods sector, the tube and pipe sector (related to liquids and gas transportation and distribution), and steel processors.

Through Siderar’s service centers in Argentina, Ternium can cut, paint or roll-form its products to specific client requirements. Customized products include metallic roofing, auto parts, steel for agricultural machinery, different types of tin used to produce sprays and food containers and cut-to-length products used in the home appliance and construction industries.

Ternium has commercial offices in Argentina and Uruguay. These offices provide services such as market development, analysis of businesses opportunities, and customer support in their respective countries. Propymes was implemented in Argentina in 2002, with the objective of promoting the local industry. Approximately 680 companies are part of this program, which provides support for industrial, training, commercial, financial and institutional requirements of the participating companies.

Other Markets.

Ternium’s steel customers in Other Markets are mainly in the construction and energy-related industries in Colombia, the United States and Central America. Several steel producers participate in these markets. In Colombia and Central America, we offer customized services through our network of service and distribution centers.

Through Ternium’s facilities and service centers located in Colombia, Costa Rica, El Salvador, Guatemala, Nicaragua and southern United States, Ternium can cut, paint or roll-form its products to specific client requirements mainly in the construction industry.

Ternium has commercial offices in Colombia, Houston, Costa Rica, Ecuador, El Salvador, Guatemala, Nicaragua and Panama. These offices provide services that enable Ternium to offer differentiated services in their respective countries.

A small share of Ternium’s shipments is destined for steel markets outside the Americas. Sales to Europe, Asia and Africa are carried out mainly through Ternium Internacional’s office in Spain. Ternium Internacional is focused on trading activities, including the development of commercial and marketing activities.

Mining

Ternium’s mining activities are mainly aimed at securing the supply of iron ore for our steel-making facilities in Mexico. Surplus production of iron ore, if any, is commercialized to partially hedge the iron ore procurement requirements of Ternium’s facilities in Argentina. We export iron ore through the Manzanillo port that is located on Mexico’s Pacific coast, mainly to customers in the Chinese iron ore market.

Competition

Steel

The steel industry operates predominantly on a regional basis, with large industry participants selling the bulk of their steel production in their home countries or regions, where they have natural advantages and are able to more effectively market value-added products and provide additional customized services. Despite the limitations associated with transportation costs, as well as the restrictive effects of protective tariffs and other trade restrictions, international trade of steel has increased in the last decade with production shifting towards low-cost production regions. In addition, since 2002, several large steel manufacturers have merged with each other or acquired steel companies in other parts of the world. This wave of consolidation has resulted in a number of large, global producers with significant operations in several regions and/or continents, contributing to the increasing globalization of the steel industry. Considered as a whole, however, the steel industry still remains considerably fragmented, compared with market conditions characterizing certain of our suppliers and customers, e.g. iron ore suppliers and the automotive industry.

 

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Steel consumption has historically been centered in developed economies, such as the United States, Western Europe and Japan. However, in the last decade steel consumption in Asia, and in particular China, has increased significantly.

There has been a trend in the last decade toward steel industry consolidation among Ternium’s competitors. Below is a summary of the most significant transactions:

 

 

June 2006: Mittal Steel and Arcelor merge to create ArcelorMittal, the world’s largest steel company.

 

 

March 2007: Votorantim acquires Colombia’s Aceria Paz del Rio.

 

 

April 2007: Tata Steel completes the acquisition of Corus.

 

 

July 2007: Gerdau acquires Chaparral Steel.

 

 

August 2007: US Steel acquires Stelco.

 

 

March 2008 to May 2008: Severstal acquires Sparrows Point, WCI Steel and Esmark (subsequently, during 2011, it divests Sparrows Point, Warren and Wheeling).

 

 

October 2012: Nippon Steel and Sumitomo merge to form NSSMC, the world’s second largest steel company.

 

 

February 2014: ArcelorMittal and NSSMC acquires ThyssenKrupp Steel USA, a steel processor based in Alabama, through a 50/50 joint venture.

 

 

September 2014: AK Steel Corporation and Steel Dynamics Incorporated acquired OAO Severstal’s U.S. Dearborn and Columbus operations, respectively.

Despite this trend, the global steel market remains highly fragmented. In 2013, the five largest steel producers, ArcelorMittal, NSSMC, Hebei Group, Baosteel Group and Wuhan Steel Group, accounted for 17% of total worldwide steel production, compared to 15% for the five largest steel producers in 2000.

Steel prices in general have exhibited significant volatility in the last decade. From 2000 to 2002, the industry, especially in North America, experienced fluctuating capacity utilization, low demand growth levels and other adverse conditions, which led to depressed steel prices, adversely impacting many steel producers’ profitability. Since 2003 steel prices strengthened worldwide, due to higher economic growth in most regions, particularly China and other developing countries, as well as higher raw material prices (for iron ore, ferroalloys and energy). During the first quarter of 2008, steel prices went up significantly due to higher demand for steel products and higher input costs resulting from constraints in the availability of raw materials. However, this trend reversed beginning in the second half of 2008 due to a global economic downturn, with prices and costs declining steeply. Since 2009, a number of events have contributed to continuously volatile steel price cycles, such as spikes and depressions in raw material prices, new steelmaking capacity additions (at a pace higher than steel demand growth), the idling and restart of steelmaking capacity, adverse economic conditions in Europe and a slowdown in China’s economic growth.

Mexico.

Ternium competes in the Mexican steel market with domestic and international steel producers. According to Canacero, the Mexican chamber of the iron and steel industry, imports of hot-rolled, cold-rolled and galvanized steel products into Mexico accounted for approximately 39%, 38% and 40% of the Mexican market for those products in 2014, 2013 and 2012, respectively, as steel consumption in Mexico is higher than the installed steel capacity in the country.

Our largest Mexican competitor in the flat products market is AHMSA, an integrated steel producer located in Monclova, Coahuila, which produces a wide variety of steel products. AHMSA focuses on low value added products such as plate and commercial quality hot-rolled and cold-rolled coils. Other significant competitors with facilities in the country are Lámina y Placa Comercial S.A. de C.V. (Grupo Villacero), a producer of galvanized coils and a distributor of steel products, and POSCO, a Korean steel company with steel galvanizing facilities in Altamira, Tamaulipas.

In the rebar market, Ternium’s largest competitor is ArcelorMittal. To a lesser extent, Ternium also faces competition from Aceros San Luis and Deacero. In the low-carbon wire rod market, Ternium’s main competitors are Deacero, ArcelorMittal and, to a lesser extent, Talleres y Aceros and Aceros San Luis.

 

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In the small diameter welded pipe market, Ternium’s main competitors are Tubería Laguna, Maquilacero and imports. Orders in this market are usually small and cover a wide range of product specifications.

Southern Region.

Ternium’s most significant market in the Southern Region is Argentina. Siderar is the main producer of flat rolled steel products in Argentina. Its main competition in the Argentine flat steel market are imports, particularly from Brazil. The main Brazilian producers of flat steel value-added products are Usiminas, Companhia Siderúrgica Nacional and ArcelorMittal. Ternium maintains a leading position in the flat steel markets of Paraguay and Uruguay and is present in the flat steel markets of Chile and Bolivia, where the location of Ternium’s facilities in neighboring Argentina provides a logistical advantage to supply these markets vis a vis its foreign competitors.

Other Markets.

In addition to its sales in Mexico and the Southern Region, Ternium sells its products in other markets, of which the most significant are Colombia, the southern United States and Central America.

Our subsidiary Ferrasa is the main flat steel processor in Colombia and is also a long steel producer. Its main competitors in the Colombian steel market are Acerías Paz del Río, Gerdau Diaco, Acerías de Colombia, Siderúrgica Nacional and Siderúrgica del Occidente, and it also faces competition from imports.

Ternium has a very small participation in the U.S. steel market in comparison with U.S. domestic steel manufacturers and importers. It successfully competes in the Gulf Coast and a large portion of the West Coast where its facilities have logistical advantages.

Ternium maintains a leading position in the coated flat steel market of Central America, benefiting from the logistical advantages of its facilities located in Costa Rica, El Salvador, Guatemala, Nicaragua and Mexico.

In addition, Ternium keeps an active presence in other regions in the Americas, including Ecuador and Peru, although it usually faces strong competition in these markets from steel producers located in Brazil.

Mining

The majority of iron ore supplies to the international seaborne market come from Australia and Brazil, from the major global miners Vale, Rio Tinto and BHP Billiton, as well as from iron ore junior companies in these countries. In Mexico, the main iron ore producers are AHMSA, ArcelorMittal and Ternium, which are, at the same time, major steel-making companies and iron ore consumers. Only a small portion of the iron ore obtained by these three players is made available for sale in the Mexican or export market. There are also other small iron ore mining concessionaries that sell their production mostly to local steel-making operations.

Capital Expenditure Program

The main objectives of Ternium’s current capital expenditure program are to:

 

 

increase steel production and processing capacity;

 

 

increase product range;

 

 

reduce production costs;

 

 

replace equipment;

 

 

improve product quality, equipment reliability and productivity;

 

 

comply with applicable environmental standards; and

 

 

provide enhanced customer services.

Capital expenditures in Ternium’s facilities during 2014 amounted to USD443 million. The current status of the most significant projects is described below.

 

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Steel

Mexico. During 2014, Ternium’s capital expenditures in the country amounted to USD201 million and were mostly related to the following projects:

 

 

Completion of the Pesquería project. In 2014, Ternium completed the construction of additional finishing lines at the cold-rolling facilities, consisting mainly in an electrolytic cleaning line, batch annealing furnaces, a temper mill and a tension-leveling line.

 

 

Environmental and safety projects. During 2014, Ternium made progress on several projects aimed at further improving environmental and safety conditions throughout our main facilities, particularly at the Guerrero unit in Nuevo León, Mexico. Advanced projects at the Guerrero unit included a technological upgrade of the iron ore feeding systems of the direct reduction modules, expected to be completed during the second half of 2015, aiming at improving the facilities’ process control conditions. Other main ongoing projects include a new hydrochloric acid regeneration plant that stores and process acid consumed by the pickling lines of the cold-rolling mills; the construction of a briquetting plant to process metallic fines produced in the direct reduction modules; the installation of a secondary de-dusting system in the steel shop to enhance control over emissions; and several improvements in the processing and handling of steel slag in the steel shop. These projects, expected to be concluded during the second half of 2016, aim at further improving environmental conditions throughout the unit. Furthermore, the program includes complementary investments such as the replacement of pickling tanks, improvements in the treatment of sludge and raw material storage yards, and safety improvements in vehicular traffic. In addition, at the Puebla unit in Puebla, Mexico, Ternium has started the replacement of obsolete equipment in the direct reduced iron plant in order to improve safety and operational reliability.

 

 

Expansion of service center processing capacity. The project involves the installation of eight slitting lines and two cut-to-length lines. The installation of the first slitting line was completed during 2013 in the Churubusco unit. During 2014 Ternium began the construction of a second slitting line in the same unit. Upon completion of this project, Ternium’s annual processing capacity of slitted and cut-to-length steel products is expected to increase by approximately 900,000 tons.

 

 

Expansion of slab processing capacity. During 2014, Ternium started the first stage of a project aimed at upgrading the Churubusco unit’s hot rolling mill, in order to increase its production capacity and to expand its product range with high-quality steel products for the automotive industry. Once the first stage is completed, including changes in the sheet cooling system, repairs at one furnace, installation of a new furnace and logistical improvements, the annual processing capacity of the mill is expected to increase by 230,000 tons.

Southern Region. During 2014, Ternium’s capital expenditures in Argentina amounted to USD189 million. Ternium carried out a capital expenditure plan to maintain its equipment’s operating performance, continued with some projects and started new ones, the most significant of which involved Siderar’s San Nicolás unit, as follows:

 

 

Expansion of coke production capacity. During 2014 Siderar made progress in the revamping and expansion of the coke by-products processing plant, and performed repair works in the coking batteries. The revamping and expansion of the coke by-products processing plant is expected to be completed during the first half of 2015. Upon completion of this project, Siderar’s coke annual production capacity is expected to increase by approximately 250,000 tons to reach 1.3 million tons.

 

 

Expansion, improvements and repairs in the steel shop. Siderar completed the construction of a second slab continuous caster during the first quarter of 2014, now in the ramp up stage. Once fully ramped-up, it is expected to enable an increase in the San Nicolas unit’s annual slab production capacity of approximately half a million tons, to a total of approximately 3.3 million tons. In addition, Siderar made progress in the expansion of the industrial area, the incorporation and replacement of equipment, and improvement works to the slab continuous caster #1.

 

 

Expansion of hot rolling mill capacity. In 2014 Siderar made progress in the revamping of its hot rolling mill; upon completion of this project, which includes the replacement of the main motors and the construction of a new electric power substation, hot-rolled annual production capacity is expected to increase by approximately 400,000 tons to reach 3.3 million tons.

 

 

Extension of blast furnace #1 production campaign. Upon completion of this project launched during 2014, Siderar expects to achieve several improvements in safety and environmental conditions, and to extend the blast furnace production campaign to 2018.

 

 

Expansion of service center processing capacity. During 2014, Siderar made progress in the installation of a new profile line in the Canning unit, and launched the installation of a new profile line and a slitting line in the Haedo unit, aimed at expanding customized annual production capacity by approximately 150,000 tons, to reach 2.2 million tons.

 

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In addition, Air Liquide Argentina S.A. (ALASA), made progress in the installation of a new oxygen plant located in our San Nicolás unit. This facility, which is owned and will be operated by ALASA, will increase current supply of gases to fulfill our steel shop projected requirements.

Other Markets. During 2014, Ternium’s capital expenditures in facilities located in countries other than Mexico or Argentina amounted to USD8 million, and mainly included projects related to the replacement of equipment, product quality and equipment reliability improvements, and overall processing capacity increases.

Mining

During 2014, Ternium’s capital expenditures in its mining segment were USD45 million. Las Encinas’ capital expenditures amounted to USD13 million in the year, and mainly included projects related to the maintenance and upgrade of equipment, and exploration activities. Ternium’s share in Consorcio Peña Colorada’s capital expenditures amounted to USD33 million, mainly related to maintenance and upgrade of equipment, and exploration activities. During 2014, Consorcio Peña Colorada’s shareholders approved the investments required to increase the processing capacity of its crushing, grinding and concentration facilities to raise iron ore concentrate production levels back to 4.5 million tons per year. The project is expected to be completed in 2016.

2015 Capital Expenditures

Ternium’s capital expenditures for 2015 are expected to range between USD500 and USD600 million. The main capital expenditure projects will relate to the following:

 

 

Projects aimed at further improving environmental and safety conditions throughout our main facilities, particularly at the Guerrero unit in Nuevo León, Mexico;

 

 

The enhancement and expansion of the capacity of the Churubusco and San Nicolás units’ hot rolling mills;

 

 

The expansion of service center capacity in Mexico and Argentina of slitted, cut-to-length and profile processing facilities;

 

 

The completion of the expansion of coke production capacity at the San Nicolás unit in Buenos Aires, Argentina; and

 

 

The project, aimed at increasing the processing capacity of Consorcio Peña Colorada iron ore crushing, grinding and concentration facilities.

Raw Materials, Slabs, Energy and Other Inputs

The main inputs for Ternium’s steelmaking facilities in Mexico are slabs, iron ore, steel scrap, electricity and natural gas; the main inputs for Siderar’s integrated steel facilities in Argentina are iron ore and coal; and the main inputs for Ternium’s facilities in Colombia are steel products, steel scrap and electricity. Below is a more complete description of the supply conditions for raw materials, slabs, energy and other inputs at Ternium’s facilities in these countries. For a description of some of the risks associated with Ternium’s access to raw materials, energy and other inputs, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability.”

Mexico

In Mexico, Ternium’s manufacturing of finished steel products relies on the supply of crude steel from its steelmaking facilities, which are based on the mini-mill technology, and on the purchase of crude steel slabs from third parties. The mini-mill technology melts a variable combination of DRI and steel scrap to produce thin slabs, billets and round bars. Ternium’s production process in Mexico requires extensive use of natural gas and electricity. Third-party slabs are the largest component of production costs; iron ore, scrap, electricity and natural gas costs are also significant.

Slabs. Ternium’s Mexican subsidiaries have some non-integrated facilities that consume large quantities of slabs purchased from third-party steel suppliers. Currently, slabs are purchased both in Mexico (primarily from ArcelorMittal) and in the international markets. In addition, in the past Siderar supplied slabs from time to time to our Mexican operations, and upon completion of the new continuous caster in Siderar’s San Nicolás unit, it will be able to supply slabs to our Mexican facilities. Slab consumption varies significantly from year to year in accordance with market conditions. Our Mexican subsidiaries purchased 3.3 million, 2.5 million and 2.8 million tons of slabs in 2014, 2013 and 2012, respectively. Slab purchase prices are market-based.

 

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Iron ore. As described under “—Production Facilities and Processes—Iron ore mining facilities” above, Ternium’s subsidiaries own interests in two mining companies in Mexico: 100% of the equity of Las Encinas and a 50% equity stake in Consorcio Peña Colorada. In 2014, Ternium’s Mexican facilities sourced 100% of their iron ore requirements from these two companies. Under our arrangement with Consorcio Peña Colorada, effective January 1, 2013, we are committed to off-take 50% of the annual production of the Peña Colorada mine. In 2014, approximately 94% of the iron ore production available to Ternium went to our own direct reduction plants and the remaining 6% was sold in the market to third parties. All of our iron ore shipments during 2014 were made on a spot basis. On average, we consume approximately 1.2 tons of iron ore to produce one ton of crude steel at our mini-mill facilities in Mexico.

Steel scrap. In 2014, approximately 79% of Ternium’s scrap requirements was obtained in the Mexican market through its own steel scrap collecting and processing operations and approximately 21% was purchased in the United States. Scrap is purchased at market prices. On average, we consume approximately 0.4 tons of scrap to produce one ton of crude steel at our mini-mill facilities in Mexico.

Electricity. Electric arc furnaces consume large quantities of electricity. During 2014, 64% of Ternium Mexico’s total consumption was supplied by the CFE, Mexico’s state-owned electricity company. The remainder was mostly purchased under a supply agreement with Tractebel Energía de Monterrey, S. de R.L. de C.V. and a supply contract with Iberdrola Energía Monterrey, S.A. de C.V. (“Iberdrola”), with electricity purchases under these contracts being made at prices linked to certain energy production input costs and at market prices less certain agreed discounts, respectively. For more information on Ternium’s commitments with Iberdrola and Tractebel, see note 24(ii) (e) and (f) to our consolidated financial statements included elsewhere in this annual report. On average, we consume approximately 0.7MWH of electricity to produce one ton of crude steel at our mini-mill facilities in Mexico.

In addition, Ternium is participating in Techgen S.A. de C.V. (“Techgen”), a joint venture company that is building a power plant in the Pesquería area of the State of Nuevo León, Mexico. The plant is expected to be operational in the fourth quarter of 2016. Ternium agreed to enter into power supply and transportation agreements with Techgen, pursuant to which Ternium will contract 78% of Techgen’s power capacity of approximately 900 megawatts. As a result, Ternium will secure the supply of electricity to its facilities in Mexico and is expected to improve its cost competitiveness. For more information on the Techgen investment, see Item 4. “Organizational Structure—Other investments—Techgen”.

Natural gas. Natural gas is mainly used as a reducing agent for the production of DRI and for the reheating of slabs and billets before the hot-rolling process. In Mexico, Ternium purchases natural gas from Pemex, the Mexican state-owned oil and gas company that is Mexico’s sole producer of natural gas, and from three distributors: Gas Industrial de Monterrey S.A. de C.V., or GIMSA, Compañía Mexicana de Gas S.A. de C.V., or CMG, and Gas Natural Mexico S.A. de C.V., or GNM. Natural gas prices for Ternium Mexico are determined pursuant to the methodology approved by the Comisión Reguladora de Energía or Energy Regulatory Commission, or CRE. Those prices are related to the market prices of natural gas in south Texas, plus transportation, distribution and service costs depending on the location of the delivery points in Mexico. In addition, effective April 1, 2013, extraordinary charges were authorized by CRE to account for the incremental transportation costs derived from higher liquefied natural gas imports into Mexico. Such extraordinary charges will remain in place for a maximum period of three years and could be eliminated in a shorter period of time if CRE declares that the current bottlenecks in Mexico’s natural gas grid transportation capacity are resolved. The extraordinary charge set for March 2015 was USD0.2863 per million btu. On average, we consume approximately 9.1 million btu of natural gas to produce one ton of crude steel at our mini-mill facilities in Mexico.

For additional information regarding inputs affecting our operations in Mexico, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—Mexico” and “—Risks Relating to our Mining Activities”.

Argentina

In Argentina, Siderar produces crude steel through the use of blast furnace technology. The principal raw materials used to produce steel are iron ore and coal. The manufacturing process also requires significant quantities of electricity and natural gas.

Iron ore. Iron ore is purchased under long-term agreements from suppliers in neighboring Brazil. Prices under these contracts are determined in accordance with market conditions. Our main suppliers of iron ore, in the form of lumps, pellets and sinter feed fines, are Vale S.A. and Samarco (a joint venture between Vale and BHP Billiton). Our geographic location provides favorable access to high quality iron ore lump and fines produced in Brazil’s iron ore mines in the Pantanal Region (Mato Grosso do Sul state), where we are in the process of developing additional iron ore suppliers, resulting in a cost advantage for Siderar. In addition, Siderar’s steelmaking facility in Argentina receives iron ore pellets and fines from ports located on Brazil’s ocean coast. We consume approximately 1.3 tons of iron ore to produce one ton of crude steel in Argentina.

 

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Coking coal and related materials. Siderar obtains its coke through the distillation of coking coal and petroleum coke in its coke ovens. Siderar requires different types of coal to produce coke. Coking coal is purchased under short-term contracts and on the spot market from several major international suppliers based mainly in Australia and the United States. Prices under contracts are determined in accordance with market conditions. Petroleum coke is sourced domestically from oil companies such as Exxon Mobil and YPF. The volume purchased from each supplier mainly depends on the technical quality requirements of the blast furnace operations. We consume approximately 0.5 tons of a mixture of coking coal and petroleum coke to produce one ton of crude steel in Argentina.

Electricity. Siderar consumes large quantities of electricity for its manufacturing activities, particularly in its San Nicolás and Ensenada facilities. Most of the electricity required by our San Nicolás facility is self-generated on site by a wholly-owned thermoelectric plant with an installed power capacity of 110 MW. This thermoelectric plant uses steam primarily generated from by-product gases obtained in the steelmaking process (blast furnace and coke oven gases) and also steam purchased under a long-term steam sales agreement, from a power plant located within the San Nicolás facility owned by Siderca S.A.I.C., a subsidiary of Tenaris. Additional fuel requirements for steam production are covered with natural gas purchased from different market vendors, and/or fuel oil bought at market prices. Siderar covers electricity shortfalls or sells surpluses, as the case may be, at spot prices in the wholesale market. Over the course of the last several years, demand for electricity in Argentina increased substantially, outpacing supply and resulting in shortages of electricity to residential and industrial users during periods of high demand. During these periods, Siderar’s energy purchases to cover its energy shortfalls suffered restrictions. We consume approximately 0.1 MWH of electricity to produce one ton of crude steel in Argentina.

Natural gas. Siderar also consumes substantial volumes of natural gas, particularly to operate its blast furnace and power generation facilities in San Nicolás. Siderar purchases natural gas at market prices mainly from Pan American Energy, Pluspetrol, Pampa Energía, Tecpetrol, a company controlled by San Faustin, and natural gas traders, including MetroEnergía, Albanesi, Energy Traders, Gas Patagonia, Alternativas Energéticas and Energy Consulting Services S.A., a company in which San Faustin holds significant but non-controlling interest. In recent years, natural gas demand in Argentina increased significantly, outpacing supply and thus, as is the case with electricity, the provision of natural gas to industrial users (including Siderar) suffered restrictions during periods of high demand.

For its San Nicolás facility, Siderar has separate transportation and distribution agreements with Transportadora de Gas del Norte S.A., or TGN, and Litoral Gas, companies in which San Faustin holds significant but non-controlling interests. Siderar’s firm transportation contracts with TGN expire in April 2028, whereas its distribution agreement with Litoral Gas expires in December 2015. For its other facilities Siderar’s transportation and distribution needs are covered by the corresponding regional distributors Camuzzi Gas Pampeana S.A., Gas Natural Ban S.A. and Metrogas S.A. We consume approximately 1.7 million btu of purchased natural gas to produce one ton of crude steel in Argentina.

Other inputs. Siderar has on-site oxygen, nitrogen and argon separation plants in order to extract these gases for use in the steelmaking process. Siderar’s separation plants are being managed by ALASA. Siderar is party to a long-term contract with ALASA for the supply of oxygen, nitrogen and argon. For further information on the contract with ALASA, see note 24 (ii) (d) to our consolidated financial statements included elsewhere in this annual report.

Colombia

In Colombia, Ternium’s manufacturing of finished steel products relies on two sources: (a) the production of steel in its steelmaking facilities, which are based on the electric arc furnace (“EAF”) technology; and (b) on the purchase of steel products, both from our overseas subsidiaries and from third parties. The EAF technology melts steel scrap to produce steel billets, which are then rolled into various long products. Ternium’s production process requires extensive use of electricity. Steel products are the largest component of production costs; scrap and electricity costs are also significant.

Steel products. Ternium’s operations in Colombia include non-integrated facilities that process steel supplied by Ternium’s overseas subsidiaries and steel purchased from third-party suppliers procured in the domestic and international markets. We purchased from third parties approximately 374,000 tons of steel products in 2014, 288,000 tons of steel products in 2013 and 345,000 tons of steel products in 2012.

Steel scrap. Scrap is the main raw material for producing steel in our steelmaking facilities in Colombia. Ternium sources 100% of its steel scrap needs from the local scrap market. We consume approximately 1.1 tons of scrap to produce one ton of crude steel in Colombia.

Electricity. Manizales is our main electricity consuming unit in Colombia, mainly due to its electric arc furnace-based steel production operations. Manizales purchases electricity from ISAGEN S.A. E.S.P., a Colombian power company, under a three-year supply contract expiring in April 2016. 70% of the electricity price is based on a fixed rate adjusted with the wholesale price index and 30% is based on prevailing prices. We consume approximately 0.7 MWH of electricity to produce one ton of crude steel in Colombia.

 

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Product Quality Standards

Ternium develops its products and services with a philosophy of continuous improvement and seeks to excel in its internal quality control of its products and processes. Ternium’s products are manufactured in accordance with proprietary standards and the requirements of customers, and within the specifications of recognized international standardization entities including the International Organization for Standardization, or ISO, the American Society for Testing and Materials, or ASTM, the European Standards, or EN, the Japanese Industrial Standards, or JIS, the Society of Automotive Engineers, or SAE, and the standards of the American Petroleum Institute, or API. Ternium also has product certifications based on international or local standards depending on the markets served.

Ternium established and implemented a Quality Management System, or QMS, and continuously improves its effectiveness in compliance with the requirements of the applicable ISO 9001:2008 and ISO / TS 16949:2009, intended for production of automotive supplies, and other specific requirements. Ternium’s QMS operates with aligned strategies, objectives and criteria throughout Ternium’s subsidiaries. To keep its ISO multisite certification, the QMS is audited annually by Lloyd’s Register Quality Assurance.

Ternium Mexico’s and Siderar’s metallurgical testing laboratories are accredited for the performance of various technical tests in accordance with ISO/IEC 17025:2005 General Requirements for the Competence of Testing and Calibration Laboratories or equivalent standards.

Research and Development; Product Development

Product research and development activities at Ternium are conducted through a central Product Development Department in coordination with local teams that operate in several of our facilities. Applied research efforts are carried out in-house and in conjunction with universities and research centers, as well as through participation in international consortia. Ternium also develops new products and processes in cooperation with its industrial customers, prioritizing an early involvement scheme.

In 2014, Ternium’s product research and development activities focused mainly on the development of high-end flat steel products to gain market share in the automotive, home appliance, electric motors and oil and gas sectors. To this end, during the year Ternium furthered the development, certification and production of advanced steel with high quality standards from its industrial center in Pesquería, currently the most modern of its kind in Latin America, with the aim of increasing its share of the Mexican automotive steel market and increasing the value added to its product sales mix.

In addition, Ternium is in the process of developing a new range of interstitial-free ultra-low carbon steel grades with high silicon content and very low core loss for automotive, home appliance and electric motor applications, in order to consolidate Ternium’s competitiveness in certain industrial steel market segments in Mexico and Argentina. Some of these new developments were made possible by the commissioning of a new steel vacuum degassing station and a new continuous caster in Argentina.

During 2014, Ternium continued the development and certification of products and manufacturing processes with its customers in the automotive industry in Mexico and Argentina. These efforts were aimed at increasing Ternium’s share in the high-end steel market, especially for products involving the utilization of its new Pesquería facilities. In addition, Ternium developed new manufacturing processes for steels with complex micro-structures, which are suitable for rugged performance such as in bodyworks and rims, as well as new manufacturing processes for steel with special qualities suited for hydroforming and steel with special qualities suited for hot-stamping, the latter of which is currently at the approval stage. These new developments were also made possible by the commissioning of the new facilities in Argentina.

For the oil and gas industry, during 2014, Ternium participated in the development of metallurgic studies for certain steel grades. This project was aimed at improving Ternium’s product portfolio for tube and pipe manufacturers serving that industry. The project is being conducted in conjunction with the Tenaris Research Center and the University of Pittsburgh, and entails the evaluation and assessment of certain steel grades intended for use in sour service conditions. In addition, during 2014, Ternium launched the development of hot-rolled steel products suitable for the manufacture of high-pressure welded pipes, given the new expected demand for these products stemming from the extension of natural gas pipelines in Mexico and Argentina.

In order to increase its participation in the electrical steel markets in Mexico, during 2014 Ternium launched the development of ultra-low carbon steel grades with high silicon content, which enhances the magnetic properties of the steel. Early tests showed that the new products yielded significant improvements in terms of electric motor energy efficiency. The project has advanced to the customer certification stage.

 

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For the home appliance industry, Ternium developed an early involvement strategy with the main home appliance manufacturers in Mexico and Argentina, a strategy that has proved decisive in gaining market share in this segment. Under these arrangements, Ternium developed customized products and services, and provided technical assistance related to the processes of shaping the new product parts.

During the year, Siderar continued to provide technical assistance to customers and to foster new technologies that enable the introduction of higher quality steels aimed at the improvement of the performance and the competitiveness of its products. Under this program, Siderar, together with can manufacturers, developed new processes that helped them increase market share through the introduction of new varnished products.

Ternium’s medium-term product research and development plans are based on a continuing assessment of steel product performance and the emerging requirements of the industry, carried out in close collaboration with leading steel customers and institutions. Based on customer needs, we improve, adapt and create new applications and define future technology requirements at our facilities.

During 2014, Ternium continued participating in leading research and development projects through international consortia and together with universities and research centers to further expand the required know-how for the development of new products. Consortia projects included the development of high-strength steel for applications in the pipe manufacturing and automotive industries, in collaboration with the Colorado School of Mines, and the development of new coating technologies for applications in the automotive industry and of improvements in the galvanizing bath to optimize processes, in collaboration with the International Zinc Association.

Projects jointly conducted with university and research centers included basic research on the mechanical and chemical performance of steel and steel coatings in collaboration with the Mexican Universidad Autónoma de Nuevo León (Nuevo León Autonomous University), research on the performance of hot-stamped steel coatings and electric steel efficiency in collaboration with the Mexican Centro de Investigación en Materiales Avanzados (Advanced Materials Research Center), and the development of high-strength steel casting and hot rolling processing in collaboration with Instituto Argentino de Siderurgia (Argentine Steel Institute).

During 2015, Ternium will focus on the optimization of its current product range design and on the development of new advanced hot-rolled steel products such as dual phase, complex phase and martensitic steel products. These new developments will be possible as a result of the enhancement project for the hot rolling mill of our Monterrey unit, and are aimed at gaining share in Mexico’s automotive steel market segment.

During the year, Ternium will consolidate ongoing developments, such as the above mentioned certification of new products and processes related to its Pesquería facilities and its new steel vacuum degassing station and continuous caster. In addition, Siderar is expected to complete the development of special steel grades to fulfill the requirements of Mexican industrial customers. Ternium also expects to complete, in 2015, the above mentioned development of metallurgic studies for oil and gas steel grades, aimed at improving its product portfolio for tube and pipe manufacturers.

Regulations

Environmental Regulation

Ternium’s operations (including mining activities in Mexico) are subject to a broad range of environmental laws, regulations, permit requirements and decrees relating to the protection of human health and the environment, including laws and regulations relating to land use; air emissions; wastewater treatment and discharges; the use, handling and disposal of hazardous or toxic materials and the handling and disposal of solid wastes. Laws and regulations protecting the environment have become increasingly complex and more stringent and expensive to implement in recent years. International environmental requirements may vary. Ternium’s corporate environmental policy commits each of its business units to comply with all applicable environmental laws and regulations and aims to achieve the highest standards of environmental performance as a basis to enhance sustainable development. Compliance with environmental laws and regulations, and monitoring regulatory changes, is addressed primarily at the regional level.

Ternium reports to the World Steel Association eleven sustainability indicators, among which carbon dioxide emissions data is being reported on an annual basis as part of the association’s initiative to collect emissions data from member companies. We support the steel industry’s ongoing effort to develop innovative solutions to reduce greenhouse gas (GHG) emissions over the life cycle of steel products. According to the Intergovernmental Panel on Climate Change (IPCC), the steel industry accounts for approximately 6% to 7% of total world GHG emissions. Our steel production facilities in Mexico have achieved GHG-specific emission levels that are close to the theoretical minimum. In Argentina, Siderar’s GHG-specific emission levels are close to the industry average for blast furnace technology.

 

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The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. In addition, new laws and regulations could emerge as a result of ongoing negotiations for new commitments on GHG emissions related to the second phase of Kyoto Protocol, which expires in 2020. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred from potential environmental liabilities, could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations.

Ternium has not been subject to any material penalty for any environmental violations in 2014, and we are not aware of any current material legal or administrative proceedings pending against Ternium with respect to environmental matters which could have an adverse material impact on Ternium’s financial condition or results of operations.

Mining regulations in Mexico

Because our operations in Mexico include mining, we are also subject to Mexican regulations relating to mining and mining concessions. Under Mexican law, mineral resources belong to the Mexican nation and a concession from the Mexican federal government is required to explore for or exploit mineral reserves. Pursuant to the Ley Minera, or Mining Law, mining concessions may only be granted to Mexican individuals and to legal entities incorporated under Mexican law. Foreign investors may hold up to 100% of the shares of such entities.

A mining concession allows its holder to perform both exploration works (including identifying mineral deposits and quantifying and evaluating economically minable reserves) and exploitation works (including detaching and extracting mineral products from such deposits). Mining concessions are granted for a 50-year period from the date of their recording in the Public Mining Registry; 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 the Mining Law.

Mining concessions grant several specified rights to the concessionaire, including:

 

 

the right to dispose freely of mineral products obtained as a result of the exploitation of the concession;

 

 

the right to obtain the expropriation of, or an easement with respect to, the land where the exploration or exploitation will be conducted; and

 

 

the use of water in the mine to facilitate extraction.

In addition, a holder of a mining concession is obligated, among other things, to explore or exploit the relevant concession (including the achievement of minimum investment targets), to pay for any relevant mining rights, to comply with all environmental and safety standards, and to provide information to and permit inspections by the Secretariat of Economy. Mining concessions may be terminated if the obligations of the concessionaire are not satisfied.

A company that holds a concession must be registered with the Public Mining Registry. In addition, mining concessions and permits, assignments, transfers and encumbrances must be recorded with the Public Mining Registry to be enforceable. We believe that our material mining concessions are duly registered in the Public Mining Registry.

For information regarding amendments to the Mining Law and regulations in Mexico, see Item 3. “Key Information—D. Risk Factors—Risks Relating to our Mining Activities—Our mining activities depend on Mexican laws and regulations, governmental concessions and on our ability to reach and maintain lease agreements (or other agreements for the use of land) with the owner of the real estate where the mines are located.”

Trade regulations

Intense global competition in the steel industry can lead many countries to increase duties or impose restrictions on steel product imports to protect their domestic industries from trades that are not made under market conditions or that are otherwise unfair. Such measures protect domestic producers from increased imports sold at dumped or subsidized prices.

During a period of intense competition in 2001, some regions to which Ternium exports its products, such as the United States and Europe, implemented these measures as well as other general measures known as safeguards. While safeguards were lifted in December 2003, antidumping and countervailing duties remain in place. More recently, a new wave of protective measures has emerged due to increased steel imports from China. The ongoing slowdown of the Chinese economy has resulted in substantial overcapacity and intensified competitive pressures throughout the steel industry worldwide. At the same time, bilateral or regional free trade agreements have liberalized trade among some countries, providing for reduced or zero tariffs for many goods, including steel products.

 

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The entry into force of various free trade agreements and certain countries’ imposition of trade remedy measures can and have both benefited and adversely affected Ternium’s home markets and export sales of steel products, as described below. See also Item 3. “Key Information—D. Risk Factors—Certain Regulatory Risks and Litigation Risks—International trade actions or regulations and trade-related legal proceedings could adversely affect Ternium’s sales, revenues and overall business.” Relevant free trade agreements and trade remedy measures, by country, are described below:

Mexico.

Imports of steel products to Mexico:

The Mexican government has imposed certain antidumping measures on imports of steel products that are similar to the ones produced by Ternium Mexico. The following antidumping measures are currently in effect:

 

 

Hot-rolled products: On March 28, 2000, the Mexican government imposed antidumping duties on the Russian Federation and Ukraine of 30.31% and 46.66%, respectively, on hot-rolled products. On March 25, 2005, the first sunset review was initiated by the Mexican authorities, and on March 17, 2006 a final resolution was issued, extending the antidumping duties for an additional five-year period. On March 16, 2010, a second sunset review was initiated; and on September 8, 2011, the final resolution was published by which new antidumping duties of 21% and 25% were set for Russia and Ukraine, respectively. On July 19, 2013, the Mexican government initiated an anti-circumvention investigation on imports of boron-alloyed hot-rolled products from Russia. On March 21, 2014, Mexico’s Secretariat of Economy published the final resolution on the investigation, by which boron-alloyed hot-rolled products from Russia are now subject to a 21% antidumping duty. Furthermore, on September 26, 2014, the Mexican government initiated an antidumping investigation on hot-rolled coils from China, Germany and France. A preliminary determination is expected by June 2015.

 

 

Plate in coil: Since June 1996, an antidumping duty of 29.3% on imports from Russia has been imposed. In June 2003, the first sunset review resolution concluded that the application of the antidumping duty should continue. In June 2007, the Secretariat of Economy issued the final resolution of the second sunset review, determining the continuation of the antidumping duties for an additional five-year period. On November 22, 2012, the Secretariat of Economy issued the final resolution of the third sunset review, determining the continuation of the antidumping duties for an additional five-year period. On July 5, 2013, the Mexican government initiated an anti-circumvention investigation on imports of boron-alloyed plate in coil imports from Russia. On February 19, 2014, Mexico’s Secretariat of Economy published the final resolution on the investigation, by which boron-alloyed plate in coil imports are now subject to a 29.3% antidumping duty. Such resolution has been appealed and judicial procedures are ongoing in Mexican courts.

 

 

Cold-rolled products: In June 1999, Mexico imposed antidumping duties on cold-rolled steel sheets from the Russian Federation and Kazakhstan. On December 12, 2005, as a result of the first sunset review, the Mexican authorities extended the antidumping duties for an additional five-year period until June 2009. On December 28, 2010, following the completion of the second sunset review procedure, the Mexican government published the final resolution setting antidumping duties on cold-rolled steel sheets from the Russian Federation at 15% and from Kazakhstan at 22%. A new sunset review commenced in March, 2015. In addition, on October 1, 2012, the Mexican government initiated a dumping investigation on cold-rolled steel imports from South Korea. On December 26, 2013, Mexico’s Secretariat of Economy published a suspension agreement under which Korean exporters, POSCO and Hyundai, voluntarily undertook to limit their cold-rolled products exports to the Mexican market. This agreement suspended the original dumping investigation. Furthermore, on April 24, 2014, the Mexican government initiated an antidumping investigation on cold-rolled products from China and issued a preliminary determination with an affirmative threat of injury on December 8, 2014. No duties were imposed, and a final determination is expected by August 2015.

 

 

Reinforcing bars: Since 1995, imports of reinforcing bars from Brazil are currently subject to an antidumping duty of 57.69%. In June 2006, the second sunset review resolution determined the continuation of antidumping duties. On August 9, 2010, a third sunset review was initiated, and on January 12, 2012, the Mexican authority determined the continuation of the 57.69% antidumping duty until August 2015.

 

 

Wire rod: Since September 2000, imports of wire rod from Ukraine are subject to an antidumping duty. The initial antidumping margin was 30.52%. In June 2006, the first sunset review resolution determined the continuation of the antidumping duty for five more years. On September 7, 2010, a second sunset review was initiated, and on March 7, 2012, the Mexican government increased the antidumping duty to 41% until September 2015.

 

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On February 9, 2010, the Mexican Government issued a decree reducing the import tariffs on several steel product groups. The tariff for finished products was set at 0% starting in 2012 (from 3% in 2011, 5% in 2010 and 7% in 2009). The tariff for semi-finished products was set at 0% starting in 2012 (from 3% in 2011 and 2010, and 5% in 2009) and the tariff for welded pipe products was set in a range from 0% to 5% starting in 2012 (from 7% in 2011 and 2010, and 10% in 2009). Three companies (including Ternium) and an industry related labor union sought an injunction (acción de amparo) against these government decisions in early 2012 when the tariffs went to 0%. The legal action taken by the companies was rejected by the courts, but the legal action taken by the labor union had a positive preliminary outcome. As a result, the government reestablished on August 1, 2012, a 3% tariff on some semi-finished, flat, long and pipe and tube steel products. A final decision is expected in the coming months.

Exports of steel products from Mexico:

U.S. authorities have imposed a number of measures on steel import products from Mexico, thereby restricting Ternium’s exports to that country. Below is a description of measures currently in effect:

 

 

Carbon and alloy steel wire rod: Mexican wire rod exports are subject to an antidumping duty of 17.94% pursuant to an antidumping duty order on carbon and certain alloy steel wire rod. On May 30, 2014, as a result of the most recent sunset review, such duty was extended for five more years, until June 2018.

 

 

Pipe and tube: During 2007, U.S. authorities initiated an antidumping investigation of light-walled rectangular pipe and tube, or LWRPT, from, among other countries, Mexico. On June 13, 2008, the authorities made a final determination of sales at less than fair value in the investigation of LWRPT from Mexico and, consequently, imposed antidumping duties. On February 18, 2011, the authorities published the final results of the first administrative review by which Mexican LWRPT exports were subject to an antidumping duty of 6.13% until May 23, 2014, when U.S. authorities made a final affirmative sunset review of 2.40% for Maquilacero S.A. de C.V. and 3.76% for certain other companies subject to the review, including Ternium Mexico.

 

 

Welded pipes: Since 1992, pursuant to an antidumping duty order on circular welded non-alloy steel pipe –or standard pipe– from various countries, including Mexico, standard pipes manufactured by Hylsamex and Grupo Imsa were subject to antidumping duties. In 2007, such measures were extended for five more years. In August 2009, U.S. authorities published the final results of a changed circumstances review, concluding that Ternium Mexico is the successor-in-interest to Hylsamex for purposes of determining antidumping duty liability. In accordance with the latest administrative review, the applicable duty for Ternium Mexico is 48.33%.

 

 

Reinforced bars: On November 6, 2014, U.S. authorities made a final determination on reinforced bar imports from Mexico, imposing antidumping duties between 20.58% and 66.70%. The antidumping duty applicable to Ternium’s products is 20.58%.

On April 30, 2014, the Colombian government made a final safeguard determination on steel wire rod imports, imposing a duty of 21.29% on imports from all WTO members except Argentina, Chile, Ecuador, Costa Rica, the United States and Canada. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations— Colombia.”

Trade agreements:

Mexico has signed trade agreements with several countries or trade blocs aimed at liberalizing trade between them:

NAFTA was signed among Canada, Mexico and the United States and came into effect on January 1, 1994. NAFTA provided for the progressive elimination over a ten-year period of duties on, among other things, steel products traded between or among Mexico, the United States and Canada. As a result, zero tariffs currently apply to steel products traded within NAFTA countries. Accordingly, Ternium has greater access to the U.S. and Canadian markets through Ternium Mexico, but also faces increased competition in Mexico from U.S. and Canadian steel imports. NAFTA provides that NAFTA member companies (including Mexican steel producers such as Ternium Mexico) can challenge trade restrictions imposed by other NAFTA countries before a binational dispute resolution panel.

The Mexican-European Free Trade Agreement, or MEFTA, became effective on July 1, 2000. MEFTA provides for the phase-out and eventual elimination of Mexican and European duties on all industrial goods, including finished steel products. The European Union, or EU, eliminated all import duties on Mexican industrial goods, including finished steel products, as of January 1, 2003, while Mexico eliminated all import duties on European industrial goods, including finished steel products, as of January 1, 2007. Accordingly, Ternium has increased access to EU markets under MEFTA through Ternium Mexico, but also could face increased competition in Mexico from EU steel imports.

 

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The Economic Partnership Agreement between Japan and Mexico came into force on April 1, 2015. The new agreement provides for a phase-out and eventual elimination of Mexican and Japanese duties on all industrial goods within a ten-year period. Beginning in April 1, 2015, all duties on steel products were eliminated. Until March 31, 2015, an import duty of 3% was applicable to Japanese steel imports.

In November 2003, Mexico and Argentina signed an Economic Complementation Agreement, or ACE 6, whereby reciprocal tariff preferences were granted. In 2006, Mexico and Argentina modified the ACE 6 Agreement, reducing to zero import duties on imports of certain steel products from the other country. Zero import duties included exports from Mexico to Argentina and from Argentina to Mexico for up to 90,000 tons per year of slabs, 60,000 tons per year of cold rolled coils and 30,000 tons per year of corrosion resistant coils, including hot dip galvanized and pre-painted sheets.

The Mexican government is also a party to trade agreements with Colombia, the European Free Trade Association—an intergovernmental organization set up by Liechtenstein, Norway, Iceland and Switzerland—Japan, Chile, Bolivia, Nicaragua, Costa Rica and Uruguay, among others. In addition, in 2012, Mexico joined the Trans-Pacific Partnership (“TPP”) negotiations, an initiative that includes Australia, Brunei Darussalam, Canada, Chile, United States, Malaysia, New Zealand, Peru, Singapore, Japan, and Vietnam. Negotiations under the TPP are expected to conclude during 2015.

Argentina.

Imports of steel products to Argentina:

In the past, the Argentine government imposed various antidumping measures on imports of certain steel products that compete directly with Ternium’s sales in Argentina. After several subsequent revisions of such cases, there are currently no measures in place.

Trade agreements:

Argentina has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them, including the following:

In early 1991, Argentina entered, together with Brazil, Uruguay and Paraguay, into the Treaty of Asunción, creating the Mercado Común del Sur (Common Market of the South), or Mercosur, a common market organization that aimed to bring about the free movement of goods, capital, services and people among its member states. In 2004, the Mercosur members entered into the Treaty of Ouro Preto, creating a customs union among them. On January 1, 2013, Venezuela became a full member of Mercosur. Over time, Mercosur has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. Since January 1, 2000, zero tariffs apply to steel products traded among them; however, in the case of Venezuela, steel import tariffs currently range from 0% to 3.8%, and are expected to be zero by 2018.

Applicable steel import tariffs to Mercosur member countries from non-member countries currently range between 2% and 16%. However, every six months, Mercosur members may exempt from tariffs a limited number of products imported from non-member countries. Uruguay has elected to exempt certain steel products, including cold-rolled sheets and galvanized flat steel products. This exemption regime is expected to be in force until December 31, 2017, but has been extended in the past and, if agreed by Mercosur member countries, could again be extended in the future.

In 2004, Mercosur and the Comunidad Andina de Naciones (Andean Community), or CAN, currently including Bolivia, Colombia, Ecuador and Peru, signed a free trade agreement aimed at reducing and eventually eliminating tariffs on steel products traded among member countries. While all tariffs on steel products traded between Argentina and Bolivia and between Argentina and Peru have been eliminated, the elimination of tariffs on steel products traded between Argentina and Ecuador and Argentina and Colombia are subject to a pending agreement on local content specifications. Mercosur entered into a trade agreement with Chile in 2005. As a result, all tariffs on steel products traded between Mercosur and Chile have been eliminated. In addition, Mercosur is negotiating a free trade agreement with the European Union.

In November 1993, Argentina and Mexico signed the ACE 6. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations—Mexico.”

Colombia.

Imports of steel products to Colombia:

The Colombian government has imposed certain antidumping measures on imports of steel products. The following antidumping measures are currently in effect:

 

 

Rebars and low-carbon wire rods: On October 8, 2013, Colombia imposed provisional safeguard duties of 25.60% on imports of rebars and of 21.29% on low-carbon wire rods from countries belonging to the World Trade Organization (WTO), with the exception of Cuba, Ecuador, the United States and Venezuela. The provisional safeguard measure on rebars was lifted on March 31, 2014. On April 30, 2014, Colombia imposed final safeguard duties of 21.29% on imports of low-carbon wire rod from WTO members with the exception of Argentina, Chile, Ecuador, Costa Rica, the United States and Canada, to remain in force for a period of one year. Under the conditions of this safeguard measure, a total of 174,452 tons of the subject products are exempted from these safeguard duties.

 

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Galvanized flat steel products: On March 5, 2014, Colombia imposed final antidumping measures on imports of galvanized flat steel products from China, to remain in force for a period of three years, consisting on a duty calculated based on a price of USD824.57 per ton less the actual FOB import price for such product.

Trade agreements:

Colombia has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them.

CAN is a trading bloc, currently including Bolivia, Colombia, Ecuador and Peru, established during 1993 and approved during 1994 for the purpose of promoting trade relations among its members and between CAN and the rest of the world. The treaty formalized a customs union among CAN’s member states. Over time, CAN has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. In particular, zero tariffs have applied to steel products imported from other member states since January 1, 2000. The current tariff applicable to steel products imported from outside CAN is between 5% and 10% and, if such products are not produced in Colombia, the tariff was reduced to 0% until August 31, 2013. CAN and Mercosur have signed a free trade agreement. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations—Argentina.”

During June 1994, Colombia and Mexico signed a free trade agreement. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade Regulations—Mexico.”

On August 9, 2007, Colombia, El Salvador, Guatemala and Honduras established the Triángulo Norte (North Triangle), or TN, free trade agreement. Members of the TN signed multilateral agreements related to funds transfers and local and most favored nation statuses, and signed bilateral agreements aimed at reducing trade duties. Colombia’s free trade agreement with Guatemala started on November 12, 2009; with El Salvador on February 1, 2010; and with Honduras on March 27, 2010. Under TN, zero tariffs apply to several steel products imported from other member states.

Colombia’s free trade agreement with the United States became effective in October 2011. Under this agreement, steel import tariffs from Colombia to the United States will remain at 0% and steel import tariffs from the United States to Colombia will decrease from a range of 5-10% in 2011 to 0% in one, five or ten years according to the product category. In particular, wire rods import tariffs became zero beginning in 2012 and rebar import tariffs will decrease gradually, reaching zero in 2021.

In addition, Colombia has also signed free trade agreements with Chile, Canada and the European Union, in effect since May 2009, August 2011 and August 2013, respectively, and has signed free trade agreements with Costa Rica, Israel, Panama and South Korea, which are not yet effective. Colombia is currently negotiating a free trade agreement with Japan.

United States.

Imports of steel products to the U.S.:

During February 2014, the U.S. government imposed antidumping and countervailing duties on certain hot-rolled carbon steel flat products from China, India, Taiwan, Thailand, Russia, Indonesia and Ukraine. Current antidumping duties range between 12.34% and 90.83% for China, 36.53% and 44.40% for India, 20.28% and 29.14% for Taiwan, 4.41% and 20.30% for Thailand and 73.59% and 184.56% for Russia; antidumping and countervailing duties are set at 47.86% for Indonesia and 90.33% for Ukraine. Current countervailing duties range between 540.78% and 563.50% for India and are set at 10.21% for Indonesia and 2.38% for Thailand. These measures are set to remain in force until March 2018.

Insurance

Our subsidiaries carry insurance policies covering property damage (including machinery breakdown and business interruption), general liability and other insurance such as, among others, automobile, marine cargo and life and workers’ compensation insurance. These insurance policies include coverage and contract amounts which are customary in the steel products industry and in line with legal and domestic market requirements. General liability coverage typically includes third party, employer, sudden and accidental seepage and pollution and product liabilities within limits up to USD100 million per occurrence.

 

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Disclosure Pursuant to Section 13(r) of the Exchange Act

The Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA, created a new subsection (r) in Section 13 of the Exchange Act, which requires a reporting issuer to provide disclosure if the issuer or any of its affiliates engaged in certain enumerated activities relating to Iran, including activities involving the Government of Iran. Ternium is providing the following disclosure pursuant to Section 13(r).

Tenaris

Tenaris is indirectly controlled by San Faustin and, accordingly, is deemed an “affiliate” of Ternium, as that term is defined in Exchange Act Rule 12b-2. In response to our inquiry, Tenaris provided the disclosure included below.

 

 

In January 2010, Tenaris Global Services S.A., or TGS, a Tenaris subsidiary, entered into an agreement with the National Iranian Drilling Company, or NIDC, a company controlled by the Government of Iran, for a total value of EUR9.4 million (approximately USD10.1 million). TGS made all deliveries and collected most of its account receivables under the NIDC agreement prior to 2012. In 2012, TGS collected an amount of EUR750 thousand (approximately USD810 thousand) for products delivered to NIDC in prior years. As of December 31, 2014 an outstanding balance of EUR172 thousand (approximately USD185 thousand) is still due to TGS. In addition, as of December 31, 2014 TGS has not yet fully performed its obligation to allow technical visits to Tenaris’s mills by fifteen NIDC experts at TGS’s cost. Tenaris expects to fulfill these pending obligations and collect outstanding payments during 2015.

 

 

TGS is also a party to an April 2011 agreement with Global Procurement General Trading FZE, or Global FZE, a company incorporated in United Arab Emirates, for the provision of OCTG for an amount of AED16.5 million (approximately USD4.5 million). TGS has been informed by Global FZE that the end users of the products delivered under this agreement are Oil Industries Engineering and Construction Group and Pars Oil and Gas Company which are controlled by the Government of Iran. In 2012, TGS delivered products under the Global FZE agreement for a total value of AED16.3 million (approximately USD4.4 million), and collected a total amount of AED15.4 million (approximately USD4.2 million). All sales of goods and services to Iran under the agreement with Global FZE have ceased. As of December 31, 2014, a balance of AED862 thousand (approximately USD200 thousand) was owing to Tenaris, and Global FZE has advised Tenaris of its inability to process payment to Tenaris of the outstanding balance as a result of the current sanctions relating to Iran.

 

 

In March 2011, TGS entered into an agreement for the provision of technical field service assistance to ENI Iran B.V., or ENI Iran, for its project in Darquain, Iran, for a value of EUR246 thousand (approximately USD264 thousand). Tenaris has been informed that ENI Iran operates the Darquain project pursuant to a service contract with the National Iranian Oil Company. All services required to be performed by Tenaris for the benefit of ENI Iran were completed and ceased prior to the end of 2012. In December 2013, Tenaris was informed by ENI Iran that it would seek approval to make payment of the contract amount in compliance with applicable laws. In June 2014, Tenaris collected all outstanding amounts under the aforementioned agreement.

Tenaris did not record any profit in 2014 in connection with the agreements described above.

Except as otherwise stated above, there are no pending obligations of Tenaris or its subsidiaries under the agreements described above. While the Tenaris’s subsidiaries identified above intend to perform their pending obligations under such pre-existing agreements, Tenaris and its subsidiaries ceased prior to the end of 2012 all sales and deliveries of goods and services to Iran. Tenaris’s current policy, based on the sanctions against Iran, is not to engage in future sales or deliveries.

Tenaris believes that its activities concerning Iran do not violate any U.S. or foreign law, and has procedures in place to ensure that such activities comply with all applicable U.S. and foreign laws.

Tenova

Tenova S.p.A., or Tenova, an Italian supplier of equipment for the mining and the steel-making industry, is indirectly controlled by San Faustin and, accordingly, is deemed an “affiliate” of Ternium, as that term is defined in Exchange Act Rule 12b-2. In response to our inquiry, Tenova informed us that:

 

 

During 2014, Tenova or its subsidiaries supplied equipment and performed engineering services for the steel-making and raw material industries to companies believed by Tenova to be subsidiaries of development agencies of the Government of Iran.

 

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None of the activities performed is connected to the activities described in Sections 5(a) or (b) of the Iran Sanctions Act of 1996, Section 105A(b)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 or was performed in favor of persons whose property and interests in property are blocked pursuant to Executive Order 13224 (terrorists and terrorist supporters) or 13382 (weapons of mass destruction proliferators and supporters).

 

 

All of these sales and activities were authorized by the Comitato di Sicurezza Finanziaria – CSF, an Italian governmental committee established pursuant to Italian Decree n. 369 of October 12, 2001 (as amended by Italian Law n. 431 of December 14, 2001) under the supervision of the Italian Ministry of Economy.

 

 

Since several of Tenova’s Iran-related contracts are still currently being executed, Tenova is required to perform all outstanding obligations under such contracts.

 

 

Any future contract between Tenova or its subsidiaries and customers controlled by the Government of Iran will continue to be made in compliance with all laws applicable to Tenova or its relevant subsidiaries.

Tenova informed us that its total sales revenue for 2014 with regard to the foregoing transactions amounted to USD34 million, which represents 2.3% of its total sales revenue for 2014.

Tenova also estimated that its net profits from such transactions, after internal cost allocation and taxes, were in the range of USD5.1 million.

 

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C. Organizational Structure

Below is a simplified diagram of Ternium’s corporate structure as of March 31, 2015

 

LOGO

 

(*) 

On April 7, 2015, Ternium acquired the remaining 46% interest in Ferrasa. For more information related to this transaction, see Item 5 “Operating and Financial Review and Prospects—G. Recent Developments—Acquisition of the remaining 46% minority interest in Ternium’s Colombian subsidiary Ferrasa.”

Subsidiaries

Ternium operates entirely through subsidiaries. For a complete list of its subsidiaries and a description of its investments in other companies, see note 2 to our consolidated financial statements included elsewhere in this annual report.

Ternium Mexico. Ternium Mexico is a leading flat and long steel manufacturer in Mexico, with total annual finished steel production capacity of approximately 7.2 million tons. Ternium Mexico’s subsidiaries operate all of Ternium’s mining and steel production facilities in Mexico, except for Tenigal’s facilities. Ternium Mexico and its subsidiaries produce steel products mainly for the construction and industrial sectors.

Siderar. Siderar is the main integrated manufacturer of flat steel products in Argentina with total annual finished steel production capacity of approximately 2.9 million tons. The shareholders of Siderar as of March 31, 2015 are set out in the following table, together with the share percentage owned by each such shareholder as of that date:

 

Siderar Shareholders    Number      Percent  

Ternium

     2,752,808,188         60.94

ANSeS

     1,175,806,541         26.03

Inversora Siderurgia Argentina S.A. (employees)

     60,735,869         1.34

Public

     527,743,425         11.68
  

 

 

    

 

 

 

Total shares issued and outstanding

     4,517,094,023         100.00
  

 

 

    

 

 

 

Ferrasa. Ferrasa is a leading long and flat steel products processor and distributor in Colombia and a scrap-based long steel manufacturer, with total annual finished steel production capacity of approximately 540,000 tons and annual sales of close to 600,000 tons, of which approximately 70% are long products and 30% are flat and tubular products, used mainly in the construction sector. We own 100% of Ferrasa (54% acquired on August 25, 2010, and 46% acquired on April 7, 2015).

 

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Tenigal. Tenigal is a hot-dip galvanized and galvannealed steel sheets manufacturer serving the Mexican automobile market with total annual finished steel production capacity of approximately 400,000 tons. Ternium and NSSMC hold 51% and 49% participations in Tenigal, respectively.

Ternium Guatemala. Ternium Guatemala and its subsidiaries operate all of Ternium’s steel processing facilities in Guatemala, El Salvador, Nicaragua and Costa Rica. Ternium Guatemala and its subsidiaries produce hot-dip galvanized steel sheets and other value-added finished steel products mainly for the construction and industrial sectors. Ternium Guatemala has total annual finished steel production capacity of 180,000 tons.

Ternium Internacional. Ternium Internacional comprises a network of companies in Uruguay, Colombia, the Netherlands and the United States that, together with our offices in Panama and Spain, market and provide services in relation to the sales of Ternium’s products to several markets other than Mexico and Argentina. The headquarters of the network are located in Uruguay. Office staff is dedicated to export sales and trading, technical assistance, commercial back office and credit analysis.

Ternium USA. Ternium USA operates Ternium’s steel processing activities in the United States and produces galvanized and color coated sheets in its Shreveport unit in Louisiana, United States. Ternium USA has total annual finished steel production capacity of 200,000 tons.

Exiros. Exiros, which we own 50%/50% with Tenaris, has offices located in various countries and is in charge of the procurement of a majority of our purchases of raw materials and other products or services. Exiros’s objectives are to procure better purchase conditions and prices by exercising the improved bargaining power that results from combining the demand of products and services by both Ternium and Tenaris.

Other Investments

Usiminas. Usiminas is the largest flat steel producer in Brazil, with total annual crude steel production capacity of 9.5 million tons. Usiminas produces steel products mainly for the automobile, line pipe, civil construction, and electrical equipment manufacturing industries. Usiminas has iron ore mines in the Serra Azul region and industrial facilities in Ipatinga, Minas Gerais and in Cubatão, São Paulo, strategically located near the main consumers of steel in Brazil. In 2014, Usiminas shipped 5.5 million tons of steel products and 5.6 million tons of iron ore, and had net sales of BRL11.7 billion. Usiminas is a publicly-traded company listed on the São Paulo stock exchange, BM&FBOVESPA S.A – Bolsa de Valores, Mercadorias e Futuros.

On January 16, 2012, the Company’s wholly-owned Luxembourg subsidiary Ternium Investments, together with Siderar (and Siderar’s wholly-owned Uruguayan subsidiary Prosid), and TenarisConfab, joined Usiminas’ existing control group through the acquisition of a total of 139.7 million ordinary shares of Usiminas, representing 27.7% of Usiminas’ voting capital (22.7% corresponding to Ternium and the other 5% corresponding to TenarisConfab). As a result, Usiminas’ control group, which holds, in the aggregate, 322.7 million ordinary shares representing approximately 63.9% of Usiminas’ voting capital, is now formed as follows: Nippon Group, which holds approximately 46.1% of the total shares held by the control group; T/T Group, which holds approximately 43.3% of the total shares held by the control group (35.6% corresponding to Ternium and the other 7.7% corresponding to TenarisConfab); and CEU, which holds the remaining 10.64% of the total shares held by the control group. As described below, after the completion of a share acquisition in October 2014, Ternium now owns additional shares of Usiminas in addition to those described in the preceding sentence.

The rights and obligations of the members of Usiminas’ control group are governed by a shareholders agreement. Under such agreement, so long as the Nippon Group and the T/T Group each hold at least 25% of the total shares held by the control group, the Nippon Group and the T/T Group shall, in the aggregate, nominate a majority of the members of Usiminas’ board of directors, with each such group nominating an equal number of directors. Usiminas’ shareholders agreement further provides that the Nippon Group and the T/T Group shall nominate, by consensus, the chairman of Usiminas’ board of directors and Usiminas’ chief executive officer. In addition, the Nippon Group and the T/T Group have the right to nominate one member of Usiminas’ executive board (diretoria executiva) each. Any remaining Usiminas executive board seats are filled with candidates nominated by Usiminas’ chief executive officer, which nominations shall require the approval of both the Nippon Group and the T/T Group. Under the Usiminas’ shareholders agreement, the Nippon Group, the T/T Group and CEU are required to vote, and cause the Usiminas directors nominated by them to vote, as a single, unified block. Any and all decisions to be adopted by the members of the control group at Usiminas’ shareholders’ meetings, or by the directors nominated by them at any Usiminas’ board or directors’ meetings, shall require the consensus of both the Nippon Group and the T/T Group, with decisions on certain extraordinary matters requiring the unanimous consent of the Nippon Group, the T/T Group and CEU. The rights and obligations of Ternium Investments, Siderar (and Prosid) and TenarisConfab within the T/T Group are governed under a separate shareholders agreement.

On October 30, 2014, Ternium acquired from PREVI 51.4 million additional ordinary shares of Usiminas for a total purchase price of BRL616.7 million. Following this transaction, Ternium, through its subsidiaries Ternium Investments, Siderar and

 

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Prosid, owns 166.1 million ordinary shares of Usiminas, representing 32.9% of Usiminas’ ordinary shares. Of these, 114.7 million ordinary shares are subject to the Usiminas shareholders agreement; the remaining 51.4 million shares (acquired in October 2014 as described above) are not subject to the shareholders agreement, although during the term of the shareholders agreement, Ternium is required to vote such shares in accordance with the control group’s decisions.

In 2014, a controversy arose within the Usiminas’ control group with respect to the governance of Usiminas and the rules applicable to the appointment of senior managers. As part of that controversy, on September 25, 2014, the board of directors of Usiminas passed a resolution dismissing the company’s chief executive officer and two other executives from their respective positions on the Usiminas board of officers. The board resolution dismissing the officers was passed with a 5 to 5 vote, including the positive vote of the Nippon Group-appointed members and the negative vote of the T/T Group and CEU-appointed members, and the tie was resolved by the chairman of the board through his casting vote. Ternium believes that the votes cast by the Nippon Group-appointed members were computed in violation of the Usiminas shareholders agreement. Following the dismissal of the officers, a temporary CEO was elected with the same votes that decided the dismissal, until a new executive board is agreed between the T/T Group and the Nippon Group. As a result of these circumstances, Ternium took several actions to protect its rights and investment in Usiminas, which include requesting an injunction before the Belo Horizonte courts and making several complaints to the Brazilian securities regulator. Similarly, Usiminas’ Supervisory Board challenged the chairman’s actions. As of the date of this annual report, these proceedings and complaints are ongoing (as is the controversy within the control group).

For a discussion of other legal proceedings associated with Ternium’s investment in Usiminas, see Item 8 “Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

Techgen. Techgen is a joint venture company owned 48% by Ternium, 30% by Tecpetrol and 22% by Tenaris. Techgen is building a natural gas-fired combined cycle electric power plant in the Pesquería area of the State of Nuevo León, Mexico. The plant is expected to be operational in the fourth quarter of 2016 with an estimated total investment of USD1.1 billion. Ternium and Tenaris agreed to enter into power supply and transportation agreements with Techgen, pursuant to which Ternium and Tenaris will contract 78% and 22%, respectively, of Techgen’s power capacity of approximately 900 megawatts. As a result, Ternium will secure the supply of electricity to its facilities in Mexico and is expected to improve its cost competitiveness. For more information on the Company’s commitments under the Techgen project, see Item 5 “Operating and Financial Review and Prospects—E. Off-Balance Sheet Arrangements” and note 24 (ii) (h), (i) and (j) to our consolidated financial statements included elsewhere in this annual report.

 

D. Property, Plants and Equipment

See “—B. Business Overview—Production Facilities and Processes” and “—B. Business Overview—Capital Expenditure Program”.

Item 4A. Unresolved Staff Comments

As part of its regular reviews of Ternium’s filings of financial statements, the Staff of the SEC has issued comments regarding the carrying value of Ternium’s investment in Usiminas, including seeking explanations on Ternium’s value in use calculations and on the differences between value in use and certain fair value indicators.

After receiving the Staff’s comments, Ternium provided additional information to the Staff supporting the Company’s accounting treatment of the Usiminas investment under IFRS as of September 2014, and Ternium had further discussions with members of the Staff.

Discussions with the Staff continue. Ternium believes that its accounting of the Usiminas investment is in accordance with IFRS; however, if it is determined after the conclusion of this process that an additional impairment of the investment in Usiminas should be recorded in 2014, Ternium could be required to restate its financial statements for the year ended December 31, 2014. A restatement of the 2014 financial statements could also result in a restatement of the financial statements for the first quarter of 2015.

The value of Ternium’s investment in Usiminas, which was determined by the application of IFRS and tested for impairment using the value in use calculation as per IAS 36, amounted to USD 1,301.5 million as of September 30, 2014, USD 1,390.7 million as of December 31, 2014 and USD 1,020.0 million as of March 31, 2015. The increase in the carrying value from September 30, 2014 to December 31, 2014 was related with the acquisition of additional Usiminas shares from PREVI at BRL12.0 (approximately USD 4.8) per ordinary share pursuant to an October 2, 2014 agreement.

The table below sets out certain information, expressed in U.S. dollars, regarding Ternium’s carrying value for its investment in Usiminas (expressed on a per share basis) at each of September 30, 2014, December 31, 2014 and March 31, 2015, as well as other potentially relevant indicators of the value of Usiminas ordinary shares.

 

     Amounts in USD per share  
     Ternium reported
carrying value
     Usiminas book
value
     Quoted market
value
 

September 30. 2014

     11.3         7.0         2.7   

December 30, 2014

     8.4         6.4         4.6   

March 31, 2014

     6.1         5.2         6.7   

At September 30, 2014 and December 31, 2014 the Company owns 114.7 million ordinary shares and 166.1 million ordinary shares of Usiminas, respectively.

The carrying value of Ternium’s investment in Usiminas as of September 30, 2014, was equivalent to USD 11.3 per ordinary share. If a further impairment charge is required to be recorded as of that date, for each USD 1.00 per share of impairment recorded, the aggregate carrying value would decrease by approximately USD 115 million and pretax profit for the nine months as of September 30, 2014, would decrease by the same amount.

As for the full year 2014, if the reported carrying value at September 30, 2014 was adjusted to a level between USD 11.3 and USD 9.2 per ordinary share, there would be no significant impact on Ternium’s profit or other comprehensive income, assuming no changes in the assumptions used for the value in use calculation at December 31, 2014. For each additional USD 1.00 reduction in adjusted carrying value per ordinary share at a level lower than USD 9.2, the effect on pretax profit and other comprehensive income for the full year 2014 would be a loss of USD 164 million and a gain of USD 11 million, respectively, and the aggregate carrying value would decrease by USD 153 million at December 31, 2014.

Item 5. Operating and Financial Review and Prospects

The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion and analysis presents our financial condition and results of operations on a consolidated basis.

Certain information contained in this discussion and analysis is presented elsewhere in this annual report, including information with respect to our plans and strategies for our business, and includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” In evaluating this discussion and analysis, you should specifically consider the various risk factors identified in this annual report and others that could cause results to differ materially from those expressed in such forward-looking statements.

Overview

Ternium is a leading steel producer in Latin America. We manufacture and process a broad range of value-added steel products, including galvanized and electro-galvanized sheets, pre-painted sheets, tinplate, welded pipes, hot-rolled products, cold-rolled products, bars and wire rods as well as slitted and cut-to-length offerings through our service centers. Our customers range from large global companies to small businesses operating in the construction, automotive, home appliances, capital goods, container, food and energy industries. Ternium has production facilities located in Mexico, Argentina, Colombia, the southern United States and Guatemala, as well as a network of service and distribution centers throughout Latin America that provide it with a strong position from which to serve its core markets. In addition, Ternium participates in the control group of Usiminas, a leading steel company in the Brazilian steel market.

 

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Ternium primarily sells its steel products in the regional markets of the Americas. Ternium provides specialized products and delivery services through its network of manufacturing facilities and service centers. We believe that Ternium is a leading supplier of flat steel products in Mexico and Argentina, a significant supplier of steel products in Colombia and in various other countries in South and Central America, and a competitive player in the international steel market for steel products. Through its network of commercial offices in several countries in Latin America, the United States and Spain, Ternium maintains an international presence that allows it to reach customers outside its local markets, achieve improved effectiveness in the supply of its products and in the procurement of semi-finished steel, and maintain a fluid commercial relationship with its customers by providing continuous services and assistance.

Ternium’s revenues are affected by general global trends in the steel industry and more specifically by the economic conditions in the countries in which it has manufacturing operations and where its customers are located. Ternium’s revenues are also impacted by events that affect the price and availability of raw materials, energy and other inputs needed for its operations. Furthermore, due to the highly cyclical nature of the steel industry, recent results may not be indicative of future performance, and historical results may not be comparable to future results. Investors should not rely on the results of a single period, particularly a period of peak prices, as an indication of Ternium’s annual results or future performance. The variables and trends mentioned below could also affect the results of its investments in steel related companies. See Item 4. “Information on the Company—B. Business Overview—Our Business Strategy.”

Ternium’s primary source of revenue is the sale of steel products. Management expects sales of steel products to continue to be Ternium’s primary source of revenue. The global market for such steel products is highly competitive, with the primary competitive factors being price, cost, product’s quality and customer service. The majority of Ternium’s sales are concentrated in the Americas. Specifically, Ternium’s largest markets are Mexico, Argentina and Colombia, where its main manufacturing facilities are located.

Ternium’s results are sensitive to economic activity and steel consumption. Ternium’s results of operations, which primarily depend on economic conditions in Mexico and Argentina, are also influenced by economic conditions in international and regional markets such as NAFTA, Mercosur and the Andean Community. Historically, annual steel consumption in the countries where Ternium operates has varied at a rate that is linked to the annual change in each country’s gross domestic product and per capita disposable income. The 2008 – 2009 global economic downturn resulted in an overall decreased demand for Ternium’s products. For example, apparent consumption of finished steel products decreased in 2009 by 15% in Mexico and 33% in Argentina. This economic downturn had a pronounced negative effect on Ternium’s business and results of operations in 2009. Subsequently, in 2010 – 2014, apparent steel consumption increased by 52% in Mexico, due mainly to the recovery of the industrial sector, and by 56% in Argentina, due to a broad recovery of economic activity. A protracted global recession or a depression would have a material adverse effect on the steel industry and Ternium.

Ternium’s results are also sensitive to prices in the international steel markets. Steel prices are volatile and are sensitive to trends in cyclical industries, such as the construction, automotive, appliance and machinery industries, which are significant markets for Ternium’s products. For example, steel prices in the international markets, which had been rising quickly during the first half of 2008, fell sharply beginning in the second half of 2008 as a result of collapsing apparent demand and the resulting excess capacity in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and writedowns of finished steel products and raw material inventories. In this regard, in the second half of 2008 Ternium recorded a valuation allowance in an amount of USD200 million and in the first half of 2009 it recorded an additional valuation allowance in an amount of USD127.6 million. Beginning in the second half of 2009, steel prices in the international markets rebounded mainly as a result of the increase in the demand for steel in China and other emerging markets, and the subsidence of the worldwide de-stocking process. A protracted fall in steel prices would have a material adverse effect on Ternium’s results, as could price volatility.

Trends in the steel industry may also have an impact on Ternium’s results. In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered, especially on downturn cycles, from substantial overcapacity. Currently, as a result of the 2008 – 2009 global downturn, the adverse economic conditions in Europe, a slowdown in China’s economic growth and the increase in steel production capacity in recent years, there is excess capacity in the global steel market that negatively affects the industry’s margins. Furthermore, there has been a trend in recent years toward steel industry consolidation among Ternium’s competitors, and current smaller competitors in the steel market could become larger competitors in the future. Intense competition could impact on Ternium’s share in certain markets and adversely affect its sales and revenue.

 

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Ternium’s production costs are sensitive to prices of raw materials, slabs and energy, which reflect supply and demand factors in the global steel industry. Ternium purchases substantial quantities of raw materials (including iron ore, coal, ferroalloys and scrap) and slabs for use in the production of its steel products. The availability and price of these and other inputs vary, sometimes significantly, according to general market and economic conditions. In addition to raw materials and slabs, natural gas and electricity are both important components of Ternium’s cost structure. Ternium generally purchases these inputs at market or market based prices; accordingly, price fluctuations in these inputs, which may also vary according to general market and economic conditions, necessarily impact Ternium’s production costs.

Ternium’s export revenues could be affected by trade restrictions and its domestic revenues could be affected by unfair competition from imports. During the second half of the 1990s, a period of strong oversupply, several antidumping measures were imposed in several countries in which Ternium operates (including Mexico and Argentina) to prevent foreign steel producers from dumping certain steel products in local markets. The recovery in global economic conditions during the 2003 – 2008 period helped normalize international steel trade conditions and, eventually, several countries reduced or eliminated protective measures established in prior years. However, a number of trade restrictions, both in Ternium’s local and export markets, remain in place. In the face of a protracted period of oversupply, countries may reestablish antidumping duties and/or other safeguards to protect their domestic markets. Ternium’s ability to profitably access the export markets may be adversely affected by trade restrictions, including antidumping duties and countervailing measures, in those markets. In addition, Ternium’s ability to sell some steel products in its principal markets could be affected by unfair competition from imports of those steel products from certain countries, if applicable trade regulations were not in force.

Changes in prevailing exchange rates could impact results from subsidiaries with net short or long position in currencies other than its functional currency. The functional currency of our Mexican and Colombian subsidiaries is the U.S. dollar, and the functional currency of our Argentine subsidiary Siderar is the Argentine peso. Ternium subsidiaries record foreign exchange results on their net non-functional currency positions when the functional currencies appreciate or depreciate with respect to other currencies. For example, Ternium’s net foreign exchange result was a gain of USD26.7 million in 2014, a gain of USD0.3 million in 2013 and a gain USD7.1 million in 2012. The 2014 net foreign exchange gain was primarily associated with the effect of a depreciation of the Mexican peso against the U.S. dollar on a net short local currency position in Ternium’s Mexican subsidiaries. In addition, Ternium’ Mexican and Colombian subsidiaries record deferred tax results when the U.S. dollar (their functional currency) revaluates or devaluates in relation to the Mexican peso or the Colombian peso, respectively, as such fluctuations change, in U.S. dollar terms, the tax base used to calculate deferred tax at such subsidiaries. Fluctuations in the value of such functional currencies against other currencies have had, and may also have in the future, an impact on Ternium’s results.

Changes in prevailing exchange rates have had an impact on Ternium’s comprehensive results in the past and could impact comprehensive results from subsidiaries and investments with a functional currency other than the U.S. dollar in the future. In accordance with IFRS, Ternium records currency translation adjustments in its consolidated statements of comprehensive income. These adjustments do not affect results but, instead, have an impact on net worth. Fluctuations in the Brazilian real (as our participation in Usiminas is denominated in Brazilian reais) and the Argentine peso (as it is the functional currency of Siderar) against the U.S. dollar have had, and may also have in the future, an impact on Ternium’s comprehensive results. Ternium’s currency translation adjustments resulted in losses of USD459.8 million in 2014, USD503.3 million in 2013 and USD425.4 million in 2012. These adjustments were mainly related to the effect of the devaluation of the Brazilian real on the value of Ternium’s investment in Usiminas as measured in U.S. dollars, amounting to USD188.1 million in 2014, USD200.2 million in 2013 and USD282.1 million in 2012, and the effect of the devaluation of the Argentine peso on the value of Siderar’s net assets as measured in U.S. dollars.

Ternium’s cash flows in 2012 include non-recurring payments received in connection with the transfer of our interest in Sidor to Venezuela. On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG. Ternium agreed to receive an aggregate amount of USD1.97 billion as compensation for its Sidor shares. Ternium received payments from CVG, including interest, totaling USD953.6 million, USD767.4 million, USD133.1 million and USD136.7 million in 2009, 2010, 2011 and 2012, respectively. With the last payment in October 2012, the pending dispute relating to the nationalization of Sidor was resolved. For more information on the Sidor nationalization process, see Item 4. “Information on the Company—A.History and Development of the Company.”

Critical accounting estimates. This discussion of our operating and financial review and prospects is based on our consolidated financial statements included elsewhere in this annual report, which have been prepared in accordance with IFRS. The use of IFRS has an impact on our critical accounting policies and 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.

 

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The principal estimates and assumptions made by management 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.

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

Also, when assessing the recoverability of tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Although we believe our estimates are appropriate, significant differences in actual performance of the asset or group of assets may materially affect our asset values and results of operations.

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 USD9.1 million and USD14.0 million as of December 31, 2014 and 2013, respectively.

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, 2014 and 2013, the Company recorded no allowance for net realizable value and USD48.0 million and USD47.8 million, respectively, as allowance for obsolescence.

Historically, losses due to obsolescence and scrapping of inventory have been within expectations and the provisions established. If, however, circumstances were to materially change (e.g. significant changes in market conditions or in the technology used in the mills), management’s estimates of the recoverability of these inventories could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

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.

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.

 

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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;

 

 

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

 

 

whether it is becoming probable that the investee will enter bankruptcy or other financial reorganization, or is experiencing other financial difficulty;

 

 

whether observable data indicates that there is a measurable decrease in the estimated future cash flows of the investee since the initial recognition; and

 

 

whether the lender of the investee, for economic or legal reasons relating to the investee’s financial difficulty, has granted a concession that the lender would not otherwise consider.

Except as described below with respect to the impairment of our investment in Usiminas in 2014, none of the Company’s cash generating units (CGUs) were tested for impairment in 2014, 2013 or 2012 (other than on goodwill as described below), as no impairment indicators were identified. On March 31, 2015, Ternium performed an additional impairment test of its investment in Usiminas and subsequently wrote down such investment. Based on the information currently available to us, except in relation to the SEC’s review process in connection with the impairment of our investment in Usiminas, as of the date of this annual report, the Company is not aware of any factors that would lead to the recognition of future impairment charges. Any such impairment charges could have a material adverse effect on Ternium’s results of operations, financial condition and net worth. For further information on the Usiminas impairment test performed on March 31, 2015 see Item 5 “Operating and Financial Review and Prospects— G. Recent Developments— March 31, 2015 Impairment of Usiminas Investment” and for a discussion of the SEC’s review process in connection with the impairment of our investment in Usiminas, see Item 4A. “Unresolved Staff Comments”.

In connection with its investment in Usiminas, the Company performed an impairment test over such investment as of December 31, 2012, and subsequently wrote down the investment by USD275.3 million, to USD1.6 billion as of year-end 2012. Furthermore, as of December 31, 2014 and March 31, 2015, the Company further wrote down its investment in Usiminas by USD196.4 million and USD109.7 million, respectively, to USD1.4 billion as of year-end 2014 and USD1.0 billion as of March 31, 2015. The impairment performed on December 31, 2014 was mainly due to expectations of a weaker industrial environment in Brazil, and consequently lower steel demand, as a result of worsening economic activity, as well as a significant additional downturn in international prices of iron ore and steel, leading to diminished cash flow expectations. For further information on the Usiminas investment, see note 3 to our consolidated financial statements included elsewhere in this annual report and for further information on the Usiminas impairment test performed on March 31, 2015, see Item 5 “Operating and Financial Review and Prospects— G. Recent Developments—March 31, 2015 Impairment of Usiminas Investment”. Any further write down to Ternium’s investment in Usiminas could have a material adverse effect on Ternium’s net worth and results.

Goodwill impairment test. Assessment of the recoverability of the carrying value of goodwill requires significant judgment. Management evaluates goodwill allocated to the operating units for impairment on an annual basis or whenever there is an impairment indicator. Goodwill is tested at the level of the CGUs. Impairment testing of the CGUs is carried out and the value in use determined in accordance with the following accounting policy:

 

 

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. 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.

 

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

 

 

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

 

 

Ternium uses cash flow projections for the next five years based on past performance and expectations of market development; thereafter, it uses a perpetuity rate. Application of the discounted cash flow (DCF) method to determine the value in use of a CGU begins with a forecast of all expected future net cash flows. Variables considered in forecasts include the gross domestic product (GDP) growth rates of the country under study and their correlation with steel demand, level of steel prices and estimated raw material costs as observed in industry reports.

 

 

Cash flows are discounted at rates that reflect specific country and currency risks associated with the cash flow projections. The discount rates used are based on Ternium’s weighted average cost of capital (WACC), which is considered to be a good indicator of cost of capital. As of December 31, 2014 the discount rate used to test goodwill allocated to the Mexico CGUs (of Steel and Mining) for impairment was 9.44%.

 

 

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.

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 as of December 31, 2014, was 9.44% and no impairment charge resulted from the impairment test performed.

At December 31, 2014, 2013 and 2012, no impairment charges resulted from the impairment tests performed. Any future impairment charge could have a material adverse effect on Ternium’s results of operations, financial condition and net worth. For a discussion of the impairments of our investment in Usiminas, see Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Overview.”

Allowances for doubtful accounts. Management makes estimates of the uncollectibility of our accounts receivable. Management analyzes the trade accounts receivable on a regular basis and, when aware of a third party’s inability to meet its financial commitments to Ternium, management 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, 2014 and 2013, allowance for doubtful accounts totaled USD11.4 million and USD12.8 million, respectively.

Historically, losses due to credit failures, aging of overdue accounts and customer claims have been within expectations and in line with the provisions established. If, however, circumstances were to materially change (e.g., higher than expected defaults), management’s estimates of the recoverability of amounts due to us could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

 

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A. Results of Operations

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements included elsewhere in this annual report. Accordingly, this discussion and analysis present our financial condition and results of operations on a consolidated basis. See “Presentation of Certain Financial and Other Information—Accounting Principles” and notes 2 and 4 to our consolidated financial statements included elsewhere in this annual report. The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report.

 

In thousands of U.S. dollars    For the year ended December 31,  
(except number of shares and per share data)    2014     2013     2012(1)     2011(1)(2)     2010(1)(2)  

Selected consolidated income statement data

          

Net sales

     8,726,057        8,530,012        8,608,054        9,122,832        7,339,901   

Cost of sales

     (6,925,169     (6,600,292     (6,866,379     (7,016,322     (5,560,201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,800,888        1,929,720        1,741,675        2,106,510        1,779,700   

Selling, general and administrative expenses

     (816,478     (843,311     (809,181     (839,362     (738,304

Other operating income (expenses), net

     71,751        23,014        (11,881     (11,495     2,162   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,056,161        1,109,423        920,613        1,255,653        1,043,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance expense

     (117,866     (132,113     (150,302     (105,570     (71,228

Finance income

     5,715        (2,358     11,400        26,190        24,024   

Other financial income (expenses), net

     42,701        (1,004     17,270        (221,042     176,441   

Equity in (losses) earnings of non-consolidated companies

     (34,218     (31,609     (346,833     10,137        12,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     952,493        942,339        452,148        965,368        1,185,662   

Income tax expense

     (363,708     (349,426     (261,227     (312,555     (406,191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     588,785        592,913        190,921        652,813        779,470   

Attributable to:

          

Owners of the parent

     452,404        455,425        142,043        517,668        622,076   

Non-controlling interest

     136,381        137,488        48,878        135,145        157,394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     588,785        592,913        190,921        652,813        779,470   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     414,797        377,133        370,855        395,988        374,201   

Weighted average number of shares outstanding (3)

     1,963,076,776        1,963,076,776        1,963,076,776        1,968,327,917        2,004,743,442   

Basic earnings per share (in USD per share) (4) (5)

     0.23        0.23        0.07        0.26        0.31   

Dividends per share (in USD per share)

     0.090 (6)      0.075        0.065        0.075        0.075   

 

(1) Starting on January 1, 2013, Consorcio Peña Colorada and Exiros have been proportionally consolidated. Comparative amounts for the years ended December 31, 2012, 2011 and 2010 show them as investments in non-consolidated companies and their results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement.
(2) Ternium changed prospectively the functional currency of its Mexican subsidiaries to the U.S. dollar, effective as of January 1, 2012. For the periods ended December 31, 2011 and 2010 the functional currency for the Company’s Mexican subsidiaries was the Mexican peso.
(3) Of the 2,004,743,442 shares issued as of December 31, 2014, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc., repurchased from Usiminas on February 15, 2011. Such shares were not considered outstanding for purposes of the calculation of the weighted average number of shares.
(4) International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as shown in the income statement includes the portion attributable to non-controlling interest. Basic earnings per share, however, continue to be calculated on the basis of income attributable solely to the owners of the parent.
(5) Diluted earnings per share (expressed in USD per share), equals basic earnings per share.
(6) Reflects dividend proposal for the year ended December 31, 2014, which has been submitted to the shareholders for a vote at the annual general shareholders’ meeting to be held on May 6, 2015.

 

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In thousands U.S. dollars    At December 31,  
(except number of shares and per share data)    2014      2013      2012      2011      2010  

Selected consolidated balance sheet data

              

Non-current assets

     6,905,672         7,153,162         7,211,371         5,195,688         5,600,608   

Property, plant and equipment, net

     4,481,027         4,708,895         4,438,117         3,969,187         4,203,685   

Other non-current assets (1)

     2,424,645         2,444,267         2,773,254         1,226,501         1,396,923   

Current assets

     3,348,869         3,219,462         3,655,628         5,547,374         5,499,306   

Cash and cash equivalents

     213,303         307,218         560,307         2,158,044         1,779,294   

Other current assets (2)

     3,120,810         2,894,474         3,083,303         3,378,956         3,710,050   

Non-current assets classified as held for sale

     14,756         17,770         12,018         10,374         9,961   

Total assets

     10,254,541         10,372,624         10,866,999         10,743,062         11,099,914   

Capital and reserves attributable to the owners of the parent (3)

     5,284,959         5,340,035         5,369,183         5,711,495         5,833,246   

Non-controlling interest

     973,523         998,009         1,065,730         1,077,055         1,127,526   

Non-current liabilities

     1,904,673         2,185,421         2,306,640         1,975,129         2,583,032   

Borrowings

     900,611         1,204,880         1,302,753         948,495         1,426,574   

Deferred tax liabilities

     611,126         605,883         657,211         719,061         847,044   

Other non-current liabilities

     392,936         374,658         346,676         307,573         309,414   

Current liabilities

     2,091,386         1,849,159         2,125,446         1,979,383         1,556,110   

Borrowings

     1,264,208         797,944         1,121,610         1,047,641         513,083   

Other current liabilities

     827,178         1,051,215         1,003,836         931,742         1,043,028   

Total liabilities

     3,996,059         4,034,580         4,432,086         3,954,512         4,139,142   

Total equity and liabilities

     10,254,541         10,372,624         10,866,999         10,743,062         11,099,914   

Number of shares (3)

     1,963,076,776         1,963,076,776         1,963,076,776         1,963,076,776         2,004,743,442   

 

(1) As of December 31, 2014, 2013, 2012, 2011 and 2010, includes goodwill mainly related to the acquisition of our Mexican subsidiaries for a total amount of USD662.3 million, USD662.3 million, USD663.8 million, USD663.8 million and USD750.1 million, respectively.
(2) As of December 31, 2014, 2013, 2012, 2011 and 2010, includes financial assets with maturity of more than three months for a total amount of USD150.0 million, USD169.5 million, USD160.8 million, USD281.7 million and USD848.4 million, respectively.
(3) The Company’s share capital as of December 31, 2014, 2013, 2012, 2011 and 2010 was represented by 2,004,743,442 shares, par value USD1.00 per share, for a total amount of USD2,004.7 million. Of the 2,004,743,442 shares, as of December 31, 2014, Ternium held 41,666,666 through its wholly-owned subsidiary Ternium International Inc., repurchased from Usiminas on February 15, 2011.

Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013

Overview

Apparent steel use in Mexico increased 11.7% year-over-year to approximately 22.5 million tons in 2014, reflecting a vibrant industrial sector in which exports of manufactured goods, particularly to the United States continued to increase, and a slowly improving construction sector. Mexico’s GDP increased 2.1% year-over-year, evidencing a moderate acceleration in economic activity versus the prior year. In Argentina, apparent steel use decreased slightly to approximately 5.0 million tons, reflecting a broad decrease in activity, particularly in the automotive sector. In Colombia, apparent steel use increased 15.8% year-over-year to approximately 4.0 million tons in 2014. Colombian GDP continued expanding at a solid pace, with positive performance by each of the different steel consuming sectors.

Ternium’s operating income in 2014 was USD1.1 billion, slightly lower than operating income in 2013. Steel shipments increased by 647,000 tons year-over-year in Mexico, and decreased by a combined 254,000 tons in the Southern Region and Other Markets. Operating margin decreased slightly, reflecting a decrease of USD14 in steel revenue per ton, partially offset by a decrease of USD3 in steel operating cost per ton. A decrease in steel prices in the Southern Region was mostly offset by higher steel prices and a higher value added product mix in Mexico.

Ternium’s net income in 2014 was USD588.8 million, which was relatively stable compared with net income in 2013, mainly as a result of the slightly lower operating income discussed above, offset by an improved financial result.

As of December 31, 2014, Ternium performed an impairment test of its investment in Usiminas and subsequently wrote down such investment by USD196.4 million in the fourth quarter of 2014. The main drivers of the changes in the Company’s estimated value in use of its investment in Usiminas leading to this additional impairment were expectations of a weaker industrial environment in Brazil, and consequently a weaker steel demand, as a result of worsening economic activity, as well

 

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as a significant downturn in international prices of iron ore and steel, which together led to diminished cash flow expectations. For further information on the Usiminas investment, see note 3 to our consolidated financial statements included elsewhere in this annual report.

In addition, in October 2014 Ternium acquired 51.4 million additional ordinary shares of Usiminas from PREVI for a total purchase price of BRL616.7 million (or USD249.0 million). Subsequently, Ternium applied its purchase price allocation procedures in connection with this transaction and determined a higher value of net assets at fair value versus book value and, accordingly, recognized a gain from bargain purchase of USD188.9 million in the fourth quarter of 2014. For further information on the Usiminas transactions, see note 3 to our consolidated financial statements included elsewhere in this annual report and for a discussion of the legal proceedings associated with Ternium’s investment in Usiminas, see Item 8 “Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

Net Sales

Net sales in 2014 were USD8.7 billion, 2% higher than net sales in 2013, mainly as a result of higher steel products sales in Mexico, partially offset by lower steel products sales in the Southern Region and Other Markets. The following table shows Ternium’s total consolidated net sales for 2014 and 2013:

 

     Net sales (million USD)  
     2014      2013      Dif.  

Mexico

     4,863.9         4,230.1         15

Southern Region

     2,641.5         2,944.7         -10

Other Markets

     1,159.3         1,251.2         -7
  

 

 

    

 

 

    

 

 

 

Total steel products consolidated net sales

     8,664.8         8,426.0         3

Other products (1)

     35.8         33.9         5
  

 

 

    

 

 

    

 

 

 

Total steel segment net sales

     8,700.5         8,459.9         3

Total mining segment net sales

     313.2         386.5         -19
  

 

 

    

 

 

    

Intersegment eliminations

     (287.6      (316.4   

Total consolidated net sales

     8,726.1         8,530.0         2
  

 

 

    

 

 

    

 

 

 

 

(1) The item “Other products” primarily includes pig iron and pre-engineered metal building systems.

Cost of sales

Cost of sales was USD6.9 billion in 2014, an increase of USD324.9 million compared with 2013. This was principally due to a USD248.0 million, or 5%, increase in raw material and consumables used, mainly reflecting a 4% increase in steel shipment volumes, higher purchased slabs costs and higher energy costs, partially offset by lower iron ore and coking coal costs; and a USD76.9 million increase in other costs, including a USD44.6 million increase in maintenance expenses, a USD39.7 million increase in depreciation of property, plant and equipment and amortization of intangible assets and a USD2.6 million increase in services and fees, partially offset by a USD6.9 million decrease in labor costs and USD2.5 million decrease in insurance costs.

Selling, general and administrative expenses

Selling, General & Administrative (SG&A) expenses in 2014 were USD816.5 million, or 9.4% of net sales, a decrease of USD26.8 million compared with SG&A in 2013, mainly as a result of lower taxes and contributions (other than income tax) and lower freight and transportation expenses.

Other net operating income

Other net operating income in 2014 was USD71.8 million, higher than the USD23.0 million gain in 2013. Other net operating income in 2014 and 2013 included a USD57.5 million and a USD11.7 million income recognition on insurance recovery, respectively.

Operating income

Operating income in 2014 was USD1.1 billion, or 12.1% of net sales, compared with operating income of USD1.1 billion, or 13.0% of net sales, in 2013.

 

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The following table shows Ternium’s operating income by segment for 2014 and 2013:

 

In millions of U.S. dollars    Steel segment     Mining segment     Intersegment
eliminations
    Total  
     2014     2013     2014     2013     2014     2013     2014     2013  

Net Sales

     8,700.5        8,459.9        313.2        386.5        (287.6     (316.4     8,726.1        8,530.0   

Cost of sales

     (6,960.0     (6,645.2     (255.2     (268.3     290.1        313.2        (6,925.2     (6,600.3

SG&A expenses

     (799.8     (820.3     (16.6     (23.0     —          —          (816.5     (843.3

Other operating income (expenses), net

     70.7        23.1        1.0        (0.1     —          —          71.8        23.0   

Operating income (loss)

     1,011.4        1,017.5        42.3        95.1        2.4        (3.2     1,056.2        1,109.4   

Steel reporting segment

The steel segment’s operating income was USD1.0 billion in 2014, a decrease of USD6.1 million compared with 2013, reflecting higher operating cost, offset by higher sales.

Net sales of steel products in 2014 increased 3% compared with 2013, reflecting an increase in shipments partially offset by a decrease in revenue per ton. Shipments increased 393,000 tons, or 4%, compared with 2013, mainly due to higher sales volume in Mexico partially offset by lower sales volume in the Southern Region and Other Markets. Revenue per ton decreased by USD14, mainly due to lower steel prices in the Southern Region, mostly offset by higher steel prices and a higher value added product mix in Mexico.

 

     Net Sales (million USD)     Shipments (thousand tons)     Revenue / ton (USD/ton)  
     2014      2013      Dif.     2014      2013      Dif.     2014      2013      Dif.  

Mexico

     4,863.9         4,230.1         15     5,632.2         4,984.9         13     864         849         2

Southern Region

     2,641.5         2,944.7         -10     2,510.9         2,633.1         -5     1,052         1,118         -6

Other Markets

     1,159.3         1,251.2         -7     1,238.5         1,370.3         -10     936         913         3

Total steel products

     8,664.8         8,426.0         3     9,381.5         8,988.4         4     924         937         -1

Other products (1)

     35.8         33.9         5                

Total steel segment

     8,700.5         8,459.9         3                

 

(1) The item “Other products” primarily includes pig iron and pre-engineered metal building systems.

Operating cost increased 4%, due to the above-mentioned 4% increase in shipment volumes and relatively stable operating cost per ton.

Mining reporting segment

The mining segment’s operating income was USD42.3 million in 2014, a decrease of USD52.8 million compared with 2013 mainly reflecting lower iron ore sales, partially offset by lower operating cost. Net Sales of mining products in 2014 were 19% lower than in 2013, reflecting lower shipments and revenue per ton. Shipments were 3.9 million tons, 9% lower than in 2013, mainly as a result of lower iron ore production at Peña Colorada.

 

     Mining segment  
     2014      2013      Dif.  

Net Sales (million USD)

     313.2         386.5         -19

Shipments (thousand tons)

     3,857.3         4,243.0         -9

Revenue per ton (USD/ton)

     81         91         -11

Operating cost decreased 7% year-over-year, due to the above mentioned 9% decrease in shipment volumes, partially offset by a 3% increase in operating cost per ton. Operating cost per ton increased mainly due to higher depreciation of property, plant and equipment.

Net financial results

Net financial results were a USD69.5 million loss in 2014, compared with a USD135.5 million loss in 2013. During 2014, Ternium’s net financial interest results totaled a loss of USD106.8 million, compared with a loss of USD111.5 million in 2013. Net foreign exchange result was a gain of USD26.7 million in 2014 compared with a gain of USD0.3 million in 2013. The gain in 2014 was primarily associated with the effect of a depreciation of the Mexican peso against the U.S. dollar on a net short local currency position in Ternium’s Mexican subsidiaries. Change in fair value of financial instruments included in net financial results in 2014 was a USD17.8 million gain, mainly related to results from changes in the fair value of financial assets, compared with a USD12.3 million loss in 2013.

 

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Equity in results of non-consolidated companies

Equity in results of non-consolidated companies was a loss of USD34.2 million in 2014, compared with a loss of USD31.6 million in 2013. Equity in results of non-consolidated companies in 2014 included the USD196.4 million loss related to an impairment of Ternium’s investment in Usiminas, partially offset by an income recognition of USD188.9 million related to Ternium’s acquisition of additional shares in Usiminas during October 2014 as a result of a higher value of net assets at fair value versus book value after applying purchase price allocation procedures, as discussed above.

Income tax expense

Income tax expense in 2014 was USD363.7 million, or 38% of income before income tax, compared with an income tax expense of USD349.4 million, or 37% of income before income tax, in 2013. The relatively high effective tax rate in 2014 was mainly related to the non-cash effect on deferred taxes of the significant depreciation of the Mexican peso and the Colombian peso against the U.S. dollar during the year, which reduces, in U.S. dollar terms, the tax base used to calculate deferred tax at our Mexican and Colombian subsidiaries (which have the U.S. dollar as their functional currency), an amendment of a previous period tax return in Mexico and the impact of non-taxable losses stemming from the investment in Usiminas, partially offset by a net gain related to a non-cash reduction of deferred tax liabilities at one of Ternium’s subsidiaries.

Net income attributable to non-controlling interests

Net income attributable to non-controlling interest in 2014 was a gain of USD136.4 million, compared with a gain of USD137.5 million in 2013.

Fiscal Year Ended December 31, 2013 compared to Fiscal Year Ended December 31, 2012

Overview

Apparent steel use in Mexico decreased 9.0% year-over-year to approximately 18.6 million tons in 2013, mainly as a consequence of a struggling construction sector. Mexico’s GDP increased 1.1% year-over-year, evidencing a slowdown in economic activity versus the prior year. In Argentina, apparent steel use increased 2.8% year-over-year to approximately 5.1 million tons, following a recovery in activity in the construction, agricultural and automotive sectors. In Colombia, apparent steel use increased 1.1% year-over-year to approximately 3.5 million tons in 2013. GDP continued expanding at a solid pace, with positive performance at each of the different steel consuming sectors.

Ternium’s operating income in 2013 was USD1.1 billion, 21% higher than in 2012 mainly due to higher operating margin and a 220,000 ton increase in steel shipments, as well as higher iron ore shipments to third parties as a result of the proportional consolidation in 2013 of Consorcio Peña Colorada’s mining operations. Operating margin in 2013 increased principally due to a lower operating cost per ton, which resulted mainly from a lower cost of purchased slabs and raw materials, partially offset by lower steel revenue per ton in Mexico and Other Markets. Operating cost per ton is equal to cost of sales plus selling, general and administrative expenses, divided by steel shipments expressed in tons.

Ternium’s net income in 2013 was USD592.9 million, USD402.0 million higher than net income in 2012, mainly due to a USD328.6 million better result related to the investment in Usiminas, which in 2012 included a USD275.3 million impairment charge, and a USD188.8 million higher operating income, partially offset by higher net financial expenses and higher net income tax expenses.

Net Sales

Net sales in 2013 were USD8.5 billion, 1% lower than net sales in 2012, mainly as a result of lower steel products sales in Mexico and Other Markets, partially offset by higher steel products sales in the Southern Region and higher iron ore sales to third parties.

 

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The following table shows Ternium’s total consolidated net sales for 2013 and 2012:

 

     Net sales (million USD)  
     2013      2012      Dif.  

Mexico

     4,230.1         4,457.3         -5

Southern Region

     2,944.7         2,737.4         8

Other Markets

     1,251.2         1,377.2         -9
  

 

 

    

 

 

    

 

 

 

Total steel products consolidated net sales

     8,426.0         8,572.0         -2

Other products (1)

     33.9         29.2         16
  

 

 

    

 

 

    

 

 

 

Total steel segment net sales

     8,459.9         8,601.1         -2

Total mining segment net sales

     386.5         190.7         103
  

 

 

    

 

 

    

Intersegment eliminations

     (316.4      (183.8   

Total consolidated net sales

     8,530.0         8,608.1         -1
  

 

 

    

 

 

    

 

 

 

 

(1) The item “Other products” primarily includes pig iron and pre-engineered metal building systems.

Cost of sales

Cost of sales was USD6.6 billion in 2013, a decrease of USD266.1 million compared to 2012. This decrease was principally due to a USD371.4 million, or 7%, decrease in raw material and consumables used, mainly reflecting a decrease in raw material and purchased slabs costs, partially offset by a 3% increase in steel shipment volumes and higher energy costs; and a USD105.3 million increase in other costs, including a USD56.1 million increase in labor cost and a USD52.7 million increase in maintenance expenses.

Selling, general and administrative expenses

SG&A expenses in 2013 were USD843.3 million, or 9.9% of net sales, an increase of USD34.1 million compared to 2012, mainly including higher taxes and contributions (other than income tax), labor expenses and freight and transportation expenses, partially offset by lower services and fees expenses.

Operating income

Operating income in 2013 was USD1.1 billion, or 13.0% of net sales, compared to operating income of USD920.6 million, or 10.7% of net sales, in 2012. The following table shows Ternium’s operating income by segment for 2013 and 2012:

 

In millions of U.S. dollars    Steel segment     Mining segment     Intersegment
eliminations
    Total  
     2013     2012     2013     2012     2013     2012     2013     2012  

Net Sales

     8,459.9        8,601.1        386.5        190.7        (316.4     (183.8     8,530.0        8,608.1   

Cost of sales

     (6,645.2     (6,909.5     (268.3     (132.8     313.2        175.9        (6,600.3     (6,866.4

SG&A expenses

     (820.3     (804.7     (23.0     (4.5     —          —          (843.3     (809.2

Other operating income (expenses), net

     23.1        (12.3     (0.1     0.4        —          —          23.0        (11.9

Operating income (loss)

     1,017.5        874.6        95.1        53.8        (3.2     (7.9     1,109.4        920.6   

Steel reporting segment

The Steel segment’s operating income was USD1.0 billion in 2013, an increase of USD142.8 million compared to 2012, reflecting lower operating cost partially offset by lower net sales.

Net sales of steel products in 2013 decreased 2% compared to 2012, reflecting a USD40 decrease in revenue per ton, mainly due to lower steel prices in Mexico and Other Markets. Shipments increased 220,000 tons compared to 2012, or 3%, mainly due to higher sales volume in the Southern Region and Mexico.

 

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     Net Sales (million USD)     Shipments (thousand tons)     Revenue / ton (USD/ton)  
     2013      2012      Dif.     2013      2012      Dif.     2013      2012      Dif.  

Mexico

     4,230.1         4,457.3         -5     4,984.9         4,952.4         1     849         900         -6

Southern Region

     2,944.7         2,737.4         8     2,633.1         2,444.5         8     1,118         1,120         0

Other Markets

     1,251.2         1,377.2         -9     1,370.3         1,371.2         0     913         1,004         -9

Total steel products

     8,426.0         8,572.0         -2     8,988.4         8,768.2         3     937         978         -4

Other products (1)

     33.9         29.2         16                

Total steel segment

     8,459.9         8,601.1         -2                

 

(1) The item “Other products” primarily includes pig iron and pre-engineered metal building systems.

Operating cost decreased 3%, due to a 6% decrease in operating cost per ton, partially offset by a 3% increase in shipment volumes. The decrease in operating cost per ton was mainly due to lower raw material and purchased slabs costs, partially offset by higher energy costs, maintenance expenses and labor costs.

Mining reporting segment

Net sales of mining products in 2013 were 103% higher than in 2012. Shipments were 4.2 million tons, 128% higher than in 2012, and revenue per ton was USD91, 11% lower than in 2012. The year-over-year differences were mainly due to the change in accounting treatment of Consorcio Peña Colorada, which began to be proportionally consolidated effective January 1, 2013.

 

     Mining segment  
     2013      2012      Dif.  

Net Sales (million USD)

     386.5         190.7         103

Shipments (thousand tons)

     4,243.0         1,862.6         128

Revenue per ton (USD/ton)

     91         102         -11

The Mining segment’s operating income was USD95.1 million in 2013, an increase of USD41.3 million compared to 2012 mainly reflecting the proportional consolidation of Consorcio Peña Colorada’s mining operations in 2013.

Net financial results

Net financial results were a USD135.5 million loss in 2013, compared with a USD121.6 million loss in 2012. During 2013, Ternium’s net financial interest results totaled a loss of USD106.3 million, USD18.9 million lower than in 2012, reflecting lower indebtedness and weighted average interest rates.

Equity in results of non-consolidated companies

Equity in results of non-consolidated companies was a loss of USD31.6 million in 2013, compared to a loss of USD346.8 million in 2012, which included a write-down of Ternium’s investment in Usiminas of USD275.3 million.

Income tax expense

Income tax expense in 2013 was USD349.4 million, or 37% of income before income tax expense, compared with an income tax expense of USD261.2 million in 2012, or 58% of income before income tax expense. Income tax expense in 2013 included a deferred income tax charge of USD24.0 million related to the introduction of a new withholding tax on dividend distributions in Argentina and other charges mostly related to the effects of the 2014 Mexican tax reform package. The effective tax rate for 2012 was impacted by losses stemming from the investment in Usiminas (including the above mentioned write-down) that were recorded in 2012 and reduced Ternium’s taxable income in that year.

Net income attributable to non-controlling interests

Net income attributable to non-controlling interest in 2013 was USD137.5 million, compared to USD48.9 million in 2012, mainly due to a higher result attributable to non-controlling interest in Siderar.

 

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Foreign Currency Fluctuations

See Item 11. “Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Exposure Risk.”

Governmental Economic, Fiscal, Monetary or Political Policies or Factors

See Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate.”

 

B. Liquidity and Capital Resources

We obtain funds from our operations, as well as from short-term and long-term borrowings from financial institutions. These funds are primarily used to finance our working capital and capital expenditures requirements, as well as our acquisitions (for further information on capital expenditures, see Item 4. “Information on the Company—B. Business Overview—Capital Expenditure Program”). In addition, during 2012, we had total cash inflows of USD136.7 million in connection with compensation payments for the nationalization of our participation in Sidor. For more information on the Sidor nationalization process, see Item 4. “Information on the Company—History and Development of the Company.” We hold money market investments, time deposits and variable-rate or fixed-rate securities, a majority of which are obligations of investment grade issuers. Our gross financial indebtedness decreased slightly in the 2013-2014 period, from USD2.4 billion at the end of 2012 to USD2.2 billion at the end of 2014. In November 2013, Ternium Mexico successfully negotiated a new USD800 million syndicated loan facility maturing in November 2018. See note 23 to our consolidated financial statements included elsewhere in this annual report for further information. In December 2014, Consorcio Peña Colorada negotiated a USD200 million loan with Nacional Financiera S.A., a Mexican development bank, maturing in April 2025. Disbursements under this facility began in April 2015. In the first quarter of 2012 and in the fourth quarter of 2014, we invested USD2.2 billion and USD249.0 million, respectively, in the purchase of Usiminas ordinary shares. For further information on the Usiminas transactions, see note 3 to our consolidated financial statements included elsewhere in this annual report.

Management believes that funds from operations will be sufficient to satisfy our current working capital needs and service our debt in the foreseeable future. Ternium has not negotiated additional committed credit facilities. However, Ternium has negotiated non-committed credit facilities and management believes it has adequate access to the credit markets. Management also believes that our liquidity and capital resources give us adequate flexibility to manage our planned capital spending programs and to address short-term changes in business conditions.

The following table shows the changes in our cash and cash equivalents for each of the periods indicated below:

 

     For the year ended December 31,  

In thousands of U.S. dollars

   2014      2013      2012  

Net cash provided by operating activities

     505,844         1,092,174         1,055,092   

Net cash used in investing activities

     (675,774      (882,779      (2,994,747

Net cash provided by (used in) financing activities

     84,561         (466,076      348,200   
  

 

 

    

 

 

    

 

 

 

Decrease in cash and cash equivalents

     (85,369      (256,681      (1,591,454

Effect of exchange rate changes

     (8,546      (8,635      (6,283

Initial cash of Consorcio Peña Colorada and Exiros (1)

     —           12,227         —     

Cash and cash equivalents at the beginning of the year

     307,218         560,307         2,158,044   

Cash and cash equivalents at the end of the year (2)

     213,303         307,218         560,307   

 

(1) Starting on January 1, 2013, Consorcio Peña Colorada and Exiros have been proportionally consolidated. Comparative amounts for the year ended December 31, 2012 show them as investments in non-consolidated companies and their results are included within “Equity in earnings (losses) of non-consolidated companies” in the consolidated income statement.
(2) In addition, at December 31, 2012, 2013 and 2014, Ternium had USD160.8, USD169.5 and USD150.0 million of other current investments with maturities of more than three months, respectively, and USD0.9, USD0.9 and USD0.1 million in restricted cash, respectively.

 

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Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013

Overview

During 2014, Ternium’s primary source of funding was cash provided by operating activities, net proceeds from borrowings and cash on hand. Cash and cash equivalents as of December 31, 2014 were USD213.3 million, a USD93.9 million decrease from USD307.2 million at the end of the previous year. The decrease is mainly attributable to net cash used in investing activities of USD675.8 million, partially offset by net cash provided by operating activities of USD505.8 million and net cash provided by financing activities of USD84.6 million.

In addition to cash and cash equivalents, as of December 31, 2014, we held other investments with maturity of more than three months for a total amount of USD150.0 million, decreasing USD19.5 million compared with December 31, 2013.

Operating activities

Net cash provided by operating activities was USD505.8 million in 2014, lower than the USD1.1 billion recorded in 2013, including an increase in working capital of USD551.0 million in 2014 and a decrease in working capital of USD114.6 million in 2013. The increase in working capital during 2014 was the result of a USD357.0 million increase in inventories, an aggregate USD108.0 million net decrease in accounts payable and other liabilities and an aggregate USD86.0 million net increase in trade and other receivables (amounts that included a negative non-cash effect of USD149.9 million reflecting variations in the exchange rates used by subsidiaries with functional currencies other than the U.S. dollar, mainly related to inventories).

Inventories increased as shown in the table below.

 

     Change in inventory Dec’14 / Dec’13  
     (in millions of USD)  
     Price      Volume      Total  

Finished goods

     (29.4      (25.6      (55.0

Goods in process

     (52.9      (47.3      (100.2

Raw materials, supplies and allowances

     (36.5      (165.3      (201.8
  

 

 

    

 

 

    

 

 

 

Total

     (118.8      (238.2      (357.0

Investing activities

Net cash used in investing activities in 2014 was USD675.8 million, compared with net cash used in investing activities of USD882.8 million in 2013. This change was primarily attributable to the following:

 

 

a decrease of USD439.9 million in capital expenditures (from USD883.3 million in 2013 to USD443.5 million in 2014); partially offset by

 

 

an increase in net cash used in acquisitions of businesses of USD249.0 million (net cash used in 2014 consisted of cash paid for the acquisition of additional ordinary shares of Usiminas).

Financing activities

Net cash provided by financing activities was USD84.6 million in 2014, compared with net cash used in financing activities of USD466.1 million in 2013, for a net year-over-year change of USD550.6 million. This change was primarily attributable to the following:

 

 

net proceeds from borrowings of USD265.4 million in 2014, compared with net repayment of borrowings of USD270.8 million in 2013, for a net year-over-year change of USD536.3 million; and

 

 

a decrease of USD33.1 million in dividends paid in cash to non-controlling interests (from USD66.7 million in 2013 to USD33.6 million in 2014); partially offset by

 

 

an increase of USD19.6 million in dividends paid in cash to the Company’s shareholders (from USD127.6 million in 2013 to USD147.2 million in 2014).

 

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Fiscal Year Ended December 31, 2013 compared to Fiscal Year Ended December 31, 2012

Overview

During 2013, Ternium’s primary source of funding was net cash provided by operating activities and its own cash reserves. Cash and cash equivalents as of December 31, 2013 were USD307.2 million, a USD253.1 million decrease from USD560.3 million at the end of the previous year. The decrease is mainly attributable to net cash used in investing activities of USD882.8 million and net cash used in financing activities of USD466.1 million, partially offset by net cash provided by operating activities of USD1.1 billion.

In addition to cash and cash equivalents, as of December 31, 2013, we held other investments with maturity of more than three months for a total amount of USD169.5 million, increasing USD1.8 million compared to December 31, 2012.

Operating activities

Net cash provided by operating activities was USD1.1 billion in 2013, similar to that of 2012, including a decrease in working capital of USD114.6 million in 2013 and of USD23.5 million in 2012.

The decrease in working capital during 2013 was the result of an aggregate USD137.1 million decrease in trade and other receivables and an aggregate USD93.3 million increase in accounts payable and other liabilities, partially offset by a USD115.8 million increase in inventories, as shown in the table below.

 

     Change in inventory Dec’13 / Dec’12  
     (in millions of USD)  
     Price      Volume      Total  

Finished goods

     (3.6      (48.9      (52.5

Goods in process

     21.8         64.3         86.0   

Raw materials, supplies and allowances

     107.1         (24.7      82.3   
  

 

 

    

 

 

    

 

 

 

Total

     125.2         (9.4      115.8   

Investing activities

Net cash used in investing activities in 2013 was USD882.8 million, compared to net cash used in investing activities of USD3.0 billion in 2012. This change was primarily attributable to the following:

 

 

in 2012, Ternium acquired a participation in the control group of Usiminas for a total consideration of USD2.2 billion; and

 

 

a decrease of USD139.3 million in capital expenditures (from USD1.0 billion in 2012 to USD883.3 million in 2013); partially offset by

 

 

a decrease of USD136.7 million in the proceeds from the Sidor financial asset arising from the nationalization of that company, as the payments received in 2012 cancelled the outstanding amount.

Financing activities

Net cash used in financing activities was USD466.1 million in 2013, compared to net cash provided by financing activities of USD348.2 million in 2012. This change was primarily attributable to the following:

 

 

a net repayment of borrowings of USD270.8 million in 2013, compared to net proceeds from borrowings of USD469.7 million in 2012, for a net year-over-year change of 740.5 million; and

 

 

an increase of USD50.8 million in dividends paid in cash by subsidiary companies (from USD15.9 million in 2012 to USD66.7 million in 2013).

Principal Sources of Funding

Funding Policies

Management’s policy is to maintain a high degree of flexibility in operating and investment activities by maintaining adequate liquidity levels and ensuring access to readily available sources of financing. While Ternium currently does not have committed credit facilities available for borrowing, management believes that it could have access to external borrowing in case of any

 

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shortfalls or specific needs. We obtain financing primarily in U.S. dollars, Argentine pesos and Colombian pesos. Whenever feasible, management bases its financing decisions, including the election of currency, term and type of the facility, on the intended use of proceeds for the proposed financing and on costs. For further information on our financial risk management, see note 28 to our consolidated financial statements, included elsewhere in this annual report.

Financial Liabilities

Our financial liabilities consist of loans with financial institutions and some pre-accorded overdraft transactions. As of December 31, 2014, these facilities were mainly denominated in U.S. dollars (81.6% of total financial liabilities), Argentine pesos (12.9% of total financial liabilities) and Colombian pesos (4.6% of total financial liabilities). Total financial debt (inclusive of principal and interest accrued thereon) increased by USD162.0 million in the year, from USD2.0 billion as of December 31, 2013, to USD2.2 billion as of December 31, 2014, mainly due to an increase in short term borrowings, partially offset by the repayment of principal and interest on borrowings related to prior acquisitions. As of December 2014, current borrowings were 58.4% of total borrowings, none of which corresponded to borrowings with related parties.

The following table shows Ternium’s financial liabilities as of December 31 of each of the last three years:

 

In thousands of U.S. dollars

   2014      2013      2012  

Borrowings with related parties

     —           —           —     

Bank borrowings (1)

     2,164,819         2,002,824         2,424,363   
  

 

 

    

 

 

    

 

 

 

Total borrowings

     2,164,819         2,002,824         2,424,363   
  

 

 

    

 

 

    

 

 

 

 

(1) Net of debt issuance costs

The weighted average interest rates at December 31, 2014, 2013 and 2012 shown below were calculated using the rates set for each instrument in its corresponding currency and weighted using the U.S. dollar-equivalent outstanding principal amount of those instruments at December 31, 2014, 2013 and 2012, respectively. Such rates do not include the effect of derivative financial instruments, nor fluctuations in the exchange rate between the instrument’s currencies and the U.S. dollar.

 

     2014     2013     2012  

Bank borrowings

     4.64     4.89     5.99

As of December 31, 2014, the maturities of our financial liabilities were as follows:

 

In thousands of U.S. dollars    1 year      1 - 2      2 - 3      3 - 4      4 - 5      Over 5         

At December 31, 2014

   Or less      Years      Years      Years      Years      Years      Total  

Borrowings (1)(2)

     1,264,208         339,768         237,679         223,361         24,944         74,859         2,164,819   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

     1,264,208         339,768         237,679         223,361         24,944         74,859         2,164,819   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Borrowings are bank borrowings with third parties. See “—B. Liquidity and Capital Resources—Principal Sources of Funding—Financial Liabilities.”
(2) Net of debt issuance costs.

For information on our derivative financial instruments, see Item 11. “Quantitative and Qualitative Disclosures about Market Risk” and note 22 to our consolidated financial statements included elsewhere in this annual report.

Most Significant Borrowings

Our most significant borrowings as of December 31, 2014, were those incurred under Ternium México’s 2013 syndicated loan facility, intended to improve the company’s debt profile, and under Tenigal’s syndicated loan facility, in order to finance the construction of its new hot-dipped galvanizing mill in Pesquería, Mexico.

 

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In Millions of U.S. dollars

 

Date

   Borrower    Type      Original
principal
amount
     Outstanding principal
amount as of
December 31, 2014
     Maturity

November 2013

   Ternium Mexico      Syndicated loan         800.0        800.0       November 2018

2012/2013

   Tenigal      Syndicated loan         200.0        200.0       July 2022

The main covenants in our syndicated loan agreements are limitations on liens and encumbrances, limitations on the sale of certain assets and compliance with financial ratios (e.g., leverage ratio and interest coverage ratio). As of December 31, 2014, we were in compliance with all covenants under our loan agreements.

For further information on our derivative financial instruments, borrowing and financial risk management, see notes 22, 23, and 28 to our consolidated financial statements included elsewhere in this annual report.

For information on Ternium’s capital expenditures, see Item 4. “Information on the Company—B. Business Overview—Capital Expenditure Program.”

 

C. Research and Development, Patents and Licenses, Etc.

See Item 4. “Information on the Company—B. Business Overview—Research and Development; Product Development.”

 

D. Trend Information

See “—Overview.”

 

E. Off-Balance Sheet Arrangements

During 2014, the Company granted the following guarantees in relation to its participation in the non-consolidated company Techgen:

 

 

A corporate guarantee covering 48% of the outstanding value of transportation capacity agreements entered into by Techgen with Kinder Morgan Gas Natural de Mexico, S. de R.L. de C.V., Kinder Morgan Texas Pipeline LLC and Kinder Morgan Tejas Pipeline LLC for a natural gas purchasing capacity of 150,000 million btu per day starting on June 1, 2016 and ending on May 31, 2036. As of December 31, 2014, the outstanding value of this commitment was approximately USD285 million. The Company’s exposure under the guarantee in connection with these agreements amounts to USD136.7 million, corresponding to 48% of the outstanding value of the agreements as of December 31, 2014.

 

 

A corporate guarantee covering 48% of Techgen’s obligations under three stand-by letters of credit up to an amount of USD47.5 million issued in relation to an agreement with GE Power Systems, Inc. and General Electric International Operations Company, Inc Mexico Branch for the purchase of power generation equipment and other services related to such equipment for an outstanding amount of approximately USD 238 million. The Company’s exposure under the guarantee in connection with these stand-by letters of credit amounts to USD15.5 million.

 

 

A corporate guarantee covering 48% of Techgen’s obligations under a syndicated loan agreement, the proceeds of which will be used by Techgen for the construction of its facilities. As of December 31, 2014, disbursements under the syndicated loan agreement amounted to USD440 million, Ternium having provided a guarantee of approximately USD211 million. If the USD800 million syndicated loan is disbursed in full, the amount guaranteed by the Company will amount to approximately USD384 million. The main covenants under the corporate guarantee are limitations on the sale of certain assets and compliance with financial ratios (e.g. leverage ratio). As of December 31, 2014, Techgen and the Company were in compliance with all of their covenants under this syndicated loan agreement.

In addition, as described above, Ternium has various off-balance sheet commitments to purchase raw materials, energy (electricity and steam for the production of electricity), supplies (oxygen, nitrogen and argon) and production equipment.

Off-balance sheet commitments are discussed in note 24 (ii) to our consolidated financial statements included elsewhere in this annual report.

 

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F. Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2014, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 

In millions of U.S. dollars    Payments Due by Period
as of December 31, 2014
 

Contractual Obligations

   Total      Less than 1
Year
     1-3
Years
     3-5
Years
     After 5
Years
 

Borrowings (1)

     2,164.8         1,264.2         577.4         248.3         74.9   

Estimated interest payments (2)

     66.7         35.6         24.5         5.5         1.1   

Purchase obligations (3)

     617.9         206.6         258.0         153.3         —     

Labor related obligations (4)

     375.8         24.1         48.0         47.7         256.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

     3,225.2         1,530.5         907.9         454.8         332.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Borrowings are bank borrowings with third parties. See “—B. Liquidity and Capital Resources—Principal Sources of Funding—Financial Liabilities.”
(2) In calculating estimated interest payments for our borrowings that bear interest at a floating rate, we use the variable rates in effect in the current interest period, and assume that such rate is fixed over the period(s) measured.
(3) Purchase obligations include mainly oxygen, nitrogen, argon, raw materials, electric power, equipment and steam.
(4) Labor related obligations include post-employment and other employee benefits, asset retirement obligations and termination benefits.

 

G. Recent Developments

March 31, 2015 Impairment of Usiminas Investment

As of March 31, 2015, Ternium performed an impairment test of its investment in Usiminas and subsequently wrote down such investment by USD109.7 million. The main changes to the Company’s previous estimation of its investment’s value in use that led to this impairment were related to expectations of lower prices of steel and iron ore, a weaker steel demand in Brazil, a weaker Brazilian Real to U.S. dollar exchange rate, a lower operating margin and a higher discount rate. For a discussion of the SEC’s review process in connection with the impairment of our investment in Usiminas, see Item 4A. “Unresolved Staff Comments”.

Acquisition of the remaining 46% minority interest in Ternium’s Colombian subsidiary Ferrasa and disposition of interest in Ferrasa Panamá S.A.

On January 20, 2015, Ternium entered into an agreement to acquire the remaining 46% interest in Ferrasa for a total consideration of USD74 million. The Ferrasa transaction closed on April 7, 2015. In addition, on January 20, 2015, Ternium sold its 54% interest in Ferrasa Panamá S.A. for a total consideration of USD2.0 million. For more information related to Ferrasa, see Item 4 “Information on the Company—C. Organizational Structure—Ferrasa.”

Annual Dividend Proposal

On February 19, 2015, the Company’s board of directors proposed that an annual dividend of USD0.090 per share (USD0.90 per ADS), or approximately USD180.4 million in the aggregate, be approved at the Company’s annual general shareholders’ meeting, which is scheduled to be held on May 6, 2015. If the annual dividend is approved, it will be paid on May 15, 2015.

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

Board of Directors

The Company’s articles of association provide for a board of directors consisting of a minimum of five members (when the shares of the Company are listed on a regulated market, as they currently are) and a maximum of fifteen. The board of directors is vested with the broadest powers to act on behalf of the Company and accomplish or authorize all acts and transactions of management and disposition that are within its corporate purpose and are not specifically reserved in the articles of association or by applicable law to the general shareholders’ meeting.

The board of directors is required to meet as often as required by the interests of the Company and at least four times per year. In 2014, the Company’s board of directors met six times. A majority of the members of the board of directors in office present or represented at each board of directors’ meeting constitutes a quorum, and resolutions may be adopted by the vote of a majority of the directors present or represented. In case of a tie, the chairman is entitled to cast the deciding vote.

Directors are elected at the annual ordinary general shareholders’ meeting to serve one-year renewable terms, as determined by the general shareholders’ meeting. The general shareholders’ meeting may dismiss all or any one member of the board of directors at any time, with or without cause, by resolution passed by a simple majority vote. The Company’s current board of directors is composed of nine directors, three of whom are independent directors.

 

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On January 9, 2006, Tenaris and a wholly-owned subsidiary of San Faustin entered into a shareholders’ agreement, pursuant to which such San Faustin subsidiary is required to take all actions in its power to cause one of the members of the Company’s board of directors to be nominated by Tenaris and any directors nominated by Tenaris only be removed pursuant to written instructions by Tenaris. Tenaris and San Faustin’s subsidiary also agreed to cause any vacancies on the board of directors to be filled with new directors nominated by either Tenaris or the San Faustin subsidiary, as applicable. On April 27, 2007, the San Faustin subsidiary assigned all of its rights and obligations under the shareholders’ agreement to Techint. The shareholders’ agreement will remain in effect so long as each of the parties holds at least 5% of the shares of the Company or until it is terminated by either Tenaris or Techint pursuant to its terms. Carlos A. Condorelli was nominated by Tenaris and appointed as a director pursuant to this agreement.

Within the limits of applicable law, the board of directors of the Company may appoint any or all members of the board of directors as the Company’s attorney-in-fact, delegating to such director or directors any management powers to the extent the board of directors may deem appropriate. In addition, the board of directors may delegate to one or more persons, whether or not members of the board of directors, the Company’s day-to-day management and the authority to represent the Company, provided that such delegation shall be subject to prior authorization by the general shareholders’ meeting. On September 14, 2005, following the requisite authorization at the general shareholders’ meeting, the board of directors delegated such day-to-day management and authority to Daniel Agustín Novegil. On May 7, 2014, the Company’s annual general shareholders’ meeting re-elected Ubaldo José Aguirre, Roberto Bonatti, Carlos Alberto Condorelli, Pedro Pablo Kuczynski, Adrián Lajous Vargas, Bruno Marchettini, Gianfelice Mario Rocca, Paolo Rocca and Daniel Agustín Novegil as members of the board of directors to serve until the next annual shareholders’ meeting, which will be held on May 6, 2015 or any adjournment thereof. The board of directors subsequently re-appointed Paolo Rocca as its chairman and Daniel Novegil as chief executive officer of the Company.

The following table sets forth the current members of the board of directors of the Company, their respective offices on the board, their principal occupation, their years of service as board members and their age.

 

Name    Position    Principal Occupation    Years as
director
   Age at December 31,
2014
Paolo Rocca (1)    Chairman    Chairman and CEO of Tenaris, director and vice president of San Faustin    10    62
Ubaldo José Aguirre    Director    Managing director of Aguirre y Gonzalez S.A.    9    66
Roberto Bonatti (1)    Director    President of San Faustin    10    65
Carlos Alberto Condorelli    Director    Director of Tenaris    9    63
Adrián Lajous Vargas    Director    President of Petrométrica, S.C.    9    71
Bruno Marchettini    Director    Director of San Faustin and senior advisor in technology matters for the Techint group    9    73
Daniel Agustín Novegil    Director    CEO of the Company    10    62
Gianfelice Mario Rocca (1)    Director    Chairman of the board of directors of San Faustin, director of Tenaris and president of Humanitas Group    9    66
Pedro Pablo Kuczynski    Director    Senior advisor to The Rohatyn Group    8    76

 

(1) Paolo Rocca and Gianfelice Rocca are brothers, and Roberto Bonatti is Paolo and Gianfelice Rocca’s first cousin.

Paolo Rocca. Mr. Rocca has served as chairman of the Board since 2005. He is a grandson of Agostino Rocca. He is also chairman and chief executive officer of Tenaris, a member of the board of directors and vice president of San Faustin, chairman of Tubos de Acero de México S.A. and a director of Techint Financial Corporation N.V. In addition, he is a member of the Executive Committee of the World Steel Association. Mr. Rocca is an Italian citizen.

Ubaldo José Aguirre. Mr. Aguirre has served on the Board since 2006. He is a managing director of Aguirre y Gonzalez S.A., an Argentine financial services firm, and also serves as chairman of the board of directors and as a member of the audit committee of Holcim Argentina S.A., a subsidiary of Holcim, the Swiss cement producer. Since 2005, he also serves as chairman of the board of directors of Permasur S.A., an Argentine winery, and of Editorial Sur S.A. Since 2000, he is a member of the board of directors of URS Argentina S.A., the Argentine subsidiary of the U.S. corporation. He is a member of the Administrative Board of Universidad Católica Argentina. Mr. Aguirre formerly served as director and chairman of the audit committee of Siderar S.A.I.C. Mr. Aguirre began his career at the World Bank in Washington, D.C. In addition, Mr. Aguirre has been a member of the boards of each of Argentina’s Central Bank —where he was responsible for that country’s external borrowing program and financial negotiations— Banco de la Nación Argentina and Banco Nacional de Desarrollo. He also served as the Republic of Argentina’s financial representative for Europe in Geneva and as negotiator on behalf of the Republic of Argentina with the Paris Club. Mr. Aguirre is an Argentine citizen.

 

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Roberto Bonatti. Mr. Bonatti has served as a director of the Company since 2005. Mr. Bonatti is a grandson of Agostino Rocca, founder of the Techint Group, a group of companies controlled by San Faustin. Throughout his career in the Techint group he has been involved specifically in the engineering and construction and corporate sectors. He was first employed by the Techint Group in 1976, as deputy resident engineer in Venezuela. In 1984, he became a director of San Faustin and, since 2001, he has served as its president. In addition, Mr. Bonatti currently serves as president of Sadma Uruguay S.A. He is also a member of the board of directors of Tenaris. Mr. Bonatti is an Italian citizen.

Carlos Alberto Condorelli. Mr. Condorelli has served as a director of the Company since 2005. He is also a member of the board of directors of Tenaris since 2007. He began his career within the Techint group in 1975 as an analyst in the accounting and administration department of Siderar. He has held several positions within Tenaris and other Techint group companies, including chief financial officer of Tenaris, finance and administrative director of Tubos de Acero de México, S.A. and president of the board of directors of Empresa Distribuidora La Plata S.A., an Argentine utilities company. Mr. Condorelli is an Argentine citizen.

Adrián Lajous Vargas. Mr. Lajous has served as a director of the Company since 2006. Mr. Lajous currently serves as chairman of the Oxford Institute for Energy Studies, a fellow at the Center for Global Energy Policy at Columbia University, president of Petrométrica, S.C. and non-executive director of Trinity Industries Inc. Mr. Lajous began his career teaching economics at El Colegio de México and in 1977 was appointed director general for energy at Mexico’s Ministry of Energy. Mr. Lajous joined Petróleos Mexicanos (Pemex) in 1983, where he held a succession of key executive positions including executive coordinator for international trade, corporate director of planning, corporate director of operations and director of refining and marketing. From 1994 until 1999, he served as chief executive officer of Pemex and chairman of the boards of the Pemex Group of operating companies. In addition, he served as non-executive director of Schlumberger Ltd. between 2002 and 2014. Mr. Lajous is a Mexican citizen.

Bruno Marchettini. Mr. Marchettini has served as a director of the Company since 2006. He is a senior advisor to the Techint group in technology matters. He has retired from executive positions and is presently engaged as a consultant by Siderar. Mr. Marchettini is a member of the board of directors of San Faustin. Mr. Marchettini is an Italian citizen.

Daniel Agustín Novegil. Mr. Novegil has served as a director and chief executive officer of the Company since 2005. With more than 35-years of experience in the steelmaking industry, he was appointed managing director of Siderar in 1993 and a member of the board of directors of Usiminas in 2012. He is also member of the board of directors of the World Steel Association and former president of Alacero (Latin American Steel Association). Since 1999 he has been a member of the advisory board of the Sloan Masters Program at Stanford University. Mr. Novegil is an Argentine citizen.

Gianfelice Mario Rocca. Mr. Rocca has served as a director of the Company since 2006. He is a grandson of Agostino Rocca. He is chairman of the board of directors of San Faustin, a member of the board of directors of Tenaris, president of the Humanitas Group and president of the board of directors of Tenova S.p.A. In June 2013, he was elected president of Assolombarda, the largest territorial association of entrepreneurs in Italy and part of Confindustria (Italian employers’ organization). In addition, he is a member of the EIT Governing Board (European Institute of Innovation and Technology) and sits on the board of directors or executive committees of several companies, including Allianz S.p.A., Brembo and Buzzi Unicem. He is a member of the Advisory Board of Allianz Group, of the Aspen Institute Executive Committee, of the Trilateral Commission and of the European Advisory Board of the Harvard Business School. Mr. Rocca is an Italian citizen.

Pedro Pablo Kuczynski. Mr. Kuczynski has served as a member of the Board since 2007. Prior to that, he served in the Peruvian government as Prime Minister (2005-2006), Minister of Economy and Finance (2001-2005) and Minister of Energy and Mines (1980-1982). He was president until 2001 of a private equity firm he founded in 1992 after spending ten years as Chairman of First Boston International (today Credit Suisse) in New York. Since 2007, he is Senior Advisor to the Rohatyn Group, a firm specializing in emerging markets. He ran a bauxite mining company affiliated with Alcoa between 1977 and 1980. He began his career at the World Bank in 1961 and in the 1970s headed its Policy Planning Division as Chief Economist for Latin America and Chief Economist of IFC. Mr. Kuczynski is a U.S. and Peruvian national.

Director Liability

Under Luxembourg law, a director may be liable to the Company for any damage caused by such director’s misconduct in the Company’s management. In addition, directors will be jointly and severally liable to the Company, its shareholders or other third parties in the event that the Company, its shareholders or such other third parties suffer a loss due to a breach by any one or more of the directors of either the Luxembourg Company Law or the Company’s articles of association, provided that the

 

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losses that are independent and separate from the losses suffered by the Company. A director will be discharged from such joint and several liability only with respect to breaches, provided no misconduct is attributable to such director and such director reports such breaches at the first general meeting after such director first has knowledge thereof.

An action against directors for damages may be initiated by the Company upon a resolution of the shareholders’ meeting passed by a simple majority vote, irrespective of the number of shares represented at the meeting. In general, claims must be brought within five years from the occurrence of an action or omission for which liability may apply or, in case the action or omission was fraudulently concealed, from the date of discovery of the relevant action or omission.

It is customary in Luxembourg that the shareholders expressly discharge the members of the board of directors from any liability arising out of or in connection with the exercise of their mandate when approving the Company’s annual accounts at the annual shareholders’ meeting. However, such discharge will not release the directors from liability for any damage caused to the Company by unrevealed acts of mismanagement or unrevealed breaches of Luxembourg Company Law or the Company’s articles of association, nor will it release the directors from liability for any personal loss of our shareholders independent and separate from the losses suffered by the Company due to a breach either revealed and unrevealed of either the Luxembourg Company Law or the Company’s articles of association.

Under Luxembourg law, any director having a conflict of interest in respect of a transaction submitted for approval to the board of directors may not take part in the deliberations concerning such transaction and must inform the board of such conflict and cause a record of his statement to be included in the minutes of the meeting. Subject to certain exceptions, transactions in which any directors may have had an interest conflicting with that of the Company must be reported at the next general shareholders’ meeting following any such transaction.

Auditors

The Company’s articles of association require the appointment of at least one independent auditor chosen from among the members of the Luxembourg Institute of Independent Auditors. Auditors are appointed by the general shareholders’ meeting, on the audit committee’s recommendation, through a resolution passed by a simple majority vote. Shareholders may determine the number and the term of the office of the auditors at the ordinary general shareholders’ meeting, provided however that an auditor’s term shall not exceed one year and that any auditor may be reappointed or dismissed by the general shareholders’ meeting at any time, with or without cause. As part of their duties, the auditors report directly to the audit committee.

PwC Luxembourg, an independent registered public accounting firm, was appointed as the Company’s independent auditor for the fiscal year ended December 31, 2014, at the ordinary general shareholders’ meeting held on May 7, 2014.

Senior Management

The following table sets forth certain information concerning our senior management:

 

Name

   Age at
December 31,
2014
  

Position

Daniel Novegil    62    Chief Executive Officer; Director
Pablo Brizzio    44    Chief Financial Officer
Máximo Vedoya    44    Mexico Area Manager
Martín Berardi    57    Siderar Executive Vice President
Héctor Obeso    50    International Area Manager
Oscar Montero Martínez    54    Planning and Operations General Director
Luis Andreozzi    64    Engineering and Environment Director
Rodrigo Piña    42    Human Resources Director
Roberto Demidchuk    53    Chief Information Officer
Rubén Herrera    57    Quality and Product Director

Daniel A. Novegil. See “—Board of Directors.”

Pablo Brizzio. Mr. Brizzio currently serves as our Chief Financial Officer. He began his career with the Techint group in 1993 in Siderar. Since then, he has held several positions within the Techint group. He served as finance director of Ternium from 2005 to 2007 and in 2009, and in 2008 he served as chief financial officer of Sidor. In 2010, he assumed his position as chief financial officer of the Company. Mr. Brizzio is an Argentine citizen.

Máximo Vedoya. Mr. Vedoya currently serves as our Mexico Area Manager. Since January 2012, he has been the executive vice president of Ternium Mexico. Prior to that, he served as chief executive officer of Ferrasa. He has held several other

 

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executive positions since joining the Techint Group in 1992, such as director of Ternium Mexico’s international and steel purchase operations, commercial director and export manager of Sidor and commercial planning manager of Siderar. He was also director of Colombian metal-mechanic and shipbuilding chamber Fedemetal, and the Venezuelan association of the metallurgical and mining industry AIMM, and is currently vice-president of the Mexican steel chamber Canacero, director of the Latin American steel chamber Alacero, vice-president of the Nuevo León industrial chamber Caintra, and vice-president of the Mexican industrial chamber CONCAMIN. Mr. Vedoya is an Argentine citizen.

Martín Berardi. Mr. Berardi currently serves as our Siderar Executive Vice President. He began his career with the Techint group in 1980 as a trainee in Propulsora Siderúrgica. He has held several positions within the Techint group including in Propulsora Siderúrgica, Siat S.A.I.C. and Siderca. He served as managing director of Siat (1992-1995), managing director of Tamsa (1995-2000), president and chief executive officer of Sidor (2000-2004) and became managing director of Siderar in October 2004, a position which he held until he assumed his present position at the Company. He was president of IVES (Venezuelan steel institute) (2002-2004), president of Mercofer (2006-2009) and president of CAA (Argentine steel chamber) (2012-2014). He is currently vice-president of CAA, president of Alacero and a member of the board of directors of ITBA (Buenos Aires Institute of Technology). Mr. Berardi is an Argentine citizen.

Héctor Obeso. Mr. Obeso currently serves as our International Area Manager. He assumed his current position in October 2012. Prior to that, he served as commercial manager of Ternium Mexico. Mr. Obeso has held several other executive positions since joining Ternium in 2007, such as quality manager of Siderar and industrial sales manager of Ternium Mexico. Mr. Obeso is a Mexican citizen.

Oscar Montero Martínez. Mr. Montero currently serves as our Planning and Operations General Director. He began his career with the Techint group in 1984 as a commercial analyst in Siderar. Since then, he has held several positions within Siderar in the planning, commercial and procurement areas. In 1998, he assumed the position of strategic planning director of Sidor. Since 2005, he serves as planning and operations general director of the Company. Mr. Montero is an Argentine citizen.

Luis Andreozzi. Mr. Andreozzi currently serves as our Engineering and Environment Director. He began his career with the Techint group in 1968 as a trainee in Siderca. He has held several positions within other Techint group companies, including Techint Engineering Company, or TEING, Siderar and Sidor. Most recently, he served as construction manager of TEING (1986-1992), construction manager of Siderar (1992-1998), engineering and environment general manager of Sidor (1998-2004) and technology manager of the Techint Flat and Long Steel Division, a position he held until he assumed his present position at the Company. Mr. Andreozzi is an Italian citizen.

Rodrigo Piña. Mr. Piña currently serves as our Human Resources Director. He assumed his current position in January 2013. Prior to that, he served as human resources director of Siderar. He has held several other executive positions since joining the Company in 2004, such as commercial planning, CEO assistant and human resources director assistant. Mr. Piña is an Argentine citizen.

Roberto Demidchuk. Mr. Demidchuk currently serves as our Chief Information Officer. He joined the Techint group in 1986 as a trainee for Techint Engineering. Since then he has held several positions in different Techint group companies, including programming manager and procurement manager at Siderar and supply chain director at Ternium. Mr. Demidchuk is an Argentine citizen.

Rubén Herrera. Mr. Herrera currently serves as our Quality and Product Director. He assumed his current position in July 1, 2008. He has also been quality and product director of Ternium Mexico since 2007. Since joining the Techint group in 1990, he has held several other executive positions, including mechanical metallurgical department chief in Siderca’s Industrial Research Center, product manager of Siderar, and quality and product director of Sidor. Mr. Herrera is an Argentine citizen.

 

B. Compensation

The compensation of the members of the Company’s board of directors is determined at the annual ordinary general shareholders’ meeting. Each member of the board of directors received for the year 2014 a fee of USD85,000, and the chairman of the board of directors received an additional fee of USD295,000. The chairman of the audit committee received as additional compensation a fee of USD65,000, while the other members of the audit committee received an additional fee of USD55,000. Under the Company’s articles of association, the members of the audit committee are not eligible to participate in any incentive compensation plan for employees of the Company or any of its subsidiaries.

The aggregate cash compensation received by senior management for the year 2014 amounted to USD12.9 million. In addition, senior management received, for the year 2014, 1,059,320 units for a total amount of USD2.8 million, in connection with the employee incentive retention program described in note 4 (n) (3) “Employee liabilities—Other compensation obligations” to our consolidated financial statements included elsewhere in this annual report.

 

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There are no service contracts between any director and Ternium that provide for material benefits upon termination of employment. The Company does not provide pension, retirement or similar benefits to directors.

 

C. Board Practices

See “—A. Directors and Senior Management.”

Audit Committee

On May 7, 2014, the Company’s board of directors re-appointed Ubaldo José Aguirre, Adrián Lajous Vargas and Pedro Pablo Kuczynski as members of its audit committee, with Mr. Aguirre to continue chairing that committee. All three members of the audit committee are independent directors as defined under the Company’s articles of association.

Under the Company’s articles of association, an independent director is a director who:

 

(i) is not employed, and has not been employed in an executive capacity by the Company or any of its subsidiaries within the five years preceding the ordinary general shareholders’ meeting at which the candidate for the board of directors was voted upon;

 

(ii) does not receive consulting, advisory or other compensatory fees from the Company or any of its subsidiaries (other than fees received as a member of the board of directors of any committee thereof and fees received as a member of the board of directors or other governing body, or any committee thereof, of any of the Company’s subsidiaries);

 

(iii) is not a person who directly or indirectly controls the Company;

 

(iv) does not have, and does not control a business entity that has, a material business relationship with the Company, any of its subsidiaries or a person who directly or indirectly controls the Company, if such material business relationship would reasonably be expected to adversely affect the director’s ability to properly discharge his or her duties;

 

(v) does not control, and is not and has not been, within the five years preceding the ordinary general shareholders’ meeting at which the candidate for the board of directors was voted upon, employed by a present or former internal or external auditor of the Company, any of its subsidiaries or a person who directly or indirectly controls the Company; and

 

(vi) is not a spouse, parent, sibling or relative up to the third degree of, and does not share a home with, any of the persons above described.

Under our articles of association and the audit committee charter, the audit committee is required, among other things, to report to the board of directors on its activity and the adequacy of the Company’s systems of internal control over financial reporting. In addition, the charter of the audit committee sets forth, among other things, the audit committee’s purpose and responsibilities. The audit committee assists the board of directors in its oversight responsibilities with respect to the integrity of the Company’s financial statements and is responsible for making recommendations regarding the appointment, dismissal, compensation, retention and oversight of, and assess the independence of the Company’s independent auditors (see Item 16.C—“Principal Accountant Fees and Services” for additional information about the audit committee’s procedures with respect to our independent auditors). The audit committee also performs other duties imposed by applicable laws and regulations of the regulated market or markets on which the shares of the Company are listed, as well as any other duty entrusted to it by the Company’s board of directors.

In addition, the audit committee is required by the Company’s articles of association to review “Material Transactions,” as such term is defined by the Company’s articles of association, to be entered into by the Company or its subsidiaries with “Related Parties,” as such term is defined by the Company’s articles of association (other than transactions reviewed and approved by the independent members of the board of directors of the Company or through any other procedures that the board of directors may deem substantially equivalent to the foregoing), in order to determine whether their terms are consistent with market conditions or are otherwise fair to the Company and/or its subsidiaries. In the case of Material Transactions entered into by the Company’s subsidiaries with Related Parties, the Company’s audit committee will review those transactions entered into by those subsidiaries whose boards of directors do not have independent members, or that have not been reviewed and approved by such independent directors or through any other procedures that the board of directors of the Company may deem substantially equivalent to the foregoing.

Under the Company’s articles of association, as supplemented by the audit committee’s charter:

 

 

a Material Transaction is (i) any transaction with or involving a Related Party (x) with an individual value equal to or greater than ten million U.S. dollars or (y) with an individual value lower than ten million U.S. dollars, when the aggregate sum of

 

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any series of transactions reflected in the financial statements of the four fiscal quarters of the Company preceding the date of determination (excluding any transactions that were reviewed and approved by any of the audit committee of the Company, or any of its subsidiaries, the board of directors of the Company, the independent members of the board of directors or other governing body of any subsidiary of the Company, or a majority of the members of the board of directors or similar governing body of any subsidiary of the Company that were not nominated by or at the request of the Company or any entity that directly or indirectly controls or is under common control with the Company) exceeds 1.5% of the Company’s consolidated net sales made in the fiscal year preceding the year on which the determination is made; or (ii) any corporate reorganization transaction (including a merger, spin-off or bulk transfer of a business) involving the Company or any of its direct or indirect subsidiaries for the benefit of or involving a Related Party; and

 

 

a Related Party is, in relation to the Company or its direct or indirect subsidiaries, any of the following persons: (i) a member of the board of directors of the Company or of the board of directors or other governing body of any of the Company’s subsidiaries; (ii) any member of the board of directors or other governing body of an entity that directly or indirectly controls the Company; (iii) any entity that directly or indirectly controls or is under common control with the Company (other than the Company’s subsidiaries); (iv) any entity controlled directly or indirectly by any member of the board of directors of the Company, or of the board of directors or other governing body of any subsidiary of the Company; and (v) any spouses, parents, siblings or relatives up to the third degree of, and any person that shares a home with, any person referred to in (i) or (ii).

The audit committee has the power (to the maximum extent permitted by applicable laws) to request that the Company or relevant subsidiary provide any information necessary for it to review any Material Transaction. A Related Party transaction shall not be entered into unless (i) the circumstances underlying the proposed transaction justify that it be entered into before it can be reviewed by the Company’s audit committee or approved by the board of directors and (ii) the Related Party agrees to unwind the transaction if the Company’s audit committee or board of directors does not approve it.

The audit committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and has direct access to the Company’s internal and external auditors as well as Ternium’s management and employees and, subject to applicable laws, its subsidiaries.

 

D. Employees

As of December 31, 2014, Ternium had 16,919 employees, an amount slightly higher than the number of employees it had as of the end of the previous two years.

The following table shows the number of persons employed by Ternium and its fully consolidated subsidiaries, and excludes proportionally consolidated subsidiaries Consorcio Peña Colorada and Exiros:

 

     At December 31,  
     2014      2013      2012  

Mexico

     9,266         9,285         9,118   

Argentina

     5,641         5,539         5,454   

Colombia

     1,440         1,354         1,455   

Other

     572         610         584   
  

 

 

    

 

 

    

 

 

 

Total employees (1)

     16,919         16,788         16,611   
  

 

 

    

 

 

    

 

 

 
(1) Does not include employees of proportionally consolidated subsidiaries Consorcio Peña Colorada and Exiros. Does not include 2,473 employees of contractors who performed services at Ternium’s facilities at year-end 2014, 2,646 employees of contractors at year-end 2013 and 2,435 employees of contractors at year-end 2012.

Mexico

In Mexico, approximately 61% of Ternium employees are unionized. Of these, approximately 44.7% of Mexico’s unionized workers are members of FENASA (“Federación Nacional de Asociaciones Sindicales Autónomas”), the national federation of autonomous union associations, and 55.3% are members of FNSI (“Federación Nacional de Sindicatos Independientes”), the national federation of independent unions. The unionized employees of Consorcio Peña Colorada, however, are members of Sindicato de Trabajadores Mineros, Metalúrgicos y Similares de la República Mexicana (Union of Mexican Republic Mine, Metal and Similar Workers). The applicable collective bargaining agreements are negotiated every two years and salary adjustments are made on an annual basis. Despite some social and union conflicts, Ternium’s Mexican subsidiaries maintain good relations with their labor force in Mexico and have never experienced a strike or work stoppage related to labor conflicts.

 

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Under Mexican law, companies are required to pay to their employees an annual benefit of 10% of their taxable income (profit sharing program), calculated similarly to income tax. Under Mexican law, Ternium Mexico is required to pay social security and tax contributions as follows: the company’s social security contributions are equal to 20.4% of the minimum salary plus additional contributions of around 24% over the employees’ total salary (subject to a cap); Ternium Mexico must also withhold an additional percentage for social security contributions (equal to 2.8%) from salaries up to a certain cap.

Under Mexican labor laws, when an employee is dismissed without cause or for a cause that is challenged by the employee, an employee (other than trust employees and those with less than one year of service) may choose to demand to be reinstated in his or her employment or to be paid severance which is equal to three months salary, plus accrued benefits, such as vacations, thirteenth month salary, and seniority bonus (“prima de antigüedad”) equal to twenty four days of regional minimum salary per each year of service. In the former case, if the Conciliation and Arbitration Board determines that even though dismissal was not properly grounded but reinstatement is not possible, employer must pay a dismissed employee back wages accrued during trial, severance equal to three months salary, plus accrued benefits, such as vacations, thirteenth month salary, seniority bonus (“prima de antigüedad”) equal to twenty four days of regional minimum salary per each year of service and additional compensation equal to twenty days per each year of service.

In Mexico, Ternium has defined benefit and defined contribution plans which are granted to employees depending on their commencement date, whether they are covered or not by a collective bargaining agreement and other factors. Defined benefit employee retirement plans (pensions and seniority premiums) are based primarily on years of service, present age and remuneration at the date of retirement. The formal retirement plans are congruent with and complementary to the retirement benefits established by the Mexican Institute of Social Security. In addition, some high level employees benefit from a plan to cover health-care expenses of retired employees. The defined contribution plans provide a benefit equivalent to the capital accumulated with the company’s contributions, which are provided as a match of employees’ contributions to the plan. The plan provides vested rights according to the years of service and cause of retirement. For further information see note 4(n) to our consolidated financial statements included elsewhere in this annual report.

Argentina

Most of Siderar’s employees are represented by the Argentine Metalworkers Union (the Unión Obrera Metalúrgica de la República Argentina (“UOM”) and are covered by a collective agreement that includes all workers in the Argentine steel industry. The employees are also covered by certain complementary collective agreements between Siderar and the UOM that define specific issues related to each or all plants, such as working structures, performance related compensation, productivity, production quantity and quality and Siderar’s results-related compensation. These agreements are subject to periodic modifications and are updated in relation to competitiveness, quality, safety and efficiency goals and to reflect inflation adjustments.

Many foremen of Siderar are represented by the Asociación de Supervisores de Industria Metalmecánica de la República Argentina (“ASIMRA”), the union of supervisors of different activities in the metal manufacturing industry. ASIMRA affiliated employees are covered by a collective agreement signed with Siderar that establishes regulations relating to salaries, working organization, absences, vacations, benefits and labor relations. This agreement is subject to periodic modifications and is updated in relation to the requirements of the production processes.

Nominal salaries in local currency have been increasing substantially, reflecting the economic situation of the country and inflation, and were the result of collective agreements entered into with the labor authorities’ involvement. Negotiations on salaries between the employers’ entity representing steel companies in the collective bargaining —including Siderar— and the steelworkers unions are made on an annual basis.

We believe that Siderar maintains good relations with its unions.

Under Argentine law, Siderar is required to pay an amount equal to up to 23% of its employees’ base salaries towards the social security system. Siderar must also withhold an additional percentage from salaries for contribution to such funds up to a certain amount. Part of those contributions finances a state-controlled pension system. There are no mandatory company-supported pension plans.

As part of the privatization process in 1992, 20% of Siderar’s shares were sold to former employees of the acquired state-owned company Somisa under the Programa de Propiedad Participada (the “Employee Stock Ownership Plan”). As of December 31, 2014 this participation decreased to 1.39% as a result of Siderar’s shares being sold in the market over time. For further information, see Item 4. “Information on the Company—C. Organizational Structure—Subsidiaries—Siderar.”

Under Argentine labor laws, when an employee is dismissed without cause, an employer must pay him or her severance equal to one month of its best, monthly and regular salary per each year of service or fraction of more than three months, subject to

 

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certain floors and caps. In addition, Siderar implemented an unfunded benefit plan for certain senior officers. The plan is designed to provide certain benefits (in addition to those contemplated under applicable Argentine labor laws) in case of termination of the employment relationship due to certain specified events, including retirement.

Colombia

Presently, approximately 3% of Ferrasa’s employees are unionized workers. Since October 2012, two unions have been acting at Ferrasa’s Barranquilla unit: the Sindicato Unitario de los Trabajadores de la Industria de Materiales para Construcción (“SUTIMAC”) and the Sindicato de Trabajadores y Empleados de la Empresa de Compra-Venta y Producción de Artículos de Construcción y Ferretería en General (“SINTRAFERRASA”).

Under Colombian labor laws, employers are required to pay its workers a monthly minimum wage, which is increased by the government on an annual basis in relation to the inflation rate in the country during the previous year. In addition, labor laws provide for the payment of transportation assistance and the supply of uniforms to those employees earning less than two minimum monthly salaries.

Under Colombian law, Ferrasa is required to pay an amount equal to 12.0% and to withhold an amount equal to 8.0% of an employee’s base salary as contributions to the social security system. A cap of twenty-five minimum wages is applicable for calculating the contributions in case of salaries exceeding such amount of minimum wages. Those contributions finance a state-controlled pension system. There are no mandatory company-supported pension plans.

In addition, Ferrasa is required to pay amounts equal to 2%, 4% and 3% of an employee’s base salary, respectively, to SENA (a national workers training body), to one Caja de Compensación Familiar (funds that subsidize families), and to the Instituto Colombiano de Bienestar Familiar (Colombian welfare institute).

Under Colombian labor laws, when an employee having a fixed-term contract is dismissed without cause, an employer must pay him or her severance equivalent to the remaining wages to reach the earnings stipulated in the employee’s contract term, and when an employee having an open-end contract is dismissed without cause, an employer must pay him or her severance according to the employee’s earnings level and time of service.

 

E. Share Ownership

To our knowledge, the total number of shares of the Company (including in the form of ADSs) owned by our directors and executive officers as of March 31, 2015 was 831,560, which represents 0.04% of our issued and outstanding shares. The following table provides information regarding share ownership by our officers and directors.

 

Director or Officer

   Number of Shares
Held
 

Adrián Lajous

     740,560   

Martín Berardi

     76,000   

Rodrigo Piña

     15,000   

Total

     831,560   
  

 

 

 

 

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Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

The following table shows the beneficial ownership of our securities (in the form of shares or ADSs) by (1) the Company’s major shareholders (persons or entities that own beneficially 5% or more of the Company’s shares), (2) non-affiliated public shareholders, and (3) the Company’s directors and senior management as a group. The information below is based on the most recent information available to the Company.

 

Identity of Person or Group

   Number      Percent  

Techint Holdings S.à r.l. and subsidiaries (1)

     1,243,433,112         62.02

Tenaris (1)

     229,713,194         11.46

Ternium (2)

     41,666,666         2.08

Directors and Senior Management as a group

     831,560         0.04

Public

     489,098,910         24.40
  

 

 

    

 

 

 

Total

     2,004,743,442         100.00
  

 

 

    

 

 

 

 

(1) Each of Techint Holdings and Tenaris are controlled by San Faustin. RP STAK holds shares in San Faustin sufficient in number to control San Faustin and has the ability to influence matters affecting, or submitted to a vote of, the shareholders of San Faustin. No person or group of persons controls RP STAK.
(2) Ternium holds its own shares through its wholly-owned subsidiary Ternium International Inc.

As of March 31, 2015, 48,993,047 ADSs (representing 489,930,470 shares, or 24% of all outstanding shares of the Company) were registered in the name of three record holders resident in the United States, as informed by BNY Mellon.

The voting rights of our principal shareholders do not differ from the voting rights of other shareholders. We are not aware of any arrangement which may at a later date result in a change of control of the Company.

 

B. Related Party Transactions

Ternium is a party to several related party transactions as described in note 25 to our consolidated financial statements included elsewhere in this annual report. Material related party transactions are subject to the review of the audit committee of the Company’s board of directors and the requirements of Luxembourg law. For further detail on the approval process for related party transactions, see Item 6. “Directors, Senior Management and Employees—C. Board Practices—Audit Committee.” Below is a description of relevant related party transactions.

Purchases of Raw Materials

In the ordinary course of business, Ternium buys raw materials and other production inputs from subsidiaries of Tenaris. These purchases are made on similar terms and conditions as those for purchases made by the Ternium companies from unrelated third parties. These transactions include:

 

 

purchase of ferrous scrap and other raw material, which amounted to USD27.8 million in 2014, USD27.4 million in 2013 and USD34.5 million in 2012; and

 

 

purchase of steam and operational services from the Argentine electric power generating facility of Siderca for Siderar in San Nicolás. These purchases amounted to USD2.0 million in 2014, USD12.0 million in 2013 and USD10.0 million in 2012.

In addition, Ternium buys iron ore from Consorcio Peña Colorada, which is jointly owned (50% / 50%) by Ternium and ArcelorMittal. These purchases amounted to USD114.3 million in 2012. Starting on January 1, 2013, and in connection with certain new agreements, Ternium began to proportionally consolidate Consorcio Peña Colorada’s assets, liabilities, revenue and expenses.

Purchases of Steel Products

In the ordinary course of business, Ternium buys steel products from Usiminas and its subsidiaries. Purchases amounted to USD58.3 million in 2014, USD109.3 million in 2013 and USD198.9 million in 2012. These purchases are made on similar terms and conditions to those purchases made by the Ternium companies from unrelated third parties.

Sales of Steel Products and Raw Materials

In the ordinary course of business, Ternium sells steel products and raw materials to subsidiaries of Tenaris. These transactions include:

 

 

sales of round steel bars done under a long-term agreement to Tenaris’ facilities in Mexico, which amounted to USD170.4 million in 2014, USD156.7 million in 2013 and USD163.1 million in 2012;

 

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sales of flat steel products to be used in the production of welded pipes and accessories, which amounted to USD49.7 million in 2014, USD50.5 million in 2013 and USD52.4 million in 2012; and

 

 

sales of metal building components for a new rolling mill, which amounted to USD2.9 million in 2014 and USD2.9 million in 2013.

All these sales are made on similar terms and conditions as those for sales made by Ternium to unrelated third parties.

Agency Services Fees

Exiros, which is jointly owned (50% / 50%) by Ternium and Tenaris, through its network of companies, provides purchase agency services to us.

In connection with Exiros’s services, Ternium paid fees amounting to USD30.8 million in 2012. Starting on January 1, 2013, and in connection with an amendment in the shareholders agreement, Ternium began to proportionally consolidate Exiros’s assets, liabilities, revenue and expenses.

Supply of Natural Gas

Ternium Mexico has natural gas supply agreements with GIMSA, a natural gas distributor and a company in which Ternium Mexico holds 23.44% equity participation. GIMSA sales to Ternium Mexico amounted to USD141.8 million in 2014, USD118.8 million in 2013 and USD87.4 million in 2012.

Siderar has natural gas supply agreements with Tecpetrol and Energy Consulting Services, natural gas transportation agreements with TGN, and natural gas distribution agreements with Litoral Gas. Tecpetrol is a company controlled by San Faustin, engaged in oil and gas exploration and production and has rights to various oil and gas fields in Argentina and elsewhere in Latin America. TGN operates two major pipelines in Argentina connecting the major gas basins of Neuquén and Noroeste-Bolivia to the major consumption centers in Argentina. Litoral Gas is a company that holds the regional license for gas distribution in the Province of Santa Fe and in the northeastern section of the Province of Buenos Aires. Energy Consulting Services is a company engaged in energy and management consulting, representing one of the major and most reliable natural gas traders in Argentina. San Faustin holds significant but non-controlling interests in TGN, Litoral Gas and Energy Consulting Services.

Tecpetrol supplies natural gas at prices and on terms and conditions that are equivalent to those charged by Siderar’s other suppliers of natural gas. Tecpetrol’s sales to Siderar amounted to USD0.4 million in 2014, USD2.3 million in 2013 and USD4.1 million in 2012.

TGN charges Siderar a price to transport its natural gas supplies that is equivalent, on a comparable basis, to prices paid by other industrial users. The Argentine government regulates the framework under which TGN operates and prices its services. TGN’s sales to Siderar amounted to USD1.0 million in 2014, USD1.3 million in 2013 and USD1.6 million in 2012.

Litoral Gas distributes gas to Siderar’s northern plants. The Argentine government regulates the framework under which Litoral Gas operates and establishes a maximum price for its distribution service. Litoral Gas’ sales to Ternium totaled USD1.6 million in 2014, USD2.1 million in 2013 and USD2.0 in 2012.

Energy Consulting Services provides Siderar with natural gas at market prices. Energy Consulting Services sales amounted to USD11.5 million in 2014, USD7.2million in 2013 and USD2.5 million in 2012.

Provision of Engineering and Labor Services

Ternium contracts with certain companies controlled by San Faustin specialized in supplying engineering services, construction services, labor and supervision services, for civil and electromechanical works, and cleaning, general maintenance and handling of by-products services. Fees accrued for these services amounted to USD123.4 million in 2014, USD227.1 million in 2013 and USD240.6 million in 2012.

Sales and Purchases of Other Products and Services

Ternium enters into other transactions with companies controlled by San Faustin from time to time. The most important ones include:

 

 

purchases of plant equipment and spare parts, and technical assistance from Tenova S.p.A. and from other related companies, which amounted to USD5.6 million in 2014, USD39.0 million in 2013 and USD22.7 million in 2012; and

 

 

purchases of steel products from Tenaris’ subsidiaries, which amounted to USD1.9 million in 2014, USD1.8 million in 2013 and USD2.5 million in 2012

 

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Administrative Services

Finma S.A., Arhsa S.A. and Techinst S.A., a group of companies controlled by San Faustin in which the Company has a 33% share ownership and other affiliates of San Faustin have the remaining share ownership, provide administrative and legal support services to San Faustin’s affiliates in Argentina, including Argentine affiliates of Ternium. Fees accrued for these services amounted to USD11.3 million in 2014, USD11.9 million in 2013 and USD11.8 million in 2012.

Loans to Related Parties

During 2014, the Company financed Techgen’s Pesquería project primarily in the form of subordinated loans to Techgen, which generated interest gains in favor of Ternium in an amount of USD1.0 million. Such loans were fully repaid during 2014. For more information on the Techgen investment, see Item 4. “Organizational Structure—Other investments—Techgen”.

Other income from Related Parties

Ternium sold software systems and provided technical assistance to Usiminas in an amount of USD3.2 million in 2014 and USD4.6 million in 2013.

Dividends from Related Parties

Ternium received dividend payments from Usiminas in an amount of USD1.9 million in 2014 and USD4.7 million in 2012.

Other Transactions

In addition, in the ordinary course of business, from time to time, we carry out other transactions and enter into other arrangements with other related parties, none of which are considered to be material.

 

C. Interest of Experts and Counsel

Not applicable.

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

See Item 18 and pages F-1 through F-73 for our consolidated financial statements.

Legal Proceedings

Outstanding Legal Proceedings

The following legal proceedings were outstanding as of the date of this report:

Claims related to CSN

In 2013, the Company was notified of a lawsuit filed in Brazil by CSN, and various of its affiliated entities against Company’s subsidiaries Ternium Investments, Siderar and Prosid, and against TenarisConfab (a Brazilian subsidiary of Tenaris S.A.), alleging that under applicable Brazilian laws and rules, they were required to launch a tag-along tender offer to all minority holders of Usiminas ordinary shares. The entities named in the CSN lawsuit had acquired a participation in Usiminas in January 2012. The CSN lawsuit alleges that, under applicable Brazilian laws and rules, the acquirers were required to launch a tag-along tender offer to all minority holders of Usiminas ordinary shares for a price per share equal to 80% of the price per share paid in such acquisition, or BRL28.8, and seeks an order to compel the acquirers to launch an offer at that price plus interest. If so ordered, the offer would need to be made to holders of 182,609,851 ordinary shares of Usiminas not belonging to Usiminas’ control group; the respective shares of Ternium Investments and Siderar (together with Prosid) in the offer would be 60.6% and 21.5%. On September 23, 2013, the first instance court issued its decision finding in favor of the defendants and dismissing the CSN lawsuit. The claimants appealed the court’s decision, and the defendants filed their response to the appeal. It is currently expected that the court of appeals will issue its judgment on the appeal sometime in 2015.

 

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In addition, Ternium is aware that on November 10, 2014, CSN filed a separate complaint with Brazil’s securities regulator Comissão de Valores Mobiliários (CVM) on the same grounds and with the same purpose as the lawsuit referred to above. The CVM proceeding is underway and the Company has not yet been served with process or requested to provide its response. Finally, on December 11, 2014, CSN filed a claim with Brazil’s antitrust regulator Consejo Administrativo de Defesa Econômica (CADE). In its claim, CSN alleges that the antitrust clearance request related to the January 2012 acquisition, which was approved by CADE without restrictions in August 2012, contained a false and deceitful description of the acquisition aimed at frustrating the minority shareholders’ right to a tag-along tender offer, and requests that CADE investigate and reopen the antitrust review of the acquisition and suspend Ternium’s voting rights with respect to the shares in Usiminas until the review is completed. The case is currently under review by CADE’s Administrative Tribunal.

Ternium believes that all of CSN’s claims and allegations are groundless and without merit, as confirmed by several opinions of Brazilian legal counsels and previous decisions issued by CVM (including CVM’s determination in February 2012 that the above mentioned acquisition did not trigger any tender offer requirement) and, subsequently, the first instance court decision issued on September 23, 2013, discussed above. Accordingly, no provision was recorded in the consolidated financial statements included elsewhere in this annual report.

Claims relating to the October 2014 acquisition of Usiminas shares

On April 14, 2015, the staff of the CVM determined that Ternium’s October 2014 acquisition of 51.4 million ordinary shares of Usiminas from PREVI triggered a requirement under applicable Brazilian laws and regulations for Usiminas’ controlling shareholders to launch a tender offer to all non-controlling holders of Usiminas ordinary shares. The CVM staff’s determination was made further to a request by NSSMC and its affiliates, who alleged that Ternium’s 2014 acquisition had exceeded a threshold that triggers the tender offer requirement. In the CVM staff’s view, the 2014 acquisition exceeded the applicable threshold by 5.2 million shares. On April 29, 2015, Ternium filed an appeal before the CVM’s Board of Commissioners, which would stay the effects of the staff’s decision until such Board rules on the matter. In the event the appeal is not successful, under applicable CVM rules Ternium may elect to sell to third parties the 5.2 million shares allegedly acquired in excess of the threshold, in which case no tender offer would be required.

Tax matters relating to Siderar

The Administración Federal de Ingresos Públicos, or 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 USD11.4 million as of December 31, 2014. Siderar appealed each of these assessments before the National Tax Court, which, in successive rulings, reduced each of the assessments made by the AFIP. The National Tax Court decisions were, however, further appealed by both Siderar and the AFIP. On May 5, 2014, Siderar was notified of a new National Tax Court ruling approving the AFIP’s assessment for fiscal year 1997 in an amount of approximately USD0.8 million (including principal and interest); as the Tax Court did not grant a stay with respect to this decision, Siderar has paid the full amount of the ruling and has reserved its right to seek reimbursement of that payment.

Based on the recent National Tax Court decision, management believes that there could be an additional potential cash outflow in connection with this assessment and, as a result, Siderar recognized a provision which, as of December 31, 2014, amounts to USD0.6 million.

Potential Mexican income tax adjustment

In March 2015, the Mexican tax authorities, as part of a tax audit to Ternium Mexico with respect to fiscal year 2008, challenged the deduction by Ternium Mexico’s predecessor IMSA Acero of a tax loss arising from an intercompany sale of shares in December 2008. Although the tax authorities have not yet determined the amount of their claim, they have indicated in a preliminary report that they have observations that may result in an income tax adjustment currently estimated at approximately USD34 million, plus interest and fines. Ternium Mexico requested an injunction from the Mexican courts against the audit observations, and also filed its defense and supporting documents with the Mexican tax authorities. The Company, based on the advice of counsel, believes that an unfavorable outcome in connection with this matter is not probable and, accordingly, no provision has been recorded in its financial statements.

 

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Dividend Policy

We do not have, and have no current plans to establish, a formal dividend policy governing the amount and payment of dividends or other distributions. The amount and payment of dividends will be determined by a simple majority vote at a general shareholders’ meeting, typically, but not necessarily, based on the recommendation of the Company’s board of directors. All shares of the Company’s share capital rank pari passu with respect to the payment of dividends.

The following table shows the dividends approved by the Company’s shareholders since its incorporation:

 

Shareholders’ meeting
date

  Approved dividend   Dividend payment
date
  Amount
(USD
million)
  Per share
(USD)
  Per ADS
(USD)
 
June 6, 2007   100.2   0.050   0.50   June 12, 2007
June 4, 2008   100.2   0.050   0.50   June 12, 2008
June 3, 2009   —     —     —     n/a
June 2, 2010   100.2   0.050   0.50   June 10, 2010
June 1, 2011   150.4   0.075   0.75   June 9, 2011
May 2, 2012   150.4   0.075   0.75   May 10, 2012
May 2, 2013   130.3   0.065   0.65   May 10, 2013
May 7, 2014   150.4   0.075   0.75   May 16, 2014

In addition, Ternium’s board of directors proposed that an annual dividend of USD0.090 per share (USD0.90 per ADS), or approximately USD180.4 million in the aggregate (including the shares held by Ternium), be approved at the Company’s annual general shareholders’ meeting, which is scheduled to be held on May 6, 2015. If the annual dividend is approved at the shareholders’ meeting, it will be paid on May 15, 2015.

We conduct all of our operations through subsidiaries and, accordingly, our main source of cash to pay dividends is the dividends received from our subsidiaries. See Item 3. “Key Information—D. Risk Factors—Risks Relating to the Structure of the Company—As a holding company, the Company’s ability to pay cash dividends depends on the results of operations and financial condition of its subsidiaries and could be restricted by legal, contractual or other limitations.” These dividend payments will likely depend on our subsidiaries’ results of operations, financial condition, cash and capital requirements, future growth prospects and other factors deemed significant by their respective boards of directors, as well as on any applicable legal restrictions. See Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—Argentina” and Item 10. “Additional Information—B. Memorandum and Articles of Association—Dividends” for a discussion of the current restrictions on the payment of dividends.

Pursuant to our articles of association, the board of directors has the power to distribute interim dividends in accordance with applicable Luxembourg law, but dividend payments must be approved by our shareholders at the annual general meeting, subject to the approval of our annual accounts. Dividends may be lawfully declared and paid if our net profits and distributable reserves are sufficient under Luxembourg law.

Under Luxembourg law, at least 5% of our net profits per year must be allocated to the creation of a legal reserve until such reserve has reached an amount equal to 10% of our issued share capital. If the legal reserve later falls below the 10% threshold, at least 5% of net profits again must be allocated toward the reserve. The Company’s legal reserve represented 10% of its share capital as of December 31, 2014. The legal reserve is not available for distribution.

 

B. Significant Changes

Except as otherwise disclosed in this annual report, there has been no undisclosed significant change since the date of the annual financial statements.

Item 9. The Offer and Listing

 

A. Offer and Listing Details

The Company’s ADSs are listed on the New York Stock Exchange, or NYSE, under the symbol “TX.” Trading on the NYSE began on February 1, 2006. As of March 31, 2015, a total of 2,004,743,442 shares were registered in the Company’s shareholder register.

 

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As of March 31, 2015, a total of 489,930,470 shares were registered on behalf of Euroclear and Clearstream, mostly related to the Company’s ADR program. On March 31, 2015, the closing price for the Company’s ADSs reported by the NYSE was USD18.07.

New York Stock Exchange

As of March 31, 2015, a total of 48,993,047 ADSs were registered of record. Each ADS represents 10 shares of the Company’s share capital. BNY Mellon acts as the Company’s depositary for issuing ADRs evidencing the ADSs. The following tables set forth, for the periods indicated, the high and low daily quoted prices for the Company’s shares, in the form of ADSs, as reported by the NYSE.

 

     Price per ADS  

Five Most Recent Full Financial Years

   High      Low  

2010

     43.07         29.16   

2011

     43.26         15.54   

2012

     24.86         17.63   

2013

     31.30         19.21   

2014

     32.24         16.22   

 

     Price per ADS  

Full Financial Quarters since 2013

   High      Low  

First quarter 2013

     24.02         19.61   

Second quarter 2013

     24.42         19.21   

Third quarter 2013

     25.48         21.76   

Fourth quarter 2013

     31.30         24.27   

First quarter 2014

     32.24         27.40   

Second quarter 2014

     30.52         26.36   

Third quarter 2014

     29.83         24.00   

Fourth quarter 2014

     23.76         16.22   

First quarter 2015

     18.83         15.85   

 

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     Price per ADS  

Last Six Months

   High      Low  

October 2014

     23.76         19.73   

November 2014

     22.28         19.65   

December 2014

     20.30         16.22   

January 2015

     17.53         15.85   

February 2015

     18.79         17.00   

March, 2015

     18.83         17.11   

 

B. Plan of Distribution

Not applicable.

 

C. Markets

See “—A. Offer and Listing Details.”

 

D. Selling Shareholders

Not applicable.

 

E. Dilution

Not applicable.

 

F. Expenses of the Issue

Not applicable.

Item 10. Additional Information

 

A. Share Capital

Not applicable.

 

B. Memorandum and Articles of Association

General

The following is a summary of certain rights of holders of the Company’s shares. These rights are set out in the Company’s articles of association or are provided by applicable Luxembourg law, and may differ from those typically provided to shareholders of U.S. companies under the corporation laws of some states of the United States of America. This summary is not exhaustive and does not contain all information that may be important to you. For more complete information, you should read the Company’s articles of association, which are attached as an exhibit to this annual report.

The Company is a public limited liability company (société anonyme) organized under the laws of Luxembourg. Its object and purpose, as set forth in Article 2 of its articles of association, is the taking of interests, in any form, in corporations or other business entities, and the administration, management, control and development thereof. The Company is registered under the number B98 668 in the Registre du Commerce et des Sociétés.

The Company’s authorized share capital is fixed by the Company’s articles of association, as amended from time to time, with the approval of shareholders at an extraordinary general shareholders’ meeting. 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. The general extraordinary meeting of shareholders held on June 2, 2010, renewed the validity of the Company’s authorized share capital until July 15, 2015. A further renewal will be submitted for the consideration of the Company’s general extraordinary meeting of shareholders to be held on May 6, 2015 or any adjournment thereof. As of March 31, 2015, there were 2,004,743,442 shares issued. All issued shares are fully paid.

 

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The Company’s articles of association authorized the board of directors or any delegate(s) duly appointed by the board of directors, to issue shares within the limits of its authorized share capital against contributions in cash, contributions in kind or by way of incorporation of available reserves, at such times and on such terms and conditions as the board of directors or its delegates may determine. The extraordinary general meeting of shareholders held on June 2, 2010 renewed this authorization through July 15, 2015. A further renewal will be submitted for the consideration of the Company’s general extraordinary meeting of shareholders to be held on May 6, 2015 or any adjournment thereof.

The Company’s shareholders have authorized the board of directors to waive, suppress or limit any pre-emptive subscription rights of shareholders provided for by law to the extent it deems such waiver, suppression or limitation advisable for any issue or issues of shares within the authorized share capital. However, if and from the date the Company’s shares are listed on a regulated market (and only for as long as they are so listed), any issuance of shares for cash within the limits of the authorized share capital shall be subject to the pre-emptive subscription rights of the then existing shareholders (as set out in the articles of association), except in the following cases (in which cases no pre-emptive rights shall apply):

 

(a) any issuance of shares for, within, in conjunction with or related to, an initial public offering of the Company’s shares on one or more regulated markets (in one or more instances);

 

(b) any issuance of shares against a contribution other than in cash;

 

(c) any issuance of shares upon conversion of convertible bonds or other instruments convertible into shares; provided, however, that the pre-emptive subscription rights of the then existing shareholders shall apply by provision of the Company’s articles of association in connection with any issuance of convertible bonds or other instruments convertible into shares for cash; and

 

(d) any issuance of shares (including by way of free shares or at a discount), up to an amount of 1.5% of the issued share capital of the Company, to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries, or its Affiliates (as such term is defined in the Company’s articles of association), including without limitation the direct issue of shares upon the exercise of options, rights convertible into shares, or similar instruments convertible or exchangeable into shares issued for the purpose of, or in relation to, compensation or incentive for any such persons.

Dividends

Subject to applicable law, all shares (including shares underlying ADSs) are entitled to participate equally in dividends when, as and if declared by the shareholders at the ordinary general shareholders’ meeting, out of funds legally available for such purposes. Under Luxembourg law, claims for dividends will lapse five years after the date such dividends are declared. However, we may elect to pay a declared dividend after such period. The shareholders may, at the ordinary general shareholders’ meeting, which every shareholder has the right to attend in person or by proxy, declare a dividend under Article 21 of the Company’s articles of association.

Under Article 21 of the articles of association, the Company’s board of directors has the power to distribute interim dividends in accordance with the conditions that apply to commercial companies set forth in particular in Section 72-2 of the Luxembourg law of August 10, 1915, on commercial companies.

Pursuant to Luxembourg law, at least 5% of our net profits per year must be allocated to the creation of a legal reserve until such reserve has reached an amount equal to 10% of our issued share capital. If the legal reserve later falls below the 10% threshold, at least 5% (or such lower amount required to reach the 10% threshold) of net profits again must be allocated toward the reserve. The Company’s legal reserve represented 10% of its share capital as of December 31, 2014. The legal reserve is not available for distribution.

Voting Rights; Shareholders’ Meetings; Election of Directors

Each share entitles the holder to one vote at the Company’s general shareholders’ meetings. Shareholder action by written consent is not permitted, but proxy voting is permitted. Notices of general shareholders’ meetings are governed by the provisions of Luxembourg law and the Company’s articles of association. Notices of such meetings must be published twice, at least at eight-day intervals, the second notice appearing at least eight days prior to the meeting, in the Luxembourg Official Gazette and in a leading newspaper having general circulation in Luxembourg. If an extraordinary general shareholders’ meeting is adjourned for lack of a quorum, notices must be published twice, in the Luxembourg Official Gazette and two Luxembourg newspapers, at 15-day intervals, the second notice appearing at least 15 days prior to the meeting. In case the Company’s shares are listed on a foreign regulated market, notices of general shareholders’ meetings shall also be published in accordance with the publicity requirements of such regulated market. No attendance quorum is required at annual ordinary general shareholders’ meetings and resolutions are adopted by a simple majority vote of the shares present or represented and

 

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voted at the meeting. An extraordinary general shareholders’ meeting must have a quorum of at least 50% of the issued and outstanding shares. If a quorum is not reached, such meeting may be reconvened at a later date with no quorum requirements by means of the appropriate notification procedures provided for by Luxembourg company law. In both cases, Luxembourg company law and the Company’s articles of association require that any resolution of an extraordinary general shareholders’ meeting be adopted by a two-thirds majority vote of the shares present or represented. If a proposed resolution consists of changing the Company’s nationality or of increasing the shareholders’ commitments, the unanimous consent of all shareholders is required. Directors are elected at annual ordinary general shareholders’ meetings. Cumulative voting is not permitted. As the Company’s articles of association do not provide for staggered terms, directors are elected for a maximum of one year and may be reappointed or removed at any time, with or without cause, by resolution passed by a simple majority vote of the shares present or represented and voted. In the case of a vacancy occurring in the board of directors, the remaining directors shall have the right to temporarily fill such vacancy by the affirmative vote of a majority of the remaining directors. The term of a temporary director elected to fill a vacancy shall expire at the end of the term of office of the replaced director; provided however that the next shareholders’ meeting shall be called upon to proceed with the definitive election of any temporary member of the board of directors so elected.

The Company’s articles of association provide that annual ordinary general shareholders’ meetings, at which its annual financial statements are approved and the members of its board of directors are appointed, must take place in Luxembourg on the first Wednesday of every May at 2:30 p.m., Luxembourg time. If that day is a legal or banking holiday in Luxembourg, the meeting shall be held on the following business day.

Any shareholder who holds one or more shares of the Company on the fifth calendar day preceding the general shareholders’ meeting (the “Record Date”) shall be admitted to a general shareholders’ meeting. Those shareholders who have sold their shares between the Record Date and the date of the general shareholders’ meeting may not attend or be represented at the meeting.

In the case of shares held through fungible securities accounts, each shareholder may exercise all rights attached to his shares and, in particular, may participate in and vote at shareholders’ meetings of the Company upon presentation of a certificate issued by the financial institution or professional depositary holding the shares, evidencing such deposit and certifying the number of shares recorded in the relevant account on the Record Date. Such certificate must be filed at least five days before the meeting with the Company at its registered address or at the address stated in the convening notice or, in case the shares of the Company are listed on a regulated market, with an agent of the Company located in the country of the listing and designated in the convening notice. In case any such holder wishes to vote by proxy, the holder shall have to present a completed proxy form together with the certificate previously referred, by the same date and time and at the same addresses.

The board of directors and the shareholders at the shareholders’ meeting may, if they deem so advisable, reduce these periods of time for all shareholders and admit all shareholders (or their proxies) who have filed the appropriate documents to the general shareholders’ meeting, irrespective of these time limits.

Holders of ADSs only have those rights that are expressly granted to them in the deposit agreement dated January 31, 2006 among the Company, BNY Mellon (formerly The Bank of New York), as depositary, and all owners and beneficial owners from time to time of ADRs of the Company. ADS holders may not attend or directly exercise voting rights in shareholders’ meetings, but may instruct the depositary on how to exercise the voting rights for the shares which underlie their ADSs.

Access to Corporate Records

Luxembourg law and the Company’s articles of association do not generally provide for shareholder access to corporate records. Shareholders may inspect the annual accounts and auditors’ reports at the Company’s registered office during the fifteen-day period prior to a general shareholders’ meeting.

Appraisal Rights

In case the shares of the Company are listed on one or more regulated markets, and in the event the shareholders, in a general meeting, approve any of the following:

 

 

the delisting of the Company’s shares from all regulated markets where the Company’s shares are listed at that time, excluding a delisting made pursuant to an offer to all of the Company’s shareholders made by a business entity subject to common control with the Company, whereby such business entity offers to issue, in exchange for the Company’s shares, shares to be listed on the same regulated market(s) on which the Company’s shares are listed;

 

 

a merger in which the Company is not the surviving entity (unless the shares or other equity securities of such entity are listed on the New York or London stock exchanges);

 

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a sale, lease, exchange or other disposition of all or substantially all of the Company’s assets;

 

 

an amendment to the Company’s articles of association that has the effect of materially changing its corporate purpose;

 

 

the relocation of the Company’s domicile outside the Grand Duchy of Luxembourg; or

 

 

amendments to the Company’s articles of association that restrict the rights of its shareholders (excluding any amendments in relation with, or to, the authorized share capital and/or the waiver or suppression of any preferential subscription rights relating thereto);

dissenting or absent shareholders have the right to have their shares repurchased by the Company at (i) the average market value of the shares over the 90 calendar days preceding the applicable general shareholders’ meeting or (ii) in the event that the Company’s shares are not traded on any regulated market, the amount that results from applying the proportion of the Company’s equity that the shares being sold represent over the Company’s net worth as determined in its last consolidated financial statements approved by the shareholders or in its last interim consolidated financial statements approved by the board of directors, whichever is more recent. Shareholders who voted in favor of the relevant resolution are not entitled to exercise this right.

Dissenting or absent shareholders must present their claim within one month following the date of the applicable general shareholders’ meeting and supply the Company with evidence of their shareholding at the time of such meeting. The Company must (to the extent permitted by applicable laws and regulations and in compliance therewith) repurchase its shares within six months following the date of the applicable general shareholders’ meeting. If delisting from one or more, but not all, of the regulated markets where the Company’s shares are listed is approved by the shareholders’ meeting, only dissenting or absent shareholders with shares held through participants in the local clearing system for that market or those markets can exercise this appraisal right if:

 

 

they held the shares as of the date of the announcement by the Company of its intention to delist or as of the date of publication of the first convening notice for the general shareholders’ meeting that approved the delisting;

 

 

they present their claim within one month following the date of the general shareholders’ meeting and supply evidence of their shareholding as of the date of the Company’s announcement or the publication of the first convening notice to the meeting; and

 

 

the delisting is not being made pursuant to an offer to all of the Company’s shareholders made by a business entity subject to common control with the Company, whereby such business entity offers to issue, in exchange for the Company’s shares, shares to be listed on the same regulated market(s) on which such dissenting or absent shareholders hold their shares through participants in the local clearing system for that market or markets.

In the event a shareholder exercises its appraisal right, applicable Luxembourg law provisions shall apply.

Distribution of Assets on Winding-up

In the event of the Company’s liquidation, dissolution or winding-up, the net assets remaining after allowing for the payment of all debts, charges and expenses shall be paid out to holders of the Company’s shares in proportion to their respective holdings.

Transferability and Form

The Company’s articles of association do not impose restrictions on the transfer of its shares. The shares are issuable in registered form only.

Pursuant to the Company’s articles of association, the ownership of registered shares is evidenced by the inscription of the name of the shareholder, the number of shares held by such shareholder and the amount paid on each share in the Company’s shareholders’ register. In addition, the Company’s articles of association provide that shares may be held through fungible securities accounts with financial institutions or other professional depositaries. Shares held through fungible securities accounts have the same rights and obligations as shares recorded in the Company’s shareholders’ register.

Shares held through fungible securities accounts may be transferred in accordance with customary procedures for the transfer of securities in book-entry form. Shares that are not held through fungible securities accounts may be transferred by a written statement of transfer signed by both the transferor and the transferee or their respective duly appointed attorney-in-fact and recorded in the Company’s shareholders’ register. The transfer of shares may also be made in accordance with the provisions of Article 1690 of the Luxembourg Civil Code. As evidence of the transfer of registered shares, the Company may also accept any correspondence or other documents evidencing the agreement between transferor and transferee as to the transfer of registered shares.

 

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Repurchase of Company Shares

The Company may repurchase its own shares in the cases and subject to the conditions set by the Luxembourg law of August 10, 1915, as amended, and, in the case of acquisitions of shares or ADSs made through the NYSE, with any applicable laws and regulations of such market. See Item 16.E “Purchases of Equity Securities by the Issuer and Affiliated Purchasers” for further information on the authorization granted on June 2, 2010, by the Company’s annual general shareholders’ meeting to the Company or its subsidiaries to repurchase the Company’s shares, including shares represented by ADRs. A further renewal on the authorization to repurchase Company’s shares will be submitted for the consideration of the Company’s annual general meeting of shareholders to be held on May 6, 2015 or any adjournment thereof.

Limitation on Securities Ownership

There are no limitations currently imposed by Luxembourg law or the articles of association on the rights of non-resident shareholders to hold or vote the Company’s shares.

Change in Control

None of our outstanding securities has any special control rights. The Company’s articles of association do not contain any provision that would have the effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company. In addition, the Company does not know of any significant agreements or other arrangements to which the Company is a party and which take effect, alter or terminate in the event of a change of control of the Company.

There are no rights associated with the Company’s shares other than those described above.

 

C. Material Contracts

For a summary of any material contract entered into by us outside of the ordinary course of business during the last two years, see Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

D. Exchange Controls

Many of the countries which are important markets for us or in which we have substantial assets have a history of substantial government intervention in currency markets, volatile exchange rates and government-imposed currency controls. These include Mexico and Argentina. For additional information regarding Ternium’s ability to hedge against exchange rate fluctuations, see Item 3. “Key Information—D. Risk Factors—Risks Relating to our Business—Changes in exchange rates or any limitation in the Ternium companies’ ability to hedge against exchange rate fluctuations could adversely affect Ternium’s business and results.” Currently, only Argentina has exchange controls or limitations on capital flows—including requirements for the repatriation of export proceeds—in place.

Mexico

Since 1994, the Mexican government has allowed the Mexican peso to float freely against the U.S. dollar. Since September 2008 until March 2009, the value of the Mexican peso against the U.S. dollar declined rapidly mainly as a consequence of the global economic downturn. Between March 2009 and June 2011, the Mexican peso partly recovered its losses mainly reflecting the subsequent recovery of economic activity. During the second half of 2014, the value of the Mexican peso against the U.S. dollar declined rapidly due to a global trend of U.S. dollar appreciation.

Historically, the Mexican economy has suffered balance of payment deficits and shortages in foreign exchange reserves. While the Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert Mexican pesos to U.S. dollars and the terms of NAFTA—to which Mexico is a signatory—generally prohibit exchange controls, the Mexican government could institute a restrictive exchange control policy in the future.

Argentina

At December 31, 2014, approximately 14% of Ternium’s consolidated net assets were located in Argentina.

Since 2002, the Argentine government has maintained a “dirty” flotation of the ARP/U.S.-dollar exchange rate, through frequent interventions in the market. In addition, the government has imposed several formal and informal foreign exchange

 

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restrictions affecting the free flow of capital. These restrictions have proven to change frequently, driven mainly by the intention of the government to control the volatility of the Argentine peso/U.S.-dollar exchange rate and to try to impede the flight of capital from Argentina. For additional information regarding factors affecting the Argentine economy, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—Argentina.” Since October 2011, the government has significantly raised the restrictions on the purchase of foreign currencies and transfers made abroad, mainly for investment and saving purposes, and in 2012, it reduced drastically the timeframe for repatriating the proceeds from the exports of goods and services into Argentina. The most relevant restrictions on foreign exchange transactions that may affect Ternium are described below.

Investments in foreign currency

As from July 2012, the Argentine Central Bank banned purchases of foreign currency for investment and saving purposes. Until that date, Ternium’s Argentine subsidiaries were entitled to transfer abroad up to USD2,000,000 per month, subject to clearance by the Argentine tax authorities. In January 2014, these restrictions were eased with respect to individuals only, who are now allowed to purchase foreign currency in very limited amounts.

Exports of Goods and Services

All proceeds from exports of goods and services must be repatriated and converted into Argentine pesos within the timeframes provided in the applicable regulations. In April 2012, timeframes were drastically shortened by the government. In the case of Ternium’s Argentine subsidiaries, the applicable timeframe is the earlier of 15 days after collection and 90 days from the shipment date. In the case of sales to affiliates, such timeframe was shortened to 30 days from the shipment date.

Imports of Goods

Since February 2012, customs clearances of imports of goods and remittances to pay for imports are subject to prior approval by the Argentine tax authorities and the Argentine Secretary of Commerce. The criteria for approval of import transactions are not determined in the applicable regulations. As a result of these measures, Ternium’s Argentine subsidiaries suffered delays in obtaining the necessary approvals for its imports of raw materials and equipment during September 2014 and October 2014. If Ternium’s Argentine subsidiaries fail to obtain the necessary approvals for their imports of raw materials and equipment, our production and growth projects in the country would be delayed or interrupted, affecting our results of operations, financial condition and net worth.

Imports of Services

Since April 2012, remittances to pay fees and royalties to foreign services providers or technology suppliers are conditioned upon the receipt of prior approval by the Argentine tax authorities when contracts exceed the aggregate value of USD100,000 or USD10,000 per installment, or if the value of the contract is not determined. In addition, since April 2012, when the beneficiary of the payment is an affiliate of the payer, or if such beneficiary or its bank account is located in a jurisdiction that is deemed non-cooperative for tax transparency purposes under Argentine law, the remittance is subject to prior Argentine Central Bank approval. Payments under services contracts with an annual value lower than USD100,000 are not subject to pre-approval. Approvals, where required, are discretionary and the approval process has proven to be lengthy.

Dividends and other distributions

Since February 2013, all remittances of dividends from Argentina must be approved by the Argentine tax authorities before the transfer is made. In addition, since mid-2012, Argentine authorities have applied informal limitations on remittances of dividends and other cash distributions from Argentina to foreign shareholders. As a result of these restrictions, Ternium’s Argentine subsidiaries may be unable to remit dividends from Argentina to its foreign shareholders, including Ternium.

Foreign Indebtedness

Foreign lending to Argentine companies (including Ternium’s Argentine subsidiaries) is subject to certain restrictions, including the following:

 

 

Proceeds from disbursements must be transferred into Argentina and converted into Argentine pesos;

 

 

30% of the disbursed funds must be deposited with a bank in Argentina in a non-assignable, non-interest bearing account for 365 days (unless the lender is a multilateral credit organization, an export agency or development bank eligible under Argentine Central Bank’s regulations, or if the funds have been disbursed under a facility to finance foreign trade or in the form of a primary offering of bonds registered and listed in Argentina, among other exceptions);

 

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No principal payments are allowed for a period of one year following the disbursement (except in the case of foreign trade financing facilities and primary offering of bonds registered and listed in Argentina);

 

 

Mandatory and voluntary pre-payments are severely restricted; and

 

 

Since February 2013, all remittances to cancel interest must be approved by the Argentine tax authorities.

Colombia

Under Colombian foreign exchange regulations, payments in foreign currency related to certain foreign exchange transactions must be conducted through the commercial exchange market, by means of an authorized financial intermediary, and declaring the payment to the Colombian Central Bank. This mechanism applies to payments in connection with, among others, imports and exports of goods, foreign loans and related financing costs, investment of foreign capital and the remittances of profits thereon, investment in foreign securities and assets and endorsements and guarantees in foreign currency. Transactions through the commercial exchange market are made at market rates freely negotiated with the authorized intermediaries.

 

E. Taxation

The following discussion of the material Luxembourg and U.S. federal income tax consequences of an investment in the Company’s ADSs is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This discussion does not address all possible tax consequences relating to an investment in the Company’s ADSs, such as the tax consequences under U.S. state and local tax laws.

Grand Duchy of Luxembourg

This section describes the material Luxembourg tax consequences of owning or disposing of ADSs.

You should consult your own tax advisor regarding the Luxembourg tax consequences of owning and disposing of ADSs in your particular circumstances.

As used herein, a “Luxembourg individual” means an individual resident in Luxembourg who is subject to personal income tax (impôt sur le revenu) on his or her worldwide income from Luxembourg or foreign sources, and a “Luxembourg corporate holder” means a company (that is, a fully taxable collectivité within the meaning of Article 159 of the Luxembourg Income Tax Law) resident in Luxembourg subject to corporate income tax (impôt sur le revenu des collectivités) on its worldwide income from Luxembourg or foreign sources. For the purposes of this summary, Luxembourg individuals and Luxembourg corporate holders are collectively referred to as “Luxembourg Holders.” A “non-Luxembourg Holder” means any investor in ADSs of the Company other than a Luxembourg Holder.

Corporate reorganization

The Company was established as a Luxembourg société anonyme holding 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 income tax and Luxembourg 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.

In light of the impending termination of Luxembourg’s 1929 holding company regime, in the fourth quarter of 2010, the Company carried out a multi-step corporate reorganization, which included, among other transactions, the contribution of all of the Company’s assets and liabilities to a wholly-owned, newly-incorporated Luxembourg subsidiary and the restructuring of indirect holdings in certain subsidiaries. The reorganization was completed in December 2010, and resulted in a non-taxable revaluation of the accounting value (under Luxembourg GAAP) of the Company’s assets, in accordance with the applicable legal provisions.

Following the completion of the corporate reorganization, and upon its conversion into an ordinary Luxembourg holding company, the Company recorded a special reserve in its tax balance sheet. Dividend distributions for the foreseeable future will be imputed to the special reserve and therefore should not be subject to Luxembourg withholding tax under current Luxembourg law. See note 1 to our consolidated financial statements included elsewhere in this annual report.

 

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Tax regime applicable to realized capital gains

Luxembourg Holders

Luxembourg resident individual holders

Capital gains realized by Luxembourg resident individuals who do not hold their ADSs as part of a commercial or industrial business and who hold no more than 10% of the share capital of the Company will only be taxable if they are realized on a sale of ADSs that takes place before their acquisition or within the first six months following their acquisition.

If such ADSs are held as part of a commercial or industrial business, capital gains would be taxable in the same manner as income from such business.

Capital gains realized by Luxembourg resident individuals holding (together with his/her spouse and underage children) directly or indirectly more than 10% of the capital of the Company2 will be taxable at a progressive rate, if a holding period of six months following their acquisition elapsed. Within the six month period, standard rates apply.

Luxembourg resident corporate holders

Capital gains realized upon the disposal of ADSs by a fully taxable resident corporate holder will in principle be subject to corporate income tax and municipal business tax. The combined applicable rate (including an unemployment fund contribution) is 29.22% for the fiscal year ending 2013 and 2014 for a corporate holder established in Luxembourg-City. An exemption from such taxes may be available to the holder pursuant to Article 1 of the Grand Ducal Decree dated December 21, 2001 in combination with article 166 of the Luxembourg Income Tax Law subject to the fulfillment of the conditions set forth therein.

Non-Luxembourg Holders

An individual who is a non-Luxembourg Holder of ADSs (and who does not have a permanent establishment, a permanent representative or a fixed place of business in Luxembourg) will only be subject to Luxembourg taxation on capital gains arising upon disposal of such ADSs if such holder has (together with his or her spouse and underage children) directly or indirectly held more than 10% of the capital of the Company at any time during the past five years, and either (i) such holder has been a resident of Luxembourg for tax purposes for at least 15 years and has become a non-resident within the last five years preceding the realization of the gain, subject to any applicable tax treaty, or (ii) the disposal of ADSs occurs within six months from their acquisition (or prior to their actual acquisition), subject to any applicable tax treaty.

A corporate non-Luxembourg Holder (that is, a collectivité within the meaning of Article 159 of the Luxembourg Income Tax Law), which has a permanent establishment, a permanent representative or a fixed place of business in Luxembourg to which ADSs are attributable, will bear Luxembourg corporate income tax and municipal business tax on a gain realized on a disposal of such ADSs as set forth above for a Luxembourg corporate holder. However, gains realized on the sale of the ADSs may benefit from the full exemption provided for by Article 1 of the Grand Ducal Decree dated December 21, 2001 in combination with Article 166 of the Luxembourg Income Tax Law subject in each case to fulfillment of the conditions set out therein.

A corporate non-Luxembourg Holder, which has no permanent establishment in Luxembourg to which the ADSs are attributable, will bear corporate income tax on a gain realized on a disposal of such ADSs under the same conditions applicable to an individual non-Luxembourg Holder, as set out above.

 

2  Or if the Luxembourg resident individuals have received the shares for no consideration within the last five years and the former holder held at least 10% in the capital of the company at any moment during said five years.

 

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Tax regime applicable to distributions

Withholding tax

Distributions to holders are in principle subject to a 15% withholding tax computed on the gross amount distributed. The rate of the withholding tax may be reduced pursuant to double tax treaty existing between Luxembourg and the country of residence of the relevant holder, subject to the fulfillment of the conditions set forth therein. However, distributions imputed for tax purposes to the special reserve (please see above paragraph “corporate reorganization”) should be out of the scope of Luxembourg withholding tax under the current tax law.

Nevertheless, no withholding tax applies if the distribution is made to (i) a Luxembourg resident corporate holder (that is, a fully taxable collectivité within the meaning of Article 159 of the Luxembourg Income Tax Law), (ii) an undertaking of collective character which is resident of a Member State of the European Union and is referred to by article 2 of the European Union Council Directive of November 30th, 2011 concerning the common fiscal regime applicable to parent and subsidiary companies of different member states (2011/96/UE), (iii) a corporation or a cooperative company resident in Norway, Iceland or Liechtenstein and subject to a tax comparable to corporate income tax as provided by the Luxembourg Income Tax Law, (iv) a company resident in Switzerland which is subject to corporate income tax in Switzerland without benefiting from an exemption, (v) an undertaking with a collective character subject to a tax comparable to corporate income tax as provided by the Luxembourg Income Tax Law which is resident in a country that has concluded a double tax treaty with Luxembourg and (vi) a Luxembourg permanent establishment of one of the above-mentioned categories, provided each time that at the date of payment, the holder holds or commits to hold directly (or through a vehicle regarded as tax transparent from a Luxembourg tax perspective), during an uninterrupted period of at least twelve months, ADSs representing at least 10% of the share capital of the Company or acquired for an acquisition price of at least EUR1,200,000.

Luxembourg Holders

With the exception of Luxembourg corporate holders benefiting from the exemption referred to above, Luxembourg individual holders, and Luxembourg corporate holders subject to Luxembourg corporate tax, must include the distributions paid on the ADSs in their taxable income, 50% of the amount of such dividends being exempt from tax. The applicable withholding tax can, under certain conditions, entitle the relevant Luxembourg Holder to a tax credit.

Net wealth tax

Luxembourg Holders

Luxembourg net wealth tax will not be levied on a Luxembourg Holder with respect to the ADSs held unless (i) the Luxembourg Holder is a legal entity subject to net wealth tax in Luxembourg; or (ii) the ADSs are attributable to an enterprise or part thereof which is carried on through a permanent establishment, a fixed place of business or a permanent representative in Luxembourg.

Net wealth tax is levied annually at the rate of 0.5% on the net wealth of enterprises resident in Luxembourg, as determined for net wealth tax purposes. The ADSs may be exempt from net wealth tax subject to the conditions set forth by Paragraph 60 of the Law of October 16, 1934 on the valuation of assets (Bewertungsgesetz), as amended.

Non-Luxembourg Holders

Luxembourg net wealth tax will not be levied on a non-Luxembourg Holder with respect to the ADSs held unless the ADSs are attributable to an enterprise or part thereof which is carried on through a permanent establishment or a permanent representative in Luxembourg.

Stamp and registration taxes

No registration tax or stamp duty will be payable by a holder of ADSs in Luxembourg solely upon the disposal of ADSs by sale or exchange.

Estate and gift taxes

No estate or inheritance tax is levied on the transfer of ADSs upon the death of a holder of ADSs in cases where the deceased was not a resident of Luxembourg for inheritance tax purposes and no gift tax is levied upon a gift of ADSs if the gift is not passed before a Luxembourg notary or recorded in a deed registered in Luxembourg.

 

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Where a holder of ADSs is a resident of Luxembourg for tax purposes at the time of his death, the ADSs are included in its taxable estate for inheritance tax or estate tax purposes.

United States federal income taxation

This section describes the material U.S. federal income tax consequences to a U.S. holder (as defined below) of owning ADSs. It applies to you only if you hold your ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

 

 

a dealer in securities,

 

 

a bank,

 

 

a trader in securities that elects to use a mark-to-market method of accounting for securities holdings,

 

 

a tax-exempt organization,

 

 

a person who invests through a pass-through entity, including a partnership,

 

 

a life insurance company,

 

 

a person liable for alternative minimum tax,

 

 

a former citizen or long-term resident of the United States,

 

 

a person that actually or constructively owns 10% or more of our voting stock (including ADSs),

 

 

a person that holds ADSs as part of a straddle or a hedging or conversion transaction,

 

 

a person that purchases or sells ADSs as part of a wash sale for tax purposes, or

 

 

a person whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the assumption that each obligation in the ADS deposit agreement and any related agreement will be performed in accordance with its terms.

If a partnership holds the ADSs, the U.S. federal income tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Each such partner holding the ADSs is urged to consult his, her or its own tax advisor.

You are a U.S. holder if you are a beneficial owner of ADSs and you are, for U.S. federal income tax purposes:

 

 

an individual citizen or resident of the United States,

 

 

a domestic corporation,

 

 

an estate whose income is subject to U.S. federal income tax regardless of its source, or

 

 

a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (ii) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

You should consult your own tax advisor regarding the U.S. federal, state and local and other tax consequences of owning and disposing of ADSs in your particular circumstances.

This discussion addresses only U.S. federal income taxation.

In general, and taking into account the earlier assumptions, for U.S. federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to U.S. federal income tax.

 

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Taxation of dividends

Under the U.S. federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any distribution we pay out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) is subject to U.S. federal income taxation. If you are a noncorporate U.S. holder, dividends paid to you that constitute qualified dividend income will be taxable to you at the preferential rates applicable to long-term capital gains provided that you hold ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the ADSs generally will be qualified dividend income but there can be no assurance in this regard.

You must generally include any Luxembourg tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when the depositary receives the dividend, actually or constructively.

The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the ADSs and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).

The amount of any dividend paid in foreign currency will equal the U.S. dollar value of the foreign currency received calculated by reference to the exchange rate in effect on the date the dividend is received by the depositary, regardless of whether the foreign currency is converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.

Dividends will be income from sources outside the United States and will, depending on your circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to you. In certain circumstances, if you have held ADSs for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends that we pay.

Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to preferential rates. To the extent a refund of the tax withheld is available to you under Luxembourg law or under any applicable treaty, the amount of tax withheld that is refundable will not be eligible for credit against your U.S. federal income tax liability. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.

Taxation of capital gains

Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your ADSs, you will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your ADSs. Capital gain of a noncorporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

Additional U.S. Federal Income Tax Considerations

PFIC rules. Based on the Company’s expected income and assets, we believe that the ADSs should not be treated as stock of a PFIC for U.S. federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be treated as a PFIC, gain realized on the sale or other disposition of your ADSs would in general not be treated as capital gain. Furthermore , if you are a U.S. holder, unless you are permitted to elect and you do elect to be taxed annually on a mark-to-market basis with respect to the ADSs, upon sale or disposition of your ADSs, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your ADSs. Dividends that you receive from us and that are not treated as excess distributions will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.

 

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F. Dividends and Paying Agents

Not applicable.

 

G. Statement by Experts

Not applicable.

 

H. Documents on Display

We are required to file annual and special reports and other information with the SEC. You may read and copy any documents filed by the Company at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a website at http://www.sec.gov which contains reports and other information regarding registrants that file electronically with the SEC.

We are subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, as applied to foreign private issuers (the “Exchange Act”). Because we are a foreign private issuer, the SEC’s rules do not require us to deliver proxy statements or to file quarterly reports. In addition, our “insiders” are not subject to the SEC’s rules that prohibit short-swing trading. We prepare quarterly and annual reports containing consolidated financial statements in accordance with IFRS. Our annual consolidated financial statements are certified by an independent accounting firm. We submit quarterly financial information to the SEC on Form 6-K simultaneously with or promptly following the publication of that information in Luxembourg or any other jurisdiction in which the Company’s securities are listed, and will file annual reports on Form 20-F within the time period required by the SEC, which is currently four months from the end of the fiscal year on December 31. These quarterly and annual reports may be reviewed at the SEC’s Public Reference Room. Reports and other information filed electronically with the SEC are also available at the SEC’s website.

As a foreign private issuer under the Securities Act, we are not subject to the proxy rules of Section 14 of the Exchange Act or the insider short-swing profit reporting requirements of Section 16 of the Exchange Act.

We have appointed BNY Mellon to act as depositary for our ADSs. During the time the deposit agreement remains in force, we will furnish the depositary with:

 

 

our annual reports; and

 

 

summaries of all notices of general meetings of shareholders and other reports and communications that are made generally available to our shareholders.

The depositary will, as provided in the deposit agreement, if we so request, arrange for the mailing of summaries in English of the reports and communications to all record holders of our ADSs. Any record holder of ADSs may read the reports, notices, or summaries thereof, and communications at the depositary’s office located at 480 Washington Blvd., Jersey City, New Jersey 07310.

Whenever a reference is made in this annual report to a contract or other document, please be aware that such reference is not necessarily complete and that you should refer to the exhibits that are a part of this annual report for a copy of the contract or other document. You may review a copy of the annual report at the SEC’s public reference room in Washington, D.C.

 

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

The multinational nature of our transactions, operations and customer base expose us to the risk of changes in interest rates, foreign currency exchange rates and commodity prices. We selectively manage these exposures through the use of derivative instruments to mitigate market risk and interest rate costs. We do not use derivative financial instruments for other purposes. In addition, in the ordinary course of business Ternium also faces risks with respect to financial instruments that are either non-financial or non-quantifiable. Such risks principally include country risk and credit risk and are not presented in the following analysis. For additional information about our financial risk management, see note 28 to our consolidated financial statements included elsewhere in this annual report.

 

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The following tables provide a breakdown of Ternium’s debt instruments at December 31, 2014, which included fixed and variable interest rate obligations detailed maturity date. The following information should be read together with note 28 “Financial Risk Management” to our consolidated financial statements included elsewhere in this annual report.

 

At December 31, 2014

In thousands of U.S. dollars

   Expected maturity in the year ending December 31,  
   2015      2016      2017      2018      2019      Thereafter      Total  

Non-current Debt

                    

Fixed Rate

        10,334         958         —           —           —           11,292   

Floating Rate

        329,434         236,721         223,361         24,944         74,859         889,319   

Current Debt

                    

Fixed Rate

     784,860         —           —          —          —           —           784,860   

Floating Rate

     479,348         —           —           —          —           —           479,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total (1) (2)

     1,264,208         339,768         237,679         223,361         24,944         74,859         2,164,819   

 

(1) Borrowings are primarily bank borrowings with third parties. See Item 5. “Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Principal Sources of Funding—Financial Liabilities.”
(2) As most borrowings are subject to floating rates that approximate market rates, with contractual repricing that occurs every one, three or six months, the fair value of each borrowing approximates its carrying amount and is not disclosed separately.

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 weighted average interest rate of Ternium’s debt was 4.64% at December 31, 2014. This figure, which incorporates a majority of instruments denominated in U.S. dollars, was 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, 2014.

Total Debt by Currency as of December 31, 2014

 

In thousands of U.S. dollars

      

USD

     1,766,661   

ARP

     278,840   

COP

     99,976   

Other

     19,342   
  

 

 

 

Total

     2,164,819   

Interest Rate Exposure Risk

Interest rate movements create a degree of risk by affecting the amount of Ternium’s interest payments and the value of Ternium’s floating-rate debt. Most of Ternium’s long-term borrowings are at variable rates. A minor portion of this debt is fixed through swaps, as described below. Ternium’s total variable interest rate debt amounted to USD1.4 billion (63% of total borrowings) for the year ended December 31, 2014.

Interest Rate Derivative Contracts

During 2012 and 2013, Tenigal entered into several interest rate forward starting swap agreements that fix the interest rate to be paid over an aggregate amount of USD100 million, at an average rate of 1.92%. These agreements became effective in July 2014, will be due on July 2022 and have been accounted for as cash flow hedges. As of December 31, 2014, the after-tax cash flow hedge reserve related to these agreements amounted to negative USD0.4 million.

Foreign Exchange Exposure Risk

Ternium’s subsidiaries may use derivative contracts in order to hedge their exposure to exchange rate risk derived from their trade and financial operations. A significant portion of Ternium’s business is carried out in currencies other than the U.S. dollar, Ternium’s reporting currency. As a result of this foreign currency exposure, exchange rate fluctuations impact Ternium’s results as reported in its income statement in the form of both translation risk and transaction risk. Translation risk is the risk that Ternium’s consolidated financial statements for a particular period or as of a certain date may be affected by changes in the

 

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prevailing rates of the various functional currencies of the reporting subsidiaries against the U.S. dollar. Transaction risk is the risk that the value of transactions executed in currencies other than the subsidiary’s functional currency may vary according to currency fluctuations.

Ternium’s 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 using 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.

The following table shows a breakdown of Ternium’s assessed financial position exposure to currency risk as of December 31, 2014. These balances include intercompany positions where the intervening parties have different functional currencies.

 

USD million exposure to

   Functional Currency  
     USD      ARP  

U.S. dollar (USD)

     (n/a      67   

EU euro (EUR)

     (0      3   

Argentine peso (ARP)

     (7 )      (n/a

Mexican peso (MXN)

     (298 )      —     

Colombian peso (COP)

     (40 )      —     

Other currencies

     (1 )      —     

We estimate that if the Argentine peso, Mexican peso and Colombian peso had weakened simultaneously by 1% against the U.S. dollar with all other variables held constant, total pre-tax income for the year would have been USD3.9 million higher, as a result of net foreign exchange gains/losses on translation of U.S. dollar-denominated financial position, mainly trade receivables, trade payables and other liabilities. 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 U.S. dollar of all net investments in non U.S. dollar operations (which amounted to USD2.4 billion as of December 31, 2014), the currency translation adjustment included in total equity would have been USD24.1 million lower, arising mainly from the adjustment on translation of the equity related to the Argentine peso and the Brazilian real. For further information on the impact of currency translation adjustments on Usiminas, see Item 5. “Operating and Financial Review and Prospects—Overview.”

Foreign Exchange Derivative Contracts

During 2013 and 2014, Prosid Investments entered into several non-deliverable forward agreements to reduce the interest rate cost of Siderar’s debt denominated in Argentine pesos. As of December 31, 2014, the notional amount on these agreements amounted to USD280.3 million and the net fair value resulting from these agreements was a positive USD4.3 million.

Furthermore, during 2014, Ferrasa entered into non-deliverable forward agreements to manage the exposure of certain trade receivables denominated in Colombian pesos. As of December 31, 2014, the notional amount on these agreements was USD2.0 million and the net fair value resulting from these agreements was a negative USD34,000.

Commodities Exposure Risk

In the ordinary course of its operations, Ternium’s subsidiaries purchase raw materials, such as iron ore and coal, slabs, and other commodities, including electricity and natural 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. During 2012, 2013 and 2014, Ternium has not hedged any commodity position. For further information on Ternium’s long-term commodity and commodity- related supply commitments, see note 24 (ii) to our consolidated financial statements included elsewhere in this annual report.

Item 12. Description of Securities Other Than Equity Securities

 

A. Debt Securities

Not applicable.

 

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B. Warrants and Rights

Not applicable.

 

C. Other Securities

Not applicable.

 

D. American Depositary Shares

According to our deposit agreement, holders of ADSs may have to pay to the Depositary, either directly or indirectly, fees or charges up to the amounts set forth below:

 

 

A fee of USD5.00 (or less) per 100 ADSs (or portion of 100 ADSs) for: issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property; and cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates.

 

 

A fee of USD0.02 (or less) per ADS for any cash distribution to ADS registered holders.

 

 

As necessary, charges for: taxes and other governmental charges the Depositary or the custodian have to pay on any ADS or share underlying an ADS (e.g., share transfer taxes, stamp duty or withholding taxes); and any charges incurred by the depositary or its agents for servicing the deposited securities.

 

 

Registration or transfer fees for transfer and registration of shares on our share register to or from the name of the Depositary or its agent when you deposit or withdraw shares.

 

 

Expenses of the Depositary for: cable, telex and facsimile transmissions; and conversion of foreign currency.

 

 

A fee equivalent to the fee that would be payable if securities distributed to ADS holders had been shares and the shares had been deposited for issuance of ADSs for distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADS registered holders.

 

 

As necessary, charges for any costs incurred by the Depositary or its agents for servicing the deposited securities.

The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Depositary may collect its annual fee for Depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The Depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

Fees payable by the Depositary to the Company

Fees incurred in 2014. In 2014, Ternium received no fees or other direct or indirect payment from the Depositary in connection with the deposited securities.

Fees to be paid in the future. Upon any listing of the Company’s shares in a non-U.S. stock exchange allowing for cross border activity, the Depositary has agreed to reimburse the Company for expenses incurred related to the administration and maintenance of the ADS program, including investor relations expenses, annual NYSE listing fees and other program related expenses. There are limits on the amount of expenses for which the Depositary will reimburse the Company. The Depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs. The Company does not expect to receive any reimbursement from the Depositary in the near future.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

 

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Item 15. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-5(e) under the Exchange Act as of December 31, 2014). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2014, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level.

Management’s report on internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Ternium’s internal control over financial reporting was designed by management to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of its financial statements for external purposes in accordance with IFRS.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or omissions. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted its assessment of the effectiveness of Ternium’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment performed by management about the implementation of the updated framework no gaps were identified.

Based on this assessment, management has concluded that Ternium’s internal control over financial reporting, as of December 31, 2014, is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

Change in Internal Control over Financial Reporting

During the period covered by this report, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

On May 7, 2014, our board of directors determined that none of the independent members of the audit committee, meets the attributes defined in Item 16A of Form 20-F for “audit committee financial experts.” We do not have an audit committee financial expert because we have concluded that the membership of the audit committee as a whole has sufficient recent and relevant financial experience to properly discharge its functions. In addition, the audit committee, from time to time as it deems necessary, may engage persons that meet all of the attributes of an “audit committee financial expert” as consultants.

Item 16B. Code of Ethics

We have adopted a code of ethics that applies specifically to our principal executive officers, and principal financial and accounting officer and controller, as well as persons performing similar functions. We have also adopted a code of conduct that applies to all company employees, including contractors, subcontractors and suppliers.

 

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The text of our code of ethics for senior financial officers and code of conduct for employees is posted on our web site at: http://www.ternium.com/en/ir/governance.

Item 16C. Principal Accountant Fees and Services

Fees Paid to the Company’s Principal Accountant

In 2014, PwC Luxembourg served as the principal external auditor for the Company. Fees paid to PwC Luxembourg and other PwC member firms in 2014 and 2013 are detailed below:

 

     For the year ended December 31,  

In thousands of U.S. dollars

   2014      2013  

Audit fees

     3,450         3,821   

Audit-related fees

     74         391   

Tax fees

     204         39   

All other fees

     199         37   
  

 

 

    

 

 

 

Total

     3,928         4,288   

Audit Fees

Audit fees were paid for professional services rendered by the auditors for the audit of the consolidated financial statements of the Company and the statutory financial statements of the Company and its subsidiaries.

Audit-Related Fees

Audit-related fees are typically services that are reasonably related to the performance of the audit or review of the consolidated financial statements and are not reported under the audit fee item above. This item includes fees for attestation services on financial information of the Company and its subsidiaries included in their annual reports that are filed with their respective regulators.

Tax Fees

Tax fees were paid for tax compliance and tax advice professional services.

All Other Fees

Fees disclosed in the table above under “All other fees” consisted primarily of fees paid for consulting services provided in connection the accounting system migration to SAP and the conversion to IFRS from local GAAP for our Colombian operations.

Audit Committee’s Pre-approval Policies and Procedures

The Company’s audit committee is responsible for, among other things, the oversight of the Company’s independent auditors. The audit committee has adopted a policy of pre-approval of audit and permissible non-audit services provided by its independent auditors in its charter.

Under the policy, the audit committee makes its recommendations through the Board of Directors to the shareholders’ meeting concerning the continuing appointment or termination of the Company’s independent auditors. On a yearly basis, the audit committee reviews together with management and the independent auditor, the audit plan, audit related services and other non-audit services and approves the related fees. Any changes to the approved fees must be reviewed and approved by the audit committee. In addition, the audit committee delegated to its Chairman the authority to consider and approve, on behalf of the Audit Committee, additional non-audit services that were not recognized at the time of engagement, which must be reported to the other members of the audit committee at its next meeting. No services outside the scope of the audit committee’s approval can be undertaken by the independent auditor.

During 2014, the audit committee did not approve any fees pursuant to the de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

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Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On June 2, 2010, the Company’s annual general shareholders’ meeting granted an authorization to the Company and to the Company’s subsidiaries to purchase, acquire or receive, from time to time shares of the Company, including shares represented by ADRs, on the following terms and conditions:

 

 

The acquisitions of shares may be made in one or more transactions as the Board of Directors of the Company or the board of directors or other governing body of the relevant entity, as applicable, considers advisable. The number of shares acquired as a block may amount to the maximum permitted amount of purchases;

 

 

The maximum number of shares, including shares represented by ADRs, acquired pursuant to this authorization may not exceed 10% of the Company’s issued and outstanding shares or, in the case of acquisitions made through a stock exchange in which the shares or ADRs are traded, such lower amount as may not be exceeded pursuant to any applicable laws or regulations of such market;

 

 

The purchase price per ADR to be paid in cash may not exceed 125% (excluding transaction costs and expenses), nor may it be lower than 75% (excluding transaction costs and expenses), in each case of the average of the closing prices of the ADRs on the New York Stock Exchange during the five trading days in which transactions in the ADRs were recorded in the New York Stock Exchange preceding (but excluding) the day on which the ADRs are purchased. In the case of purchases of shares other than in the form of ADRs, the maximum and minimum per share purchase prices shall be equal to the prices that would have applied in case of an ADR purchase pursuant to the formula above divided by the number of underlying shares represented by an ADR at the time of the relevant purchase. Such maximum and minimum purchase prices shall also apply to over-the-counter or off-market transactions. Compliance with maximum and minimum purchase price requirements in any and all acquisitions made pursuant to this authorization (including, without limitation, acquisitions carried out through the use of derivative financial instruments or option strategies) shall be determined on and as of the date on which the relevant transaction is entered into, irrespective of the date on which the transaction is to be settled;

 

 

The above maximum and minimum purchase prices shall, in the event of a change in the par value of the shares, a capital increase by means of a capitalization of reserves, a distribution of shares under compensation or similar programs, a stock split or reverse stock split, a distribution of reserves or any other assets, the redemption of capital, or any other transaction impacting the Company’s equity be adapted automatically, so that the impact of any such transaction on the value of the shares shall be reflected;

 

 

The acquisitions of shares may not have the effect of reducing the Company’s net assets below the sum of the Company’s share capital plus its undistributable reserves;

 

 

Only fully paid-up shares may be acquired pursuant to this authorization;

 

 

The acquisitions of shares may be carried out for any purpose, as may be permitted under applicable laws and regulations, including, without limitation, to reduce the share capital of the Company, to offer such shares to third parties in the context of corporate mergers or acquisitions of other entities or participating interests therein, for distribution to the Company’s or the Company’s subsidiaries’ directors, officers or employees or to meet obligations arising from convertible debt instruments;

 

 

The acquisitions of shares may be carried out by any and all means, as may be permitted under applicable laws and regulations, including through any stock exchange in which the shares or other securities representing shares are traded, through public offers to all shareholders of the Company to buy shares, through the use of derivative financial instruments or option strategies, or in over the counter or off-market transactions or in any other manner;

 

 

The acquisitions of shares may be carried out at any time and from time to time during the duration of the authorization, including during a tender offer period, as may be permitted under applicable laws and regulations;

 

 

The authorization granted to acquire shares shall be valid for such maximum period as may be provided for under applicable Luxembourg law as in effect from time to time (such maximum period being, as of to date, five years);

 

 

The acquisitions of shares shall be made at such times and on such other terms and conditions as may be determined by the Board of Directors of the Company or the board of directors or other governing body of the relevant Company subsidiary, provided that any such purchase shall comply with Article 49-2 et.seq. of the Luxembourg law of August 10, 1915 on commercial companies, as amended (or any successor law) and, in the case of acquisitions of shares made through a stock exchange in which the shares or other securities representing shares are traded, with any applicable laws and regulations of such market.

 

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In the future, we may, on the terms and subject to the conditions above referenced, initiate a share capital repurchase or similar program or engage in other transactions pursuant to which we would repurchase, directly or indirectly, the Company’s ordinary shares, ADSs or both. In addition, we or our subsidiaries may enter into transactions involving sales or purchases of derivatives or other instruments (either settled in cash or through physical delivery of securities) with returns linked to the Company’s ordinary shares, ADSs or both. The timing and amount of repurchase transactions under any such program, or sales or purchases of derivatives or other instruments, would depend on market conditions as well as other corporate and regulatory considerations.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

Our corporate governance practices are governed by Luxembourg law (particularly the law of August 10th, 1915 on commercial companies) and our articles of association. As a Luxembourg company listed on the NYSE, we are not required to comply with all of the corporate governance listing standards of the NYSE. We, however, believe that our corporate governance practices meet or exceed, in all material respects, the corporate governance standards that are generally required for controlled companies by the NYSE but the following is a summary of the significant ways that our corporate governance practices differ from the corporate governance standards required for controlled companies by the NYSE (provided that our corporate governance practices may differ in non-material ways from the standards required by the NYSE that are not detailed here):

Non-management Directors’ Meetings

Under NYSE standards, non-management directors must meet at regularly scheduled executive sessions without management present and, if such group includes directors who are not independent, a meeting should be scheduled once per year including only independent directors. Neither Luxembourg law nor our articles of association require the holding of such meetings and we do not have a set policy for these meetings. Our articles of association provide, however, that the board shall meet as often as required by the interests of the Company and at least four times a year, upon notice by the chairperson or by any two directors.

In addition, NYSE-listed companies are required to provide a method for interested parties to communicate directly with the non-management directors as a group. While we do not have such a method, we have set up a compliance line for investors and other interested parties to communicate their concerns to members of our audit committee (which, as already stated, are independent).

Audit Committee

Under NYSE standards, listed U.S. companies are required to have an audit committee composed of independent directors that satisfies the requirements of Rule 10A-3 promulgated under the Exchange Act. Our articles of association currently require us to have an audit committee composed of three members, of which at least two must be independent (as defined in our articles of association) and our audit committee complies with such requirements. In accordance with NYSE standards, we have an audit committee entirely composed of independent directors.

Under NYSE standards, all audit committee members of listed U.S. companies are required to be financially literate or must acquire such financial knowledge within a reasonable period and at least one of its members shall have experience in accounting or financial administration. In addition, if a member of the audit committee is simultaneously a member of the audit committee of more than three public companies, and the listed company does not limit the number of audit committees on which its members may serve, then in each case the board must determine whether the simultaneous service would prevent such member from effectively serving on the listed company’s audit committee and shall publicly disclose its decision. No comparable provisions on audit committee membership exist under Luxembourg law or our articles of association.

Standards for Evaluating Director Independence

Under NYSE standards, the board is required, on a case by case basis, to express an opinion with regard to the independence or lack of independence of each individual director. Neither Luxembourg law nor our articles of association require the board to express such an opinion. In addition, the definition of “independent” under the rules of the NYSE differs in some non-material respects from the definition contained in our articles of association.

 

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Audit Committee Responsibilities

Pursuant to our articles of association, the audit committee shall assist the Board of Directors in fulfilling its oversight responsibilities relating to the integrity of the Company’s financial statements, including periodically reporting to the Board of Directors on its activity and the adequacy of the Company’s system of internal controls over financial reporting. As per the audit committee charter, as amended, the audit committee shall make recommendations for the appointment, compensation, retention and oversight of, and consider the independence of, the Company’s external auditors. The audit committee is required to review material transactions (as defined by the articles of association) between us or our subsidiaries with related parties and also perform the other duties entrusted to it by the board.

The NYSE requires certain matters to be set forth in the audit committee charter of U.S. listed companies. Our audit committee charter provides for many of the responsibilities that are expected from such bodies under the NYSE standard; however, due to our equity structure and holding company nature, the charter does not contain all such responsibilities, including provisions related to setting hiring policies for employees or former employees of independent auditors, discussion of risk assessment and risk management policies, and an annual performance evaluation of the audit committee.

Shareholder Voting on Equity Compensation Plans

Under NYSE standards, shareholders must be given the opportunity to vote on equity-compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans. We do not currently offer equity-based compensation to our directors, executive officers or employees, and therefore do not have a policy on this matter.

Disclosure of Corporate Governance Guidelines

NYSE-listed companies must adopt and disclose corporate governance guidelines. Neither Luxembourg law nor our articles of association require the adoption or disclosure of corporate governance guidelines. Our board of directors follows corporate governance guidelines consistent with our equity structure and holding company nature, but we have not codified them and therefore do not disclose them on our website.

Code of Business Conduct and Ethics

Under NYSE standards, listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Neither Luxembourg law nor our articles of association require the adoption or disclosure of such a code of conduct. We have adopted a code of conduct that applies to all directors, officers and employees, which is posted on our website and complies with the NYSE’s requirements, except that it does not require the disclosure of waivers of the code for directors and officers. In addition, we have adopted a supplementary code of ethics for senior financial officers which is also posted on our website.

Chief Executive Officer Certification

A chief executive officer of a U.S. company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate governance standards. In accordance with NYSE rules applicable to foreign private issuers, our chief executive officer is not required to provide the NYSE with this annual compliance certification. However, in accordance with NYSE rules applicable to all listed companies, our chief executive officer must promptly notify the NYSE in writing after any of our executive officers becomes aware of any noncompliance with any applicable provision of the NYSE’s corporate governance standards. In addition, we must submit an executed written affirmation annually and an interim written affirmation each time a change occurs to the board or the audit committee.

Item 16H. Mine Safety Disclosure

Not applicable.

PART III

Item 17. Financial Statements

We have responded to Item 18 in lieu of responding to this Item.

 

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Item 18. Financial Statements

See pages F-1 through F-73 of this annual report.

 

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LOGO

TERNIUM S.A.

Consolidated Financial Statements

as of December 31, 2014 and 2013 and

for the years ended on December 31, 2014, 2013 and 2012

29 Avenue de la Porte-Neuve, 3rd floor

L – 2227

R.C.S. Luxembourg: B 98 668


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Consolidated Income Statements for the years ended December 31, 2014, 2013 and 2012

     F-2   

Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012

     F-3   

Consolidated Statements of Financial Position as of December 31, 2014 and 2013

     F-4   

Consolidated Statements of Changes in Equity for the years ended December 31, 2014, 2013 and 2012

     F-5   

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

     F-8   

Index to the Notes to the Consolidated Financial Statements

     F-9   


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Income Statements

 

          Year ended December 31,  
     Notes    2014     2013     2012  

Net sales

   5      8,726,057        8,530,012        8,608,054   

Cost of sales

   6      (6,925,169     (6,600,292     (6,866,379
     

 

 

   

 

 

   

 

 

 

Gross profit

  1,800,888      1,929,720      1,741,675   

Selling, general and administrative expenses

7   (816,478   (843,311   (809,181

Other operating income (expenses), net

9   71,751      23,014      (11,881
     

 

 

   

 

 

   

 

 

 

Operating income

  1,056,161      1,109,423      920,613   

Finance expense

10   (117,866   (132,113   (150,302

Finance income

10   5,715      (2,358   11,400   

Other financial income (expenses), net

10   42,701      (1,004   17,270   

Equity in (losses) earnings of non-consolidated companies

3 & 14   (34,218   (31,609   (346,833
     

 

 

   

 

 

   

 

 

 

Profit before income tax expense

  952,493      942,339      452,148   

Income tax expense

11   (363,708   (349,426   (261,227
     

 

 

   

 

 

   

 

 

 

Profit for the year

  588,785      592,913      190,921   
     

 

 

   

 

 

   

 

 

 

Attributable to:

Owners of the parent

  452,404      455,425      142,043   

Non-controlling interest

  136,381      137,488      48,878   
     

 

 

   

 

 

   

 

 

 

Profit for the year

  588,785      592,913      190,921   
     

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding

  1,963,076,776      1,963,076,776      1,963,076,776   

Basic and diluted earnings per share for profit attributable to the owners of the parent (expressed in USD per share)

  0.23      0.23      0.07   

 

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

F-2


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Statements of Comprehensive Income

 

     Year ended December 31,  
     2014     2013     2012  

Profit for the year

     588,785        592,913        190,921   

Items that may be reclassified subsequently to profit or loss:

      

Currency translation adjustment

     (270,773     (301,943     (149,550

Currency translation adjustment from participation in non-consolidated companies

     (188,995     (201,362     (275,897

Changes in the fair value of derivatives classified as cash flow hedges and available-for-sale financial instruments

     (3,016     1,805        17,556   

Income tax relating to cash flow hedges

     638        (541     (2,808

Changes in the fair value of derivatives classified as cash flow hedges from participation in non-consolidated companies

     154        6,869        1,437   

Others from participation in non-consolidated companies

     (5,642     6,113        (1,961

Items that will not be reclassified subsequently to profit or loss:

      

Remeasurement of post employment benefit obligations

     (27,562     (7,714     (15,408

Income tax relating to remeasurement of post employment benefit obligations

     7,711        2,224        3,556   
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss for the year, net of tax

  (487,484   (494,549   (423,075
  

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

  101,301      98,364      (232,154
  

 

 

   

 

 

   

 

 

 

Attributable to:

Equity holders of the Company

  92,155      98,856      (195,081

Non-controlling interest

  9,146      (492   (37,073
  

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

  101,301      98,364      (232,154
  

 

 

   

 

 

   

 

 

 

 

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

F-3


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Statements of Financial Position

 

          Balances as of  
     Notes    December 31, 2014      December 31, 2013  

ASSETS

              

Non-current assets

              

Property, plant and equipment, net

   12      4,481,027            4,708,895      

Intangible assets, net

   13      948,886            961,504      

Investments in non-consolidated companies

   14      1,396,560            1,375,165      

Derivative financial instruments

   22      —              1,535      

Deferred tax assets

   20      31,626            24,902      

Receivables, net

   15      47,482            79,407      

Trade receivables, net

   16      91         6,905,672         1,754         7,153,162   
     

 

 

    

 

 

    

 

 

    

 

 

 

Current assets

Receivables

15   112,229      112,388   

Derivative financial instruments

22   4,338      —     

Inventories, net

17   2,134,034      1,941,130   

Trade receivables, net

16   720,214      671,453   

Other investments

18   149,995      169,503   

Cash and cash equivalents

18   213,303      3,334,113      307,218      3,201,692   
     

 

 

    

 

 

    

 

 

    

 

 

 

Non-current assets classified as held for sale

  14,756      17,770   
        

 

 

       

 

 

 
  3,348,869      3,219,462   
        

 

 

       

 

 

 

Total Assets

  10,254,541      10,372,624   
        

 

 

       

 

 

 

EQUITY

Capital and reserves attributable to the owners of the parent

  5,284,959      5,340,035   

Non-controlling interest

  973,523      998,009   
        

 

 

       

 

 

 

Total Equity

  6,258,482      6,338,044   
        

 

 

       

 

 

 

LIABILITIES

Non-current liabilities

Provisions

19   9,067      13,984   

Deferred tax liabilities

20   611,126      605,883   

Other liabilities

21   371,900      345,431   

Trade payables

  11,969      15,243   

Borrowings

23   900,611      1,904,673      1,204,880      2,185,421   
     

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

Current income tax liabilities

  51,083      92,009   

Other liabilities

21   210,206      203,326   

Trade payables

  564,513      755,880   

Derivative financial instruments

22   1,376      —     

Borrowings

23   1,264,208      2,091,386      797,944      1,849,159   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

  3,996,059      4,034,580   
        

 

 

       

 

 

 

Total Equity and Liabilities

  10,254,541      10,372,624   
        

 

 

       

 

 

 

 

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

F-4


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Statements of Changes in Equity

 

     Attributable to the owners of the parent (1)              
     Capital
stock

(2)
     Treasury
shares
    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, 2014

     2,004,743         (150,000     (23,295     1,499,976        (2,324,866     (1,563,562     5,897,039        5,340,035        998,009        6,338,044   

Profit for the year

                  452,404        452,404        136,381        588,785   

Other comprehensive income (loss) for the year

                     

Currency translation adjustment

                (335,892       (335,892     (123,876     (459,768

Remeasurement of post employment benefit obligations

            (17,871           (17,871     (1,979     (19,850

Cash flow hedges and available-for-sale financial instruments, net of tax

            (1,327           (1,327     (897     (2,224

Others

            (5,159           (5,159     (483     (5,642
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

 

—  

  

  —        —        (24,357   —        (335,892   452,404      92,155      9,146      101,301   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid in cash (5)

  (147,231   (147,231   (147,231

Dividends paid in cash by subsidiary companies

  —        (33,632   (33,632
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  2,004,743      (150,000   (23,295   1,475,619      (2,324,866   (1,899,454   6,202,212      5,284,959      973,523      6,258,482   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 24 (iii).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2014, 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, undistributable reserves under Luxembourg law for USD 1.4 billion, hedge accounting reserve, net of tax effect, for USD (0.4) million and reserves related to the acquisition of non-controlling interest in subsidiaries according to IAS 27 for USD (58.9) million.
(4) Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.
(5) Represents USD 0.075 per share (USD 0.75 per ADS). Related to the dividends distributed on May 7, 2014, and as 41,666,666 shares are held as treasury shares 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.

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 24 (iii).

 

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

F-5


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Statements of Changes in Equity

 

     Attributable to the owners of the parent (1)              
     Capital
stock

(2)
     Treasury
shares
    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, 2013

     2,004,743         (150,000     (23,295     1,493,201        (2,324,866     (1,199,814     5,569,214        5,369,183        1,065,730        6,434,913   

Profit for the year

                  455,425        455,425        137,488        592,913   

Other comprehensive income (loss) for the year

                     

Currency translation adjustment

                (363,748       (363,748     (139,557     (503,305

Remeasurement of post employment benefit obligations

            (5,126           (5,126     (364     (5,490

Cash flow hedges, net of tax

            6,813              6,813        1,317        8,130   

Others

            5,492              5,492        624        6,116   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

  —        —        —        7,179      —        (363,748   455,425      98,856      (492   98,364   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition of non-controlling interest (5)

  (404   (404   (525   (929

Dividends paid in cash (6)

  (127,600   (127,600   (127,600

Dividends paid in cash by subsidiary companies

  —        (66,704   (66,704
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  2,004,743      (150,000   (23,295   1,499,976      (2,324,866   (1,563,562   5,897,039      5,340,035      998,009      6,338,044   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 24 (iii).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2013, 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, undistributable reserves under Luxembourg law for USD 1.4 billion, hedge accounting reserve, net of tax effect, for USD 1.1 million and reserves related to the acquisition of non-controlling interest in subsidiaries according to IAS 27 for USD (58.9) million.
(4) Represents the difference between book value of non-monetary contributions received from shareholders under Luxembourg GAAP and IFRS.
(5) Corresponds to the acquisition of the non-controlling interest held by Siderúrgica de Caldas S.A.S., a subsidiary of Ternium S.A., in Procesadora de Materiales Industriales S.A. in April 2013.
(6) Represents USD 0.065 per share (USD 0.65 per ADS). Related to the dividends distributed on May 10, 2013, and as 41,666,666 shares are held as treasury shares by one of Ternium’s subsidiaries, the dividends attributable to these treasury shares amounting to USD 2.7 million were included in equity as less dividend paid.

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 24 (iii).

 

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

F-6


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Statements of Changes in Equity

 

     Attributable to the owners of the parent (1)              
     Capital
stock

(2)
     Treasury
shares
    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, 2012

     2,004,743         (150,000     (23,295     1,489,794        (2,324,866     (859,283     5,574,402        5,711,495        1,077,055        6,788,550   

Profit for the year

                  142,043        142,043        48,878        190,921   

Other comprehensive income (loss) for the year

                     

Currency translation adjustment

                (340,531       (340,531     (84,916     (425,447

Remeasurement of post employment benefit obligations

            (9,632           (9,632     (2,220     (11,852

Cash flow hedges, net of tax

            14,800              14,800        1,385        16,185   

Others

            (1,761           (1,761     (200     (1,961
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year

  —        —        —        3,407      —        (340,531   142,043      (195,081   (37,073   (232,154
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid in cash (5)

  (147,231   (147,231   (147,231

Dividends paid in cash by subsidiary companies

  —        (15,902   (15,902

Contributions from non-controlling shareholders in consolidated subsidiaries (6)

  —        41,650      41,650   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

  2,004,743      (150,000   (23,295   1,493,201      (2,324,866   (1,199,814   5,569,214      5,369,183      1,065,730      6,434,913   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Shareholders’ equity determined in accordance with accounting principles generally accepted in Luxembourg is disclosed in Note 24 (iii).
(2) The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2012, 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, undistributable reserves under Luxembourg law for USD 1.4 billion, hedge accounting reserve, net of tax effect, for USD 1.2 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 0.075 per share (USD 0.75 per ADS). Related to the dividends distributed on May 2, 2012, and as 41,666,666 shares are held as treasury shares 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.
(6) Corresponds to the contribution made by Nippon Steel Corporation in Tenigal, S.R.L. de C.V.

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 24 (iii).

 

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

F-7


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

(All amounts in USD thousands)

 

 

Consolidated Statements of Cash Flows

 

         Year ended December 31,  
     Notes   2014     2013     2012  

Cash flows from operating activities

        

Profit for the year

       588,785        592,913        190,921   

Adjustments for:

        

Depreciation and amortization

   12 & 13     414,797        377,133        370,855   

Income tax accruals less payments

   26 (b)     (14,926     (24,177     41,030   

Equity in losses (earnings) of non-consolidated companies

   3 & 14     34,218        31,609        346,833   

Interest accruals less payments

   26 (b)     5,162        (16,869     816   

Changes in provisions

   19     92        7,330        5,754   

Changes in working capital (1)

   26 (b)     (550,980     114,611        23,533   

Net foreign exchange results and others

       28,696        9,624        75,350   
    

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

  505,844      1,092,174      1,055,092   
    

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

Capital expenditures

12 & 13   (443,463   (883,317   (1,022,592

Acquisition of business/stake - Purchase consideration Usiminas

3 & 14   (249,032   —        (2,243,610

Decrease (Increase) in other investments

18   18,258      (1,802   127,875   

Proceeds from the sale of property, plant and equipment

  1,473      2,133      2,143   

Proceeds from Sidor financial asset

  —        —        136,719   

Dividends received from non-consolidated companies

14   —        207      4,718   

Investments in non-consolidated companies - Techgen

14   (3,010   —        —     
    

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (675,774   (882,779   (2,994,747
    

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

Dividends paid in cash to company’s shareholders

  (147,231   (127,600   (147,231

Dividends paid in cash to non-controlling interests

  (33,632   (66,704   (15,902

Contributions from non-controlling shareholders in consolidated subsidiaries

  —        —        41,650   

Acquisition of non-controlling interest

  —        (929   —     

Proceeds from borrowings

  1,038,820      1,863,868      1,284,659   

Repayments of borrowings

  (773,396   (2,134,711   (814,976
    

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  84,561      (466,076   348,200   
    

 

 

   

 

 

   

 

 

 

    

    

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

  (85,369   (256,681   (1,591,454
    

 

 

   

 

 

   

 

 

 

Movement in cash and cash equivalents

At January 1,

  307,218      560,307      2,158,044   

Effect of exchange rate changes

  (8,546   (8,635   (6,283

Initial cash of Peña Colorada and Exiros

  —        12,227      —     

Decrease in cash and cash equivalents

  (85,369   (256,681   (1,591,454
    

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at December 31, (2)

  213,303      307,218      560,307   
    

 

 

   

 

 

   

 

 

 

 

(1) The working capital is impacted by non-cash movement of USD (149.9) million as of December 31, 2014 (USD (157.7) million and USD (53.7) million as of December 31, 2013 and 2012, respectively) due to the variations in the exchange rates used by subsidiaries with functional currencies different from the US dollar.
(2) It includes restricted cash of USD 93, USD 869 and USD 941 as of December 31, 2014, 2013 and 2012, respectively. In addition, the Company had other investments with a maturity of more than three months for USD 149,995, USD 169,503 and USD 160,750 as of December 31, 2014, 2013 and 2012, respectively.

 

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

F-8


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

1

    

General information

     F-10   

2

    

Basis of presentation

     F-11   

3

    

Acquisition of business - Usinas Siderúrgicas de Minas Gerais S.A. - USIMINAS

     F-15   

4

    

Accounting policies

     F-17   

5

    

Segment information

     F-37   

6

    

Cost of sales

     F-40   

7

    

Selling, general and administrative expenses

     F-41   

8

    

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

     F-41   

9

    

Other operating income (expenses), net

     F-41   

10

    

Other financial income (expenses), net

     F-42   

11

    

Income tax expense

     F-42   

12

    

Property, plant and equipment, net

     F-44   

13

    

Intangible assets, net

     F-45   

14

    

Investments in non-consolidated companies

     F-46   

15

    

Receivables, net - non-current and current

     F-48   

16

    

Trade receivables, net - non-current and current

     F-49   

17

    

Inventories, net

     F-49   

18

    

Cash, cash equivalents and other investments

     F-50   

19

    

Allowances and provisions - non-current and current

     F-50   

20

    

Deferred income tax

     F-51   

21

    

Other liabilities - non-current and current

     F-53   

22

    

Derivative financial instruments

     F-55   

23

    

Borrowings

     F-57   

24

    

Contingencies, commitments and restrictions on the distribution of profits

     F-59   

25

    

Related party transactions

     F-63   

26

    

Other required disclosures

     F-64   

27

    

Recently issued accounting pronouncements

     F-65   

28

    

Financial risk management

     F-66   

29

    

Subsequent events

     F-73   

 

F-9


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

Notes to the Consolidated Financial Statements

 

1. GENERAL INFORMATION

Ternium S.A. (the “Company” or “Ternium”), was incorporated on December 22, 2003 to hold investments in flat and long steel manufacturing and distributing companies. The Company has an authorized share capital of a single class of 3.5 billion shares having a nominal value of USD 1.00 per share. As of December 31, 2014, 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.

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

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

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

 

F-10


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

1. GENERAL INFORMATION (continued)

 

Following the completion of the corporate reorganization, and upon its conversion into an ordinary Luxembourg holding company, the Company voluntarily recorded a special reserve exclusively for tax-basis purposes. As of December 31, 2014 and 2013, this special tax reserve amounted to USD 7.3 billion and USD 7.5 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 2015), as issued by the International Accounting Standards Board, and adopted by the European Union (“EU”). 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 has 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 18, 2015.

Detailed below are the companies whose financial statements have been consolidated and accounted for interest in these consolidated financial statements.

 

F-11


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

2. BASIS OF PRESENTATION (continued)

 

     Country of         Percentage of ownership at
December 31,
 

Company

   Organization   

Main activity

   2014     2013     2012  

Ternium S.A.

   Luxembourg   

Holding

     100.00     100.00     100.00

Ternium Investments S.à.r.l.

   Luxembourg   

Holding

     100.00     100.00     100.00

Ternium Solutions A.G. (1)

   Switzerland   

Services

     100.00     100.00     100.00

Ternium Brasil S.A. (1)

   Brazil   

Holding

     100.00     100.00     100.00

Ternium Investments Switzerland AG (1)

   Switzerland   

Holding

     100.00     100.00     100.00

Ternium Internacional España S.L.U. (1)

   Spain   

Marketing of steel products

     100.00     100.00     100.00

Siderúrgica do Norte Fluminense S.A. (2)

   Brazil   

Manufacturing and selling of steel products

     —          100.00     100.00

Consorcio Siderurgia Amazonia S.L. (3)

   Spain   

Holding

     —          94.38     94.38

Secor - Servicios Corporativos S.A. (4)

   Venezuela   

Holding

     —          —          94.53

Siderar S.A.I.C. (5)

   Argentina   

Manufacturing and selling of flat steel products

     60.94     60.94     60.94

Impeco S.A. (6)

   Argentina   

Manufacturing of pipe products

     60.97     60.97     60.97

Prosid Investments S.C.A. (6)

   Uruguay   

Holding

     60.94     60.94     60.94

Ternium Mexico S.A. de C.V. (7)

   Mexico   

Holding

     88.72     88.72     88.72

Hylsa S.A. de C.V. (8)

   Mexico   

Manufacturing and selling of steel products

     88.72     88.72     88.72

Las Encinas S.A. de C.V. (8)

   Mexico   

Exploration, exploitation and pelletizing of iron ore

     88.72     88.72     88.72

Ferropak Comercial S.A. de C.V. (8)

   Mexico   

Scrap services company

     88.72     88.72     88.72

Ferropak Servicios S.A. de C.V. (8)

   Mexico   

Services

     88.72     88.72     88.72

Galvacer America Inc (8)

   USA   

Distributing company

     88.72     88.72     88.72

Galvamet America Corp (8)

   USA   

Manufacturing and selling of insulated panel products

     88.72     88.72     88.72

Transamerica E. & I. Trading Corp. (8)

   USA   

Scrap services company

     88.72     88.72     88.72

Técnica Industrial S.A. de C.V. (8)

   Mexico   

Services

     88.72     88.72     88.72

Corporativo Grupo Imsa S.A. de C.V. (8)

   Mexico   

Services

     88.72     88.72     88.72

Acedor, S.A. de C.V. (8)

   Mexico   

Holding

     88.72     88.72     88.72

Ternium Gas México S.A. de C.V. (9)

   Mexico   

Financial Services

     88.72     88.72     88.72

Ecore Holding S. de R.L. de C.V. (10)

   Mexico   

Holding

     —          88.72     88.72

Treasury Services S.A. de C.V. (10)

   Mexico   

Financial Services

     —          88.72     88.72

APM, S.A. de C.V. (10)

   Mexico   

Manufacturing and selling of steel products

     —          88.72     88.72

Acerus S.A. de C.V. (10)

   Mexico   

Manufacturing and selling of steel products

     —          88.72     88.72

Neotec L.L.C. (11)

   USA   

Holding

     —          88.72     88.72

Imsa Monclova S.A. de C.V. (12)

   Mexico   

Services

     —          —          88.72

Ternium Internacional Guatemala S.A. (13)

   Guatemala   

Selling of steel products

     99.98     99.98     99.98

Ternium USA Inc. (14)

   USA   

Manufacturing and selling of steel products

     100.00     100.00     88.72

Consorcio Minero Benito Juarez Peña Colorada S.A.de C.V. (15)

   Mexico   

Exploration, exploitation and pelletizing of iron ore

     44.36     44.36     —     

Peña Colorada Servicios S.A. de C.V. (15)

   Mexico   

Services

     44.36     44.36     —     

Exiros B.V. (15)

   Netherlands   

Procurement and trading services

     50.00     50.00     —     

Servicios Integrales Nova de Monterrey S.A. de C.V. (16)

   Mexico   

Medical and Social Services

     66.09     66.09     66.09

 

F-12


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

2. BASIS OF PRESENTATION (continued)

 

     Country of         Percentage of ownership at
December 31,
 

Company

   Organization   

Main activity

   2014     2013     2012  

Ternium Internacional Nicaragua S.A.

   Nicaragua   

Manufacturing and selling of steel products

     99.38     99.38     99.38

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

   Honduras   

Manufacturing and selling of steel products

     99.18     99.18     99.18

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

   El Salvador   

Manufacturing and selling of steel products

     99.91     99.91     99.91

Ternium Internacional Costa Rica S.A.

   Costa Rica   

Manufacturing and selling of steel products

     99.98     99.98     99.98

Ferrasa S.A.S. (17)

   Colombia   

Manufacturing and selling of steel products

     54.00     54.00     54.00

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

   Colombia   

Manufacturing and selling of steel products

     54.00     54.00     54.00

Siderúrgica de Caldas S.A.S. (17)

   Colombia   

Manufacturing and selling of steel products

     54.00     54.00     54.00

Procesadora de Materiales Industriales S.A. (17)

   Colombia   

Scrap services company

     54.00     54.00     32.40

Figuraciones S.A.S. (18)

   Colombia   

Manufacturing and selling of steel products

     —          54.00     54.00

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

   Mexico   

Manufacturing and selling of steel products

     51.00     51.00     51.00

Ternium Internacional S.A. (20)

   Uruguay   

Holding and 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 Treasury Services S.A. (20)

   Uruguay   

Financial Services

     100.00     100.00     100.00

Ternium International Ecuador S.A. (21)

   Ecuador   

Marketing of steel products

     100.00     100.00     100.00

Ternium International USA Corporation (21)

   USA   

Marketing of steel products

     100.00     100.00     100.00

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

   Colombia   

Marketing of steel products

     100.00     100.00     100.00

Ternium Internationaal B.V. (22)

   Netherlands   

Marketing of steel products

     100.00     100.00     100.00

Ternium Engineering & Services S.A. (23)

   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 México S.A. de C.V.

   Mexico   

Engineering and other services

     100.00     100.00     100.00

Ternium Treasury Services B.V. (24)

   Netherlands   

Financial Services

     —          100.00     100.00

Soluciones Integrales de Gestión S.A. (25)

   Argentina   

Other services

     100.00     100.00     —     

Ferrasa Panamá, S.A. (26)

   Panama   

Manufacturing and selling of steel products

     54.00     54.00     54.00

Aceros Transformados de Panamá, S.A. (26)

   Panama   

Manufacturing and selling of steel products

     54.00     54.00     54.00

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

2. BASIS OF PRESENTATION (continued)

 

(1) Indirectly through Ternium Investments S.à.r.l. Total voting rights held: 100.00%.
(2) This company was sold as of January 9, 2014.
(3) This company was dissolved as of December 17, 2014.
(4) This company was dissolved as of January 8, 2013.
(5) Indirectly through Ternium Internacional España S.L.U. Total voting rights held: 60.94%.
(6) Indirectly through Siderar S.A.I.C and Ternium Internacional S.A. Total voting rights held 100.00%.
(7) Indirectly through Siderar S.A.I.C., Ternium Internacional S.A. and Ternium Internacional España S.L.U. Total voting rights held 99.93%.
(8) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 100.00%.
(9) Indirectly through Ternium Mexico S.A. de C.V. and Tenigal S. de R.L. de C.V. Total voting rights held: 100.00%.
(10) Merged with Ternium Mexico S.A. de C.V. during the first quarter of 2014.
(11) This company was dissolved as of September 5, 2014.
(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) Since first quarter 2013, indirectly through Ternium Investments S.à.r.l. (100,00%). Total voting rights held: 100.00%. Before that, indirectly through Ternium Mexico S.A. de C.V.
(15) Total voting rights held: 50.00%.
(16) Indirectly through Ternium Mexico S.A. de C.V. Total voting rights held: 74.50%.
(17) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held: 54.00%.
(18) This company was dissolved as of December 24, 2014.
(19) Indirectly through Ternium Internacional España S.L.U.. Total voting rights held: 51.00%.
(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) Since fourth quarter 2014, indirectly through Ternium Investments Switzerland AG (100,00%). Total voting rights held: 100.00%. Before that, indirectly through Ternium Internacional S.A.
(23) Indirectly through Ternium Internacional Inc.. Total voting rights held 100.00%.
(24) Merged with Ternium Internationaal B.V. during the fourth quarter of 2014.
(25) Indirectly through Ternium Investments S.à.r.l. and Ternium Treasury Services S.A. Total voting rights held: 100.00%.
(26) Indirectly through Ternium Treasury Services S.A. Total voting rights held: 54.00%.

The most important non-controlling interest is related to the investment in Siderar S.A.I.C., which is a company listed in the Buenos Aires Stock Exchange. All the information related to this investment could be found in the Buenos Aires Stock Exchange webpage.

 

F-14


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

3. ACQUISITION OF BUSINESS – USINAS SIDERÚRGICAS DE MINAS GERAIS S.A. – USIMINAS

On November 27, 2011, the Company’s wholly-owned Luxembourg subsidiary Ternium Investments S.à r.l. (“Ternium Investments”), together with its 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 Brazilian subsidiary of Tenaris S.A. (“TenarisConfab”), entered into share purchase agreements with Camargo Corrêa, Votorantim and Usiminas employee pension fund Previdência Usiminas (f.k.a. Caixa dos Empregados da Usiminas) (“CEU”) for the acquisition of 139.7 million ordinary shares of Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS (“Usiminas”), representing 27.66% of Usiminas’ voting capital, at a price of BRL 36.0 (approximately USD 19.0) per ordinary share.

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 & Sumitomo Metal Corporation (f.k.a. Nippon Steel Corporation) (“NSSMC”) acquired from CEU 8.5 million ordinary shares. In addition, Ternium Investments, Siderar, Prosid and TenarisConfab 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 held 322.7 million ordinary shares representing the majority of Usiminas’ voting rights, was then formed as follows: NSSMC Group 46.1%, Ternium/Tenaris Group 43.3%, 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.

During 2012, the Company completed its purchase price allocation procedures and determined a notional goodwill included within the investment balance of USD 583 million, according to the following calculation:

 

Opening net assets at January 16, 2012

  9,690,397   
  

 

 

 

Percentage of interest of the Company over opening assets (1)

  11.62
  

 

 

 

Interest of the Company over opening net assets

  1,126,306   
  

 

 

 

Net assets at fair value vs. book value

  534,531   

Goodwill

  582,773   
  

 

 

 

Total Purchase consideration

  2,243,610   
  

 

 

 

 

(1) This percentage of interest is calculated considering treasury shares.

The Company reviews periodically the recoverability of its investment in Usiminas. To determine the recoverable value, the Company estimates the value in use of the investment by calculating the present value of the expected cash flows. There is a significant interaction among the principal assumptions made in estimating Usiminas’ cash flow projections, which include iron ore and steel prices, foreign exchange and interest rates, Brazilian GDP and steel consumption in the Brazilian market.

 

F-15


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

3. ACQUISITION OF BUSINESS – USINAS SIDERÚRGICAS DE MINAS GERAIS S.A. – USIMINAS (continued)

 

As of December 31, 2012, the Company wrote down its investment in Usiminas by USD 275 million. The impairment was mainly due to expectations of a weaker industrial environment in Brazil, where industrial production and consequently steel demand had suffered downward adjustments. In addition, a higher degree of uncertainty regarding future prices of iron ore led to a reduction in Ternium’s forecast of long term iron ore prices that affected cash flow expectations. As of December 31, 2012, the discount rate used to test the investment in Usiminas for impairment was 9.6%.

On October 2, 2014, Ternium Investments entered into a definitive purchase agreement with Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI for the acquisition of 51.4 million ordinary shares of Usiminas at a price of BRL 12 per share, for a total amount of BRL 616.7 million. On October 30, 2014, Ternium Investments completed the acquisition.

Following the acquisition of these additional shares, Ternium (through Ternium Investments, Siderar and Prosid) owns 166.1 million ordinary shares, representing 32.9% of Usiminas’ ordinary shares. Ternium continues to hold 35.6% of Usiminas’ voting rights over the control group and has a participation in Usiminas’ results of 16.82%.

During 2014, the Company performed its purchase price allocation procedures in connection with the acquisition of these additional shares, determined a higher value of net assets at fair value versus book value and, accordingly, recognized a gain in the amount of USD 188.9 million. Set forth below is the Company’s calculation:

 

Net assets at fair value at September 30, 2014

  8,415,389   
  

 

 

 

Percentage of interest of the Company over net assets at fair value acquired (1)

  5.20
  

 

 

 

Interest of the Company over net assets at fair value acquired

  437,920   
  

 

 

 

Gain from bargain purchase

  (188,888
  

 

 

 

Total Purchase consideration

  249,032   
  

 

 

 

As of December 31, 2014, the Company further wrote down its investment in Usiminas by USD 196.4 million. As a result, the recoverable value of the Company’s investment in Usiminas currently amounts to USD 1,390.7 million (see note 14). The impairment was mainly due to expectations of a weaker industrial environment in Brazil, and consequently steel demand, as a result of worsening economic activity, as well as a significant additional downturn in international prices of iron ore and steel, which led to diminished cash flow expectations. As of December 31, 2014 the discount rate used to test the investment in Usiminas for impairment was 9.8%.

Factors that could result in impairment charges in future periods would be an increase in the discount rate or a decrease in steel prices. The Company estimated that a change of 10 bps in the discount rate would have resulted in a change of 2% in the value in use, and a change of 10 USD per ton in the steel price would have resulted in a change of 7% in the value in use.

At December 31, 2014, the closing price of the Usiminas’ ordinary shares as quoted on the BM&FBovespa Stock Exchange was BRL 12.30 (approximately USD 4.63) per share, giving Ternium’s ownership stake a market value of approximately USD 769.3 million.

 

F-16


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

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, 2013.

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

 

  (a) Group accounting

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

Subsidiaries are all entities over which the Company has control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases.

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

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

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

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

 

F-17


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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

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

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

(2) Investments in non-consolidated companies

Associated companies are those entities in which Ternium has significant influence, but which it does not control.

Investments in non-consolidated companies are accounted for using the equity method of accounting. Under this method, interests in joint ventures and associates are initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Company’s share of the post-acquisition profits or losses in the income statement, and its share of post-acquisition changes in reserves recognized in reserves and in other comprehensive income in the income statement. Unrealized gains on transactions among the Company and its non-consolidated companies are eliminated to the extent of the Company’s interest in such non-consolidated companies; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When the Company’s share of losses in a non-consolidated company equals or exceeds its interest in such non-consolidated company, the Company does not recognize further losses unless it has incurred obligations or made payments on behalf of such non-consolidated company.

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

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

 

F-18


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

  (b) Foreign currency translation

(1) Functional and presentation currency

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

(2) Subsidiary companies

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

 

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

 

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

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than the functional currency are recorded as gains and losses from foreign exchange and included in “Other financial income (expenses), net” in the consolidated income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the “fair value gain or loss,” while translation differences on non-monetary financial assets such as equities classified as 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, 2014 and 2013, 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, 2014, there are USD 35 million classified under this category, while as of December 31, 2013, there were 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.

 

F-20


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

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 28 “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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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:

 

Land

No depreciation

Buildings and improvements

10-50 years

Production equipment

5-30 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. The re-estimation of assets useful lives by the Company did not materially affect depreciation charges in 2014, 2013 and 2012.

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”).

 

  (e) Intangible assets

(1) Information system projects

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

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

(2) Mining assets

Mining assets include:

 

  (a) Mining licenses acquired;

 

  (b) Capitalized exploration and evaluation costs, reclassified from exploration and evaluation costs (see note 4 (e) 3); and

 

  (c) Capitalized developmental stripping costs (see note 4 (t)).

Mining licenses were recognized as separate intangible assets upon the acquisition of the investment in Mexico and comprise the right to exploit the mines and are recognized at its fair value at acquisition date less accumulated amortization.

 

F-22


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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, 2014, 2013 and 2012, is approximately 10%, 9% and 9% per year, respectively.

(3) Exploration and evaluation costs

Exploration and evaluation activities involve the search for iron ore resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource.

Exploration and evaluation costs are measured at cost. Costs directly associated with exploration and evaluation activities are capitalized as intangible assets until the determination of reserves is evaluated. The costs associated to the acquisition of machinery and equipment are recognized as property, plant and equipment. If it is determined that commercial discovery has been achieved, costs incurred are reclassified into Mining assets and amortization starts once production begins.

Exploration costs are tested for impairment when there are indicators that impairment exists. Indicators of impairment include, but are not limited to:

 

    Rights to explore in an area have expired or will expire in the near future without renewal;

 

    No further exploration and evaluation is planned or budgeted;

 

    A decision to discontinue exploration and evaluation in an area because of the absence of commercial reserves; and

 

    Sufficient data exists to indicate that the book value will not be fully recovered from future development and production.

When technical feasibility and commercial viability are demonstrated, exploration and evaluation costs are tested for impairment immediately prior to reclassification to the definitive intangible asset. Any impairment charge arising from this test will be included as Other operating expense.

When analyzing the existence of impairment indicators, the exploration and evaluation areas from the mining cash-generating units will be evaluated.

(4) Goodwill

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

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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, 2014, the carrying amount of goodwill allocated to the Mexico CGUs was USD 662.3 million, of which USD 619.8 million corresponds to steel operations and USD 42.5 million to mining operations.

(5) Research and development

Research expenditures are recognized as expenses as incurred. Development costs are recorded as cost of sales in the income statement as incurred because they do not fulfill the criteria for capitalization. Research and development expenditures for the years ended December 31, 2014, 2013 and 2012 totaled USD 8.0 million, USD 7.6 million and USD 8.8 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.

 

  (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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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

Ternium uses cash flow projections for the next five years based on past performance and expectations of market development; thereafter, it uses a perpetuity rate. Application of the discounted cash flow (DCF) method to determine the value in use of a CGU begins with a forecast of all expected future net cash flows. Variables considered in forecasts include the gross domestic product (GDP) growth rates of the country under study and their correlation with steel demand, level of steel prices and estimated raw material costs as observed in industry reports.

Cash flows are discounted at rates that reflect specific country and currency risks associated with the cash flow projections. The discount rates used are based on Ternium’s weighted average cost of capital (WACC), which is considered to be a good indicator of cost of capital. As of December 31, 2014 the discount rate used to test goodwill allocated to the Steel and Mining Mexico CGUs for impairment was 9.44%.

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.

Except for the impairment in connection with the investment in Usiminas in 2014 and 2012, during the years 2014, 2013 and 2012, no impairment provisions were recorded in connection with assets that have an indefinite useful life (including goodwill). For the impairment in connection with the investment in Usiminas, see note 3.

 

  (g) Other investments

Other investments consist primarily of investments in financial debt instruments and equity investments where the Company holds a minor equity interest and does not exert significant influence.

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

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

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

Certain fixed income financial instruments purchased by the Company have been categorized as available for sale if designated in this category or not classified in any of the other categories. The results of these financial investments are recognized in Finance Income in the Consolidated Income Statement using the effective interest method. Unrealized gains and losses other than impairment and foreign exchange results are recognized in Other comprehensive income. On maturity or disposal, net gain and losses previously deferred in Other comprehensive income are recognized in Finance Income in the Consolidated Income Statement.

 

  (h) Inventories

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

The cost of iron ore produced in our mines comprises all direct costs necessary to extract and convert stockpiled inventories into raw materials, including production stripping costs, depreciation of fixed assets related to the mining activity and amortization of mining assets for those 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 (y) (4)).

 

  (i) Trade receivables and other receivables

Trade and other receivables are recognized initially at fair value, generally the original invoice amount. The Company analyzes its trade receivables on a regular basis and, when aware of a specific counterparty’s difficulty or inability to meet its obligations, impairs any amounts due by means of a charge to an allowance for doubtful accounts. Additionally, this allowance is adjusted periodically based on the aging of receivables.

 

  (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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

  (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, 2014 and 2013 totals USD 14.8 million and USD 17.8 million, respectively, which corresponds principally to land and other real estate items. Sale is expected to be completed within a one-year period.

 

  (l) Borrowings

Borrowings are recognized initially for an amount equal to the proceeds received. In subsequent periods, borrowings are stated at amortized cost following the effective interest method.

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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

  (n) Employee liabilities

(1) Post-employment obligations

The Company has defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The Company applied IAS 19 (amended 2011), “Employee benefits”, on January 1, 2013. In accordance with the amended standard, post-employment benefits are accounted as follows:

The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually (at year end) by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. In countries where there is no deep market in such bonds, the market rates on government bonds are used.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.

Past-service costs are recognized immediately in income.

For defined benefit plans, net interest income/expense is calculated based on the surplus or deficit derived by the difference between the defined benefit obligations less plan assets.

For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

Mexico

Ternium Mexico has defined benefit and defined contribution plans.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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 termination of the employment relationship due to certain specified events, including retirement. Benefits provided by the plan 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.

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

As of December 31, 2014 and 2013, the outstanding liability corresponding to the Program amounts to USD 22.5 million and USD 19.3 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, 2014 and 2013, is USD 27.4 million and USD 21.8 million, respectively.

Under Mexican law, Ternium’s subsidiaries are required to pay their employees an annual benefit which is determined as a percentage of taxable profit for the year.

(4) Social security contributions

Social security laws in force in the countries in which the Company operates provide for pension benefits to be paid to retired employees from government pension plans and/or private fund managed plans to which employees may elect to contribute. As stipulated by the respective laws, 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 collectability is reasonably assured. Revenues are shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group.

Interest income is recognized on an effective yield basis.

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

  (r) Borrowing Costs

The Company 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, 2014, 2013 and 2012, 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) Stripping costs

Stripping costs are the costs associated with the removal of overburden and other waste materials and can be incurred before the mining production commences (“developmental stripping”) or during the production stage (“production stripping”).

Development stripping costs that contribute to the future economic benefits of mining operations are capitalized as intangible assets (Mining assets). Production stripping costs which are part of on-going activities are included in the cost of the inventory produced (that is extracted) at each mine during the period in which they are incurred.

Capitalization of development stripping costs finishes when the commercial production of the mine commences. At that time, all development stripping costs are presented within Mining assets and depreciated on a unit-of-production basis. It is considered that commercial production begins when the production stage of mining operations begins and continues throughout the life of a mine.

 

  (u) Mining development costs

Mining development costs are the costs associated to the activities related to the establishment of access to the mineral reserve and other preparations for commercial production. These activities often continue during production.

Development expenditures are capitalized and classified as Work in progress. On completion of development, all assets included in Work in progress are individually reclassified to the appropriate category of property, plant and equipment and depreciated accordingly.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

  (v) Asset retirement obligations

Ternium records asset retirement obligations (“ARO”) initially at the fair value of the legal or constructive obligation in the period in which it is incurred and capitalizes the ARO by increasing the carrying amount of property, plant and equipment. The fair value of the obligation is determined as the discounted value of the expected future cash flows and is included in Provisions. The liability is accreted to its present value through net financing cost and the capitalized cost is depreciated based in the unit of production method.

 

  (w) 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. There are no dilutive securities for the periods presented.

 

  (x) 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, 2014 and 2013, the effective portion of designated cash flow hedges (net of taxes) amounted to USD (0.4) million and USD 1.1 million, respectively, and were included under “changes in the fair value of derivatives classified as cash flow hedges” line item in the statement of comprehensive income (see Note 26 (a)).

More information about accounting for derivative financial instruments and hedging activities is included in Note 28 “Financial risk management”.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

  (y) Critical Accounting Estimates

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

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

(1) Goodwill impairment test

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

Goodwill is tested at the level of the CGUs. Impairment testing of the CGUs is carried out and the value in use determined in accordance with the accounting policy stated in Note 4(f). The discount rates used for these tests are based on Ternium’s weighted average cost of capital adjusted for specific country and currency risks associated with the cash flow projections. The discount rate used at December 31, 2014 was 9.44% 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.

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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

(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 9.1 million and USD 14.0 million as of December 31, 2014 and 2013, 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, 2014 and 2013, the Company recorded no allowance for net realizable value and USD 48.0 million and USD 47.8 million, respectively, as allowance for obsolescence.

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

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

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

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 the investment in Usiminas and goodwill test (see note 4 (y) (1)), in 2014 and 2013, 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. For the impairment in connection with the investment in Usiminas in 2014 and 2012, see note 3.

(6) Allowances for doubtful accounts

Management makes estimates of the uncollectibility of our accounts receivable. Management analyses the trade accounts receivable on a regular basis and, 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, 2014 and 2013, allowance for doubtful accounts totals USD 11.4 million and USD 12.8 million, respectively.

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

4. ACCOUNTING POLICIES (continued)

 

(7) Mining reserve estimates

Reserves are estimates of the amount of product that can be economically and legally extracted from the Company’s mining concessions. In order to estimate reserves, a range of geological, technical and economic factors is required to be considered. Estimating the quantity and/or grade of reserves requires complex and difficult geological judgments to interpret the data. Because the economic assumptions used to estimate reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may change from period to period.

Changes in reported reserves may affect the Company’s financial results and financial position, including the following:

 

    Asset carrying amounts may be affected due to changes in estimated future cash flows.

 

    Depreciation and amortization charges may change where such charges are determined by the units of production basis, or where the useful economic lives of assets change.

 

    Stripping costs recognized in Mining assets or charged to results may change due to changes in stripping ratios or the units of production basis of depreciation.

 

    Asset retirement obligations may change where changes in estimated reserves affect expectations about the timing or cost of these activities.

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

5. SEGMENT INFORMATION

REPORTABLE OPERATING SEGMENTS

The Company is organized in two reportable segments: Steel and Mining.

The Steel segment includes the sales of steel products, which comprises slabs, hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets, pre-painted sheets, billets (steel in its basic, semi-finished state), wire rod and bars and other tailor-made products to serve its customers’ requirements.

The Steel segment comprises three operating segments: Mexico, Southern Region and Other markets. These three segments have been aggregated considering the economic characteristics and financial effects of each business activity in which the entity engages; the related economic environment in which it operates; the type or class of customer for the products; the nature of the products; and the production processes. The Mexico operating segment comprises the Company’s businesses in Mexico. The Southern region operating segment manages the businesses in Argentina, Paraguay, Brazil, Chile, Bolivia and Uruguay. The Other markets operating segment includes businesses mainly in United States, Colombia, Guatemala, Costa Rica, El Salvador, Nicaragua, Panamá and Honduras.

The Mining segment includes the sales of mining products, mainly iron ore and pellets, and comprises the mining activities of Las Encinas, an iron ore mining company in which Ternium holds a 100% equity interest and the 50% of the operations and results performed by Peña Colorada, another iron ore mining company in which Ternium maintains that same percentage over its equity interest. Both mining operations are located in Mexico. In the comparative information as of December 31, 2012, the 50% of the operations and results performed by Peña Colorada are only included under management view. Until December 31, 2012, Ternium’s investment in Consorcio Minero Benito Juarez Peña Colorada S.A. de C.V. and Peña Colorada Servicios S.A. de C.V. was presented as an investment in non-consolidated companies and its results under the equity in earnings (losses) in non-consolidated companies within the consolidated income statement. Starting on January 1, 2013, and in connection with certain new agreements, the Company began to recognize its assets, liabilities, revenue and expenses in relation to its interest in the joint operation.

Ternium’s Chief Operating Decision Maker (CEO) holds monthly meetings with senior management, in which operating and financial performance information is reviewed, including financial information that differs from IFRS principally as follows:

 

    The use of direct cost methodology to calculate the inventories, while under IFRS is at full cost, including absorption of production overheads and depreciation.

 

    The use of costs based on previously internally defined cost estimates, while, under IFRS, costs are calculated at historical cost (with the FIFO method).

 

    Under IFRS, the results of Peña Colorada are aggregated in equity in earnings of non-consolidated companies until December 31, 2012. Starting on January 1, 2013, these results are included considering 50% of the operations on a line by line basis. In the comparative information as of December 31, 2012, the 50% of the operations and results performed by Peña Colorada are only included under management view.

 

    Other timing and non-significant differences.

Most information on segment assets is not disclosed as it is not reviewed by the CODM.

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

5. SEGMENT INFORMATION (continued)

 

     Year ended December 31, 2014  
     Steel      Mining      Inter-segment
eliminations
     Total  

IFRS

           

Net sales

     8,700,521         313,157         (287,621      8,726,057   

Cost of sales

     (6,960,009      (255,216      290,056         (6,925,169
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

  1,740,512      57,941      2,435      1,800,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Selling, general and administrative expenses

  (799,844   (16,634   —        (816,478

Other operating income, net

  70,725      1,026      —        71,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income - IFRS

  1,011,393      42,333      2,435      1,056,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management view

Net sales

  8,700,521      333,718      (308,182   8,726,057   

Operating income

  830,312      65,671      (1,504   894,479   

Reconciliation items:

Differences in Cost of sales

  161,682   
           

 

 

 

Operating income - IFRS

  1,056,161   
           

 

 

 

Financial income (expense), net

  (69,450

Equity in (losses) earnings of non-consolidated companies

  (34,218
           

 

 

 

Income before income tax expense - IFRS

  952,493   
           

 

 

 

Depreciation and amortization - IFRS

  (369,197   (45,600   —        (414,797

 

     Year ended December 31, 2013  
     Steel      Mining      Inter-segment
eliminations
     Total  

IFRS

           

Net sales

     8,459,943         386,466         (316,397      8,530,012   

Cost of sales

     (6,645,180      (268,307      313,195         (6,600,292
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

  1,814,763      118,159      (3,202   1,929,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

Selling, general and administrative expenses

  (820,338   (22,973   —        (843,311

Other operating income, net

  23,070      (56   —        23,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income - IFRS

  1,017,495      95,130      (3,202   1,109,423   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management view

Net sales

  8,459,943      505,603      (435,534   8,530,012   

Operating income

  777,505      219,610      (3,202   993,913   

Reconciliation items:

Differences in Cost of sales

  115,510   
           

 

 

 

Operating income - IFRS

  1,109,423   
           

 

 

 

Financial income (expense), net

  (135,475

Equity in (losses) earnings of non-consolidated companies

  (31,609
           

 

 

 

Income before income tax expense - IFRS

  942,339   
           

 

 

 

Depreciation and amortization - IFRS

  (344,415   (32,718   —        (377,133

 

F-38


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

5. SEGMENT INFORMATION (continued)

 

     Year ended December 31, 2012  
     Steel      Mining      Inter-segment
eliminations
     Total  

IFRS

           

Net sales

     8,601,134         190,698         (183,778      8,608,054   

Cost of sales

     (6,909,538      (132,766      175,925         (6,866,379
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

  1,691,596      57,932      (7,853   1,741,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Selling, general and administrative expenses

  (804,690   (4,491   —        (809,181

Other operating income, net

  (12,261   380      —        (11,881
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income - IFRS

  874,645      53,821      (7,853   920,613   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management view

Net sales

  8,601,134      498,171      (491,251   8,608,054   

Operating income

  803,487      265,802      (7,853   1,061,436   

Reconciliation items:

Differences in Cost of sales

  (120,118

Differences related to Peña Colorada (Line by line vs. Equity method)

  (20,704
           

 

 

 

Operating income - IFRS

  920,613   
           

 

 

 

Financial income (expense), net

  (121,632

Equity in (losses) earnings of non-consolidated companies

  (346,833
           

 

 

 

Income before income tax expense - IFRS

  452,148   
           

 

 

 

Depreciation and amortization - IFRS

  (355,247   (15,608   —        (370,855

GEOGRAPHICAL INFORMATION

There are no revenues from external customers attributable to the Company’s country of incorporation (Luxembourg).

For purposes of reporting geographical information, net sales are allocated based on the customer’s location. Allocation of depreciation and amortization is based on the geographical location of the underlying assets.

 

     Year ended December 31, 2014  
     Mexico      Southern region      Other markets      Total  

Net sales

     4,911,989         2,648,512         1,165,556         8,726,057   

Non-current assets (1)

     4,248,087         916,447         265,379         5,429,913   
     Year ended December 31, 2013  
     Mexico      Southern region      Other markets      Total  

Net sales

     4,260,676         2,952,372         1,316,964         8,530,012   

Non-current assets (1)

     4,314,223         1,078,966         277,210         5,670,399   
     Year ended December 31, 2012  
     Mexico      Southern region      Other markets      Total  

Net sales

     4,475,139         2,746,585         1,386,330         8,608,054   

Non-current assets (1)

     3,902,868         1,220,886         279,570         5,403,324   

 

(1) Includes Property, plant and equipment and Intangible assets

 

F-39


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

5. SEGMENT INFORMATION (continued)

 

REVENUES BY PRODUCT

 

     Year ended December 31,  
     2014      2013      2012  

Semi-finished (1)

     209,061         202,826         192,335   

Hot rolled (2)

     3,581,566         3,416,674         3,617,300   

Cold rolled

     1,297,969         1,314,392         1,342,036   

Coated (3)

     3,061,580         2,906,477         2,808,765   

Roll-formed and tubular (4)

     514,586         585,627         611,551   
  

 

 

    

 

 

    

 

 

 

Steel products

  8,664,762      8,425,996      8,571,987   
  

 

 

    

 

 

    

 

 

 

Other products (5)

  61,295      104,016      36,067   
  

 

 

    

 

 

    

 

 

 

TOTAL SALES

  8,726,057      8,530,012      8,608,054   
  

 

 

    

 

 

    

 

 

 

 

(1) Semi-finished includes slabs, billets and round bars.
(2) Hot rolled includes hot rolled flat products, merchant bars, reinforcing bars, stirrups and rods.
(3) Coated includes tin plate and galvanized products.
(4) Roll-formed and tubular includes tubes, beams, insulated panels, roofing and cladding, roof tiles and steel decks.
(5) Other products include pre-engineered metal building systems and pig iron.

 

6. COST OF SALES

 

     Year ended December 31,  
     2014      2013      2012  

Inventories at the beginning of the year

     1,941,130         2,000,137         2,123,516   

Opening inventories - Peña Colorada

     —           18,006         —     

Translation differences

     (161,983      (186,609      (103,129

Plus: Charges for the year

        

Raw materials and consumables used and other movements

     5,718,736         5,242,806         5,474,845   

Services and fees

     95,940         93,366         114,612   

Labor cost

     601,258         608,151         552,009   

Depreciation of property, plant and equipment

     330,866         310,257         306,584   

Amortization of intangible assets

     34,988         15,851         10,851   

Maintenance expenses

     484,929         440,328         387,672   

Office expenses

     7,238         7,034         7,360   

Insurance

     12,310         14,848         7,743   

Charge of obsolescence allowance

     15,924         1,245         12,289   

Recovery from sales of scrap and by-products

     (39,846      (42,556      (44,085

Others

     17,713         18,558         16,249   

Less: Inventories at the end of the year

     (2,134,034      (1,941,130      (2,000,137
  

 

 

    

 

 

    

 

 

 

Cost of Sales

  6,925,169      6,600,292      6,866,379   
  

 

 

    

 

 

    

 

 

 

 

F-40


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

     Year ended December 31,  
     2014      2013      2012  

Services and fees (1)

     75,057         76,450         97,443   

Labor cost

     232,837         234,519         212,820   

Depreciation of property, plant and equipment

     10,957         13,839         8,788   

Amortization of intangible assets

     37,986         37,186         44,632   

Maintenance and expenses

     5,785         7,443         6,904   

Taxes

     133,383         143,834         113,898   

Office expenses

     39,831         41,254         44,988   

Freight and transportation

     263,682         271,364         263,083   

Increase (Decrease) of allowance for doubtful accounts

     1,287         (202      855   

Others

     15,673         17,624         15,770   
  

 

 

    

 

 

    

 

 

 

Selling, general and administrative expenses

  816,478      843,311      809,181   
  

 

 

    

 

 

    

 

 

 

 

(1) For the year ended December 31, 2014, it includes fees accrued for professional services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to USD 3,928, including USD 3,450 for audit services, USD 74 for audit-related services, USD 204 for tax services and USD 199 for all other services.

For the year ended December 31, 2013, it includes fees accrued for professional services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to USD 4,288, including USD 3,821 for audit services, USD 391 for audit-related services, USD 39 for tax services and USD 37 for all other services.

For the year ended December 31, 2012, it includes fees accrued for professional services rendered by PwC to Ternium S.A. and its subsidiaries that amounted to USD 4,228, including USD 3,569 for audit services, USD 296 for audit-related services, USD 159 for tax services and USD 204 for all other services.

 

8. LABOR COSTS (Included Cost of sales and Selling, General and Administrative expenses)

 

     Year ended December 31,  
     2014      2013      2012  

Wages, salaries and social security costs

     778,932         790,378         699,899   

Termination benefits

     25,348         19,680         37,176   

Post-employment benefits (Note 21 (i))

     29,815         32,612         27,754   
  

 

 

    

 

 

    

 

 

 

Labor costs

  834,095      842,670      764,829   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2014, 2013 and 2012, the quantity of employees was 16,919, 16,788 and 16,611, respectively.

 

9. OTHER OPERATING INCOME (EXPENSES), NET

 

     Year ended December 31,  
     2014      2013      2012  

Results of sundry assets

     4,111         1,987         3,916   

Collection of insurance (1)

     57,500         11,700         —     

Other operating income

     10,232         16,657         —     
  

 

 

    

 

 

    

 

 

 

Other operating income

  71,843      30,344      3,916   
  

 

 

    

 

 

    

 

 

 

Provision for legal claims and other matters (Note 19 and 24 (ii))

  (92   (7,330   (5,754

Other operating expense

  —        —        (10,043

Other operating expense

  (92   (7,330   (15,797
  

 

 

    

 

 

    

 

 

 

Other operating (expenses) income, net

  71,751      23,014      (11,881
  

 

 

    

 

 

    

 

 

 

 

(1) Includes an insurance collection of USD 57,500 and USD 11,700 in Argentina in the years 2014 and 2013, respectively.

 

F-41


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

10. OTHER FINANCIAL INCOME (EXPENSES), NET

 

     Year ended December 31,  
     2014      2013      2012  

Interest expense

     (114,472      (121,016      (144,488

Debt issue costs

     (3,394      (11,097      (5,814
  

 

 

    

 

 

    

 

 

 

Finance expense

  (117,866   (132,113   (150,302
  

 

 

    

 

 

    

 

 

 

Interest income

  7,685      9,517      17,047   

Change in fair value of financial assets

  (1,970   (11,875   (5,647
  

 

 

    

 

 

    

 

 

 

Finance income

  5,715      (2,358   11,400   
  

 

 

    

 

 

    

 

 

 

Net foreign exchange gain

  26,664      259      7,145   

Derivative contract results

  19,748      (400   16,688   

Others

  (3,711   (863   (6,563
  

 

 

    

 

 

    

 

 

 

Other financial income (expenses), net

  42,701      (1,004   17,270   
  

 

 

    

 

 

    

 

 

 

 

11. INCOME TAX EXPENSE

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

 

     Year ended December 31,  
     2014      2013      2012  

Current tax

     (336,176      (370,349      (298,082

Deferred tax (Note 20)

        

Deferred tax

     (22,240      78,474         40,401   

Effect of changes in tax law on deferred income tax (1)

     (12,702      (33,826      (5,769

Withholding tax on dividend distributions (2)

     (10,474      (24,046      —     

Recovery of income tax (3)

     17,884         321         2,224   
  

 

 

    

 

 

    

 

 

 

Income tax expense

  (363,708   (349,426   (261,227
  

 

 

    

 

 

    

 

 

 

 

(1) For 2014, it includes mainly the effects of the Colombian tax rate reform which introduced an increase from 34% to 39% in 2015, 40% in 2016, 42% in 2017 and 43% in 2018 and of the Mexican mining tax. For the year 2013, it includes the effects of the 2013 Mexican tax reform package, which mainly maintained the current 30% corporate income tax rate, eliminating the scheduled reduction to 29% in 2014 and to 28% in 2015 and repealed the existing tax consolidation regime.
(2) It includes the 10% withholding tax on dividend distributions made by Argentine companies to foreign beneficiaries since 2013.
(3) The amounts recorded in 2014, 2013 and 2012 corresponded to the capitalization of tax losses carried forward generated and not recognized in previous years.

 

F-42


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

11. INCOME TAX EXPENSE (continued)

 

Income tax expense for the years ended December 31, 2014, 2013 and 2012 differed from the amount computed by applying the statutory income tax rate in force in each country in which the company operates to pre-tax income as a result of the following:

 

     Year ended December 31,  
     2014      2013      2012  

Income before income tax

     952,493         942,339         452,148   

Income tax expense at statutory tax rate

     (282,777      (302,741      (205,408

Non taxable income

     2,073         14,799         1,012   

Non deductible expenses

     (21,787      (1,940      (58,892

Effect of currency translation on tax base (1)

     (55,925      (1,993      5,607   

Withholding tax on dividend distributions

     (10,474      (24,046      —     

Recovery of income tax

     17,884         321         2,224   

Effect of changes in tax law

     (12,702      (33,826      (5,769
  

 

 

    

 

 

    

 

 

 

Income tax expense

  (363,708   (349,426   (261,227
  

 

 

    

 

 

    

 

 

 

 

(1) Ternium applies the liability method to recognize deferred income tax on temporary differences between the tax bases of assets and their carrying amounts in the financial statements. By application of this method, Ternium recognizes gains and losses on deferred income tax due to the effect of the change in the value on the tax basis in subsidiaries, which have a functional currency different to their local currency.

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.

 

F-43


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

12. PROPERTY, PLANT AND EQUIPMENT, NET

 

     Year ended December 31, 2014  
     Land     Buildings
and
improvements
    Production
equipment
    Vehicles,
furniture
and
fixtures
    Work in
progress
    Spare
parts
    Total  

Cost

              

Values at the beginning of the year

     503,267        1,839,727        4,083,016        125,559        741,554        61,435        7,354,558   

Translation differences

     (3,036     (246,741     (263,228     (18,871     (70,393     (5,753     (608,022

Additions

     6,202        5,134        4,461        3,256        331,281        35,035        385,369   

Disposals / Consumptions

     —          —          (12,452     (4,015     (541     (13,215     (30,223

Transfers

     21,034        119,712        494,430        7,694        (649,276     8,309        1,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Values at the end of the year

  527,467      1,717,832      4,306,227      113,623      352,625      85,811      7,103,585   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

Accumulated at the beginning of the year

  —        (610,740   (1,931,231   (98,887   —        (4,805   (2,645,663

Translation differences

  —        118,714      213,284      16,854      —        775      349,627   

Depreciation charge

  —        (83,321   (246,485   (7,133   —        (4,884   (341,823

Disposals / Consumptions

  —        —        11,964      2,915      —        422      15,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated at the end of the year

  —        (575,347   (1,952,468   (86,251   —        (8,492   (2,622,558
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2014

  527,467      1,142,485      2,353,759      27,372      352,625      77,319      4,481,027   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year ended December 31, 2013  
     Land     Buildings
and
improvements
    Production
equipment
    Vehicles,
furniture
and
fixtures
    Work in
progress
    Spare
parts
    Total  

Cost

              

Values at the beginning of the year

     498,757        1,768,194        3,754,450        142,628        1,021,352        52,633        7,238,014   

Translation differences

     (4,056     (313,836     (341,357     (25,169     (96,771     (9,573     (790,762

Interest in joint operation

     —          —          79,002        909        3,233        37        83,181   

Additions

     7,983        20,235        3,102        3,002        793,582        29,908        857,812   

Disposals / Consumptions

     —          (2,235     (12,554     (3,975     (544     (5,425     (24,733

Transfers

     583        367,369        600,373        8,164        (979,298     (6,145     (8,954
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Values at the end of the year

  503,267      1,839,727      4,083,016      125,559      741,554      61,435      7,354,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

Accumulated at the beginning of the year

  —        (673,934   (2,005,899   (116,999   —        (3,065   (2,799,897

Translation differences

  —        151,850      286,744      22,786      —        885      462,265   

Depreciation charge

  —        (90,855   (223,328   (7,091   —        (2,822   (324,096

Disposals / Consumptions

  —        1,759      7,822      2,216      —        197      11,994   

Transfers

  —        440      3,430      201      —        —        4,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated at the end of the year

  —        (610,740   (1,931,231   (98,887   —        (4,805   (2,645,663
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2013

  503,267      1,228,987      2,151,785      26,672      741,554      56,630      4,708,895   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-44


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

13. INTANGIBLE ASSETS, NET

 

     Year ended December 31, 2014  
     Information
system
projects
    Mining
assets
    Exploration
and

evaluation
costs
    Customer
relationships
and other
contractual
    Trademarks     Goodwill      Total  

Cost

               

Values at the beginning of the year

     186,681        122,361        34,767        288,475        73,665        662,307         1,368,256   

Translation differences

     (12,097     —          —          —          —          —           (12,097

Additions

     28,973        2,341        21,628        10,000        —          —           62,942   

Transfers

     —          17,956        (17,956     —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Values at the end of the year

  203,557      142,658      38,439      298,475      73,665      662,307      1,419,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Depreciation

Accumulated at the beginning of the year

  (88,258   (68,432   —        (184,465   (65,597   —        (406,752

Translation differences

  9,511      —        —        —        —        —        9,511   

Depreciation charge

  (30,463   (9,241   —        (29,045   (4,225   —        (72,974
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Accumulated at the end of the year

  (109,210   (77,673   —        (213,510   (69,822   —        (470,215
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

At December 31, 2014

  94,347      64,985      38,439      84,965      3,843      662,307      948,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Year ended December 31, 2013  
     Information
system
projects
    Mining
assets
    Exploration
and

evaluation
costs
    Customer
relationships
and other
contractual
    Trademarks     Goodwill     Total  

Cost

              

Values at the beginning of the year

     165,515        111,321        26,658        290,172        73,665        663,807        1,331,138   

Translation differences

     (15,518     —          —          (142     —          —          (15,660

Interest in joint operation

     124        8,533        1,755        —          —          —          10,412   

Additions

     37,574        —          8,861        —          —          —          46,435   

Disposals / Consumptions

     (1,014     —          —          (1,555     —          (1,500     (4,069

Transfers

     —          2,507        (2,507     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Values at the end of the year

  186,681      122,361      34,767      288,475      73,665      662,307      1,368,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

Accumulated at the beginning of the year

  (85,985   (59,732   —        (156,305   (63,910   —        (365,932

Translation differences

  12,217      —        —        —        —        —        12,217   

Depreciation charge

  (14,490   (8,700   —        (28,160   (1,687   —        (53,037
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated at the end of the year

  (88,258   (68,432   —        (184,465   (65,597   —        (406,752
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2013

  98,423      53,929      34,767      104,010      8,068      662,307      961,504   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-45


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

14. INVESTMENTS IN NON-CONSOLIDATED COMPANIES

 

     As of December 31,  
     2014      2013  

At the beginning of the year

     1,375,165         1,710,722   
  

 

 

    

 

 

 

Equity in earnings of non-consolidated companies

  (26,697   (31,609

Other comprehensive income

  (194,571   (188,588

Dividends from non-consolidated companies

  (1,858   (207

Transfers of joint operations

  —        (115,153

Acquisitions (note 3)

  252,042      —     

Gain from bargain purchase (note 3)

  188,888      —     

Impairment charge (note 3)

  (196,409   —     
  

 

 

    

 

 

 

At the end of the year

  1,396,560      1,375,165   
  

 

 

    

 

 

 

The principal investments in non-consolidated companies, all of which are unlisted, except for Usiminas, are:

 

Company

  

Country of
incorporation

 

Main activity

   Voting rights at     Value at  
        December 31,
2014
    December 31,
2013
    December 31,
2014
     December 31,
2013
 

Usinas Siderurgicas de Minas Gerais S.A. - USIMINAS

   Brazil   Manufacturing and selling of steel products      32.88     22.71     1,390,717         1,369,820   

Techgen S.A. de C.V.

   Mexico   Provision of electric power      48.00     —          1,119         —     

Other non-consolidated companies (1)

              4,724         5,345   
           

 

 

    

 

 

 
  1,396,560      1,375,165   
           

 

 

    

 

 

 

 

(1) It includes the investment held in Finma S.A.I.F., Arhsa S.A., Techinst S.A., Recrotek S.R.L. de C.V. and Gas Industrial de Monterrey S.A. de C.V.

 

F-46


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

14. INVESTMENTS IN NON-CONSOLIDATED COMPANIES (continued)

 

Usinas Siderurgicas de Minas Gerais S.A. – USIMINAS

Usiminas is a Brazilian producer of high quality flat steel products used in the energy, automotive and other industries.

As of December 31, 2014 and 2013, the value of the investment in Usiminas is comprised as follows:

 

Value of investment    As of December 31,
2014
     As of December 31,
2013
 

At the beginning of the year

     1,369,820         1,592,340   
  

 

 

    

 

 

 

Share of results (1)

  (25,135   (35,267

Other comprehensive income

  (193,621   (187,253

Dividends

  (1,858   —     

Acquisitions (note 3)

  249,032      —     

Gain from bargain purchase (note 3)

  188,888      —     

Impairment charge (note 3)

  (196,409   —     
  

 

 

    

 

 

 

At the end of the year

  1,390,717      1,369,820   
  

 

 

    

 

 

 

 

(1) It includes the depreciation of the values associated to the purchase price allocation.

On February 17, 2015, Usiminas approved its annual accounts as of and for the year ended December 31, 2014, which state that revenues, post-tax gains from continuing operations and shareholders’ equity amounted to USD 5,017 million, USD 63 million and USD 6,293 million, respectively.

 

Summarized balance sheet (in million USD)    As of December 31,
2014
     As of December 31,
2013
 

Assets

     

Non-current

     8,372         9,348   

Current

     3,104         4,038   
  

 

 

    

 

 

 

Total Assets

  11,476      13,386   
  

 

 

    

 

 

 

Liabilities

Non-current

  2,618      3,174   

Current

  1,796      2,172   
  

 

 

    

 

 

 

Total Liabilities

  4,414      5,346   
  

 

 

    

 

 

 

Minority interest

  769      906   
  

 

 

    

 

 

 

Shareholders’ equity

  6,293      7,134   
  

 

 

    

 

 

 

 

     USIMINAS  
Summarized income statement (in million USD)    As of December 31,
2014
     As of December 31,
2013
 

Net sales

     5,017         5,971   

Cost of sales

     (4,569      (5,294
  

 

 

    

 

 

 

Gross Profit

  448      677   

Selling, general and administrative expenses

  (337   (422

Other operating income (loss), net

  118      (22
  

 

 

    

 

 

 

Operating income

  229      233   

Financial expenses, net

  (220   (420

Equity in earnings of associated companies

  79      84   
  

 

 

    

 

 

 

Profit (Loss) before income tax

  88      (103

Income tax benefit

  8      101   
  

 

 

    

 

 

 

Net profit (loss) before minority interest

  96      (2

Minority interest in other subsidiaries

  (33   (73
  

 

 

    

 

 

 

Net profit (loss) for the year

  63      (75
  

 

 

    

 

 

 

 

F-47


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

14. INVESTMENTS IN NON-CONSOLIDATED COMPANIES (continued)

 

Techgen S.A. de C.V.

Techgen is a Mexican project company currently undertaking the construction and operation of a natural gas-fired combined cycle electric power plant in the Pesquería area of the State of Nuevo León, Mexico. As of February 2014, Ternium, Tenaris, and Tecpetrol International S.A. (a wholly-owned subsidiary of San Faustin S.A., the controlling shareholder of both Ternium and Tenaris) completed their initial investments in Techgen. Techgen is currently owned 48% by Ternium, 30% by Tecpetrol and 22% by Tenaris. Ternium and Tenaris also agreed to enter into power supply and transportation agreements with Techgen, pursuant to which Ternium and Tenaris will contract 78% and 22%, respectively, of Techgen’s power capacity of between 850 and 900 megawatts. During 2014, each of Techgen’s shareholders made additional investments in Techgen, primarily in the form of subordinated loans; however, as of December 31, 2014, all such shareholder loans have been fully repaid with the proceeds of an up to USD 800 million syndicated loan facility.

For commitments from Ternium in connection with Techgen, see note 24.

 

15. RECEIVABLES, NET – NON CURRENT AND CURRENT

 

     As of December 31,  
     2014      2013  

Receivables with related parties (Note 25)

     —           43   

Employee advances and loans

     5,804         6,288   

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

     17,218         22,250   

Advances to suppliers for the purchase of property, plant and equipment with related parties (Note 25)

     467         330   

Tax credits

     21,644         46,828   

Others

     2,349         3,668   
  

 

 

    

 

 

 

Receivables, net - Non-current

  47,482      79,407   
  

 

 

    

 

 

 
     As of December 31,  
     2014      2013  

Value added tax

     9,300         19,459   

Tax credits

     51,120         45,963   

Employee advances and loans

     8,282         8,196   

Advances to suppliers

     6,830         6,784   

Advances to suppliers with related parties (Note 25)

     37         10   

Expenses paid in advance

     10,864         6,068   

Government tax refunds on exports

     6,631         4,530   

Receivables with related parties (Note 25)

     5,441         5,581   

Others

     13,724         15,797   
  

 

 

    

 

 

 

Receivables, net - Current

  112,229      112,388   
  

 

 

    

 

 

 

 

F-48


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

16. TRADE RECEIVABLES, NET – NON CURRENT AND CURRENT

 

     As of December 31,  
     2014      2013  

Trade receivables

     91         1,754   
  

 

 

    

 

 

 

Trade receivables, net – Non-current

  91      1,754   
  

 

 

    

 

 

 
     As of December 31,  
     2014      2013  

Current accounts

     710,173         659,871   

Trade receivables with related parties (Note 25)

     21,413         24,385   

Allowance for doubtful accounts (Note 19)

     (11,372      (12,803
  

 

 

    

 

 

 

Trade receivables, net – Current

  720,214      671,453   
  

 

 

    

 

 

 

 

     Trade receivables, net as of December 31, 2014  
     Total      Fully
performing
     Past due  

Guaranteed

     442,100         413,518         28,582   

Not guaranteed

     289,577         242,859         46,718   
  

 

 

    

 

 

    

 

 

 

Trade receivables

  731,677      656,377      75,300   
  

 

 

    

 

 

    

 

 

 

Allowance for doubtful accounts (Note 19)

  (11,372   —        (11,372
  

 

 

    

 

 

    

 

 

 

Trade receivables, net

  720,305      656,377      63,928   
  

 

 

    

 

 

    

 

 

 
     Trade receivables, net as of December 31, 2013  
     Total      Fully
performing
     Past due  

Guaranteed

     534,400         497,261         37,139   

Not guaranteed

     151,610         101,849         49,761   
  

 

 

    

 

 

    

 

 

 

Trade receivables

  686,010      599,110      86,900   
  

 

 

    

 

 

    

 

 

 

Allowance for doubtful accounts (Note 19)

  (12,803   —        (12,803
  

 

 

    

 

 

    

 

 

 

Trade receivables, net

  673,207      599,110      74,097   
  

 

 

    

 

 

    

 

 

 

 

17. INVENTORIES, NET

 

     As of December 31,  
     2014      2013  

Raw materials, materials and spare parts

     539,611         560,720   

Goods in process

     1,119,123         934,909   

Finished goods

     374,981         330,098   

Goods in transit

     148,337         163,228   

Obsolescence allowance (Note 19)

     (48,018      (47,825
  

 

 

    

 

 

 

Inventories, net

  2,134,034      1,941,130   
  

 

 

    

 

 

 

 

F-49


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

18. CASH, CASH EQUIVALENTS AND OTHER INVESTMENTS

 

     As of December 31,  
     2014      2013  

(i) Other investments

     

Deposits with maturity of more than three months

     149,995         169,503   
  

 

 

    

 

 

 

Other investments

  149,995      169,503   
  

 

 

    

 

 

 

(ii) Cash and cash equivalents

Cash and banks

  75,354      102,465   

Restricted cash

  93      869   

Deposits with maturity of less than three months

  137,856      203,884   
  

 

 

    

 

 

 

Cash and cash equivalents

  213,303      307,218   
  

 

 

    

 

 

 

 

19. ALLOWANCES AND PROVISIONS – NON CURRENT AND CURRENT

 

Provisions and allowances - Non current    Deducted
from assets
     Liabilities      Liabilities  
     Allowance for
doubtful
accounts
     Legal claims
and other
matters
     Asset
retirement
obligation
 

Year ended December 31, 2014

        

Values at the beginning of the year

     —           13,984         19,853   

Translation differences

     —           (3,126      (2,643

Additions

     —           2,269         4,534   

Reversals

     —           (2,177      —     

Uses

     —           (1,883      —     
  

 

 

    

 

 

    

 

 

 

At December 31, 2014

  —        9,067      21,744   
  

 

 

    

 

 

    

 

 

 

Year ended December 31, 2013

Values at the beginning of the year

  —        17,498      —     

Translation differences

  —        (3,753   —     

Additions

  —        11,518      19,853   

Reversals

  —        (4,188   —     

Uses

  —        (7,091   —     
  

 

 

    

 

 

    

 

 

 

At December 31, 2013

  —        13,984      19,853   
  

 

 

    

 

 

    

 

 

 

 

F-50


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

19. ALLOWANCES AND PROVISIONS – NON CURRENT AND CURRENT (continued)

 

Provisions and allowances - Current    Deducted from assets      Liabilities  
     Allowance for
doubtful
accounts
     Obsolescence
allowance
     Asset
retirement
obligation
 

Year ended December 31, 2014

        

Values at the beginning of the year

     12,803         47,825         —     

Translation differences

     (1,245      (1,792      (73

Additions

     2,879         28,116         2,154   

Reversals

     (1,592      (12,192      —     

Uses

     (1,473      (13,939      —     
  

 

 

    

 

 

    

 

 

 

At December 31, 2014

  11,372      48,018      2,081   
  

 

 

    

 

 

    

 

 

 

Year ended December 31, 2013

Values at the beginning of the year

  15,304      66,102      —     

Translation differences

  (756   (2,856   —     

Interest in joint operation

  —        679      —     

Additions

  1,678      21,396      —     

Reversals

  (1,880   (20,151   —     

Uses

  (1,543   (17,345   —     
  

 

 

    

 

 

    

 

 

 

At December 31, 2013

  12,803      47,825      —     
  

 

 

    

 

 

    

 

 

 

 

20. DEFERRED INCOME TAX

Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rate of the applicable country.

Changes in deferred income tax are as follows:

 

     As of December 31,  
     2014      2013  

At the beginning of the year

     (580,981      (644,670

Interest in joint operation

     —           (8,116

Translation differences

     20,309         49,199   

Effect of changes in tax law (note 11)

     (12,702      (33,826

Withholding tax on dividend distributions

     (10,474      (24,046

Charges directly to other comprehensive income

     8,704         1,683   

Deferred tax credit (charge)

     (4,356      78,795   
  

 

 

    

 

 

 

At the end of the year

  (579,500   (580,981
  

 

 

    

 

 

 

 

F-51


Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

20. DEFERRED INCOME TAX (continued)

 

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

 

Deferred tax liabilities

   PP&E     Inventories     Intangible
assets
    Other     Total at
December 31,

2014
 

At the beginning of the year

     (516,811     (52,680     (44,136     (135,129     (748,756

Translation differences

     18,906        (800     173        9,259        27,538   

Charges directly to other comprehensive income

     —          —          —          638        638   

Withholding tax on dividend distributions

     —          —          —          (10,474     (10,474

Effect of changes in tax law

     (10,814     (504     (1,467     (29     (12,814

Income statement credit (charge)

     (81,143     (26,233     (1,425     58,095        (50,706
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At the end of the year

  (589,862   (80,217   (46,855   (77,640   (794,574
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax assets

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

2014
 

At the beginning of the year

     58,237        7,991        27,571        73,976        167,775   

Translation differences

     (3,829     (432     —          (2,968     (7,229

Charges directly to other comprehensive income

     —          —          —          8,066        8,066   

Effect of changes in tax law

     37        —          —          75        112   

Income statement credit (charge)

     3,614        3,183        35,958        3,595        46,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At the end of the year

  58,059      10,742      63,529      82,744      215,074   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) As of December 31, 2014, the recognized deferred tax assets on tax losses amount to USD 63,529 and the net unrecognized deferred tax assets amount to USD 2,064. 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 liabilities

   PP&E     Inventories     Intangible
assets
    Other     Total at
December 31,
2013
 

At the beginning of the year

     (515,943     (68,710     (48,382     (166,582     (799,617

Translation differences

     26,774        1,128        255        29,414        57,571   

Interest in joint operation

     (6,277     (2,467     (3,024     —          (11,768

Charges directly to other comprehensive income

     —          —          —          —          —     

Effect of changes in tax law

     (26,476     —          (3,108     (24,046     (53,630

Income statement credit (charge)

     5,111        17,369        10,123        24,402        57,005   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At the end of the year

  (516,811   (52,680   (44,136   (136,812   (750,439
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax assets

   Provisions     Trade
receivables
    Tax losses (2)     Other     Total at
December 31,
2013
 

At the beginning of the year

     54,659        8,291        18,193        73,804        154,947   

Translation differences

     (8,054     109        —          (427     (8,372

Interest in joint operation

     1,806        —          —          1,846        3,652   

Charges directly to other comprehensive income

     —          —          —          1,683        1,683   

Effect of changes in tax law

     —          —          —          (4,242     (4,242

Income statement credit (charge)

     9,826        (409     9,378        2,995        21,790   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At the end of the year

  58,237      7,991      27,571      75,659      169,458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) As of December 31, 2013, the recognized deferred tax assets on tax losses amount to USD 27,571 and the net unrecognized deferred tax assets amount to USD 17,782. 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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

20. DEFERRED INCOME TAX (continued)

 

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

 

     As of December 31,  
     2014      2013  

Deferred tax assets to be recovered after more than 12 months

     159,918         115,201   

Deferred tax assets to be recovered within 12 months

     55,155         51,936   

Deferred tax liabilities to be settled after more than 12 months

     (700,031      (681,459

Deferred tax liabilities to be settled within 12 months

     (94,542      (66,659
  

 

 

    

 

 

 
  (579,500   (580,981
  

 

 

    

 

 

 

 

21. OTHER LIABILITIES – NON CURRENT AND CURRENT

 

     As of December 31,  
     2014      2013  

(i) Other liabilities - Non current

     

Termination benefits

     203         474   

Post-employment benefits

     313,146         291,822   

Other employee benefits

     35,351         30,111   

Asset retirement obligation (note 19) (1)

     21,744         19,853   

Other

     1,456         3,171   
  

 

 

    

 

 

 

Other liabilities - Non-current

  371,900      345,431   
  

 

 

    

 

 

 

 

(1) The asset in connection with this liability is included in Property, plant and equipment.

Post-employment benefits

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

 

     Post-employment benefits  
     As of December 31,  
     2014      2013  

Present value of unfunded obligations

     313,146         313,269   

Fair value of plan assets

     —           (21,447
  

 

 

    

 

 

 

Liability in the statement of financial position

  313,146      291,822   
  

 

 

    

 

 

 

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

 

     Post-employment benefits  
     Year ended December 31,  
     2014      2013  

Current service cost

     8,603         8,355   

Interest cost

     20,794         22,976   

Amortization of prior service costs

     418         1,281   
  

 

 

    

 

 

 

Total included in labor costs

  29,815      32,612   
  

 

 

    

 

 

 

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

21. OTHER LIABILITIES – NON CURRENT AND CURRENT (continued)

 

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

 

     Post-employment benefits  
     As of December 31,  
     2014      2013  

At the beginning of the year

     291,822         261,415   

Interest in joint operation

     —           8,103   

Transfers, new participants and funding of the plan

     (1,595      7,592   

Total expense

     29,815         32,612   

Remeasurements

     27,474         7,787   

Translation differences

     (30,929      (2,477

Contributions paid

     (3,441      (23,210
  

 

 

    

 

 

 

At the end of the year

  313,146      291,822   
  

 

 

    

 

 

 

The principal actuarial assumptions used were as follows:

 

     Year ended December 31,  
Mexico    2014     2013  

Discount rate

     7.75     8.50

Compensation growth rate

     4.00     4.00
     Year ended December 31,  
Argentina    2014     2013  

Discount rate

     7.00     7.00

Compensation growth rate

     2.00     2.00

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is as follows:

 

     Impact on defined benefit obligation  
     Change in
assumption
    Increase in
assumption
    Decrease in
assumption
 

Discount rate

     1.00     -10.6     12.8

Compensation growth rate

     1.00     2.6     -2.2

Pension growth rate

     1.00     1.0     -1.1

Life expectancy

     1 year        -0.2     0.2

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

21. OTHER LIABILITIES – NON CURRENT AND CURRENT (continued)

 

     As of December 31,  
     2014      2013  

(ii) Other liabilities - Current

     

Payroll and social security payable

     99,509         92,188   

VAT liabilities

     57,031         50,765   

Other tax liabilities

     39,620         46,042   

Termination benefits

     3,298         4,584   

Related Parties (Note 25)

     3,704         3,901   

Asset retirement obligation (Note 19)

     2,081         —     

Others

     4,963         5,846   
  

 

 

    

 

 

 

Other liabilities - Current

  210,206      203,326   
  

 

 

    

 

 

 

 

22. DERIVATIVE FINANCIAL INSTRUMENTS

Net fair values of derivative financial instruments

The net fair values of derivative financial instruments at December 31, 2014 and 2013 were as follows:

 

     As of December 31,  
     2014      2013  

Contracts with positive fair value

     

Interest rate swap contracts

     —           1,535   

Foreign exchange contracts

     4,338         —     
  

 

 

    

 

 

 
  4,338      1,535   
  

 

 

    

 

 

 

Contracts with negative fair value

Interest rate swap contracts

  (1,342   —     

Foreign exchange contracts

  (34   —     
  

 

 

    

 

 

 
  (1,376   —     
  

 

 

    

 

 

 

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, 2014, most of the Company’s long-term borrowings were at variable rates.

During 2012 and 2013, Tenigal entered into several forward starting interest rate swap agreements in order to fix the interest rate to be paid over an aggregate amount of USD 100 million, in an average rate of 1.92%. These agreements are effective from July 2014, will due on July 2022 and have been accounted for as cash flow hedges. As of December 31, 2014, the after-tax cash flow hedge reserve related to these agreements amounted to USD (0.4) million.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

22. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

 

Changes in fair value of derivative instruments designated as cash flow hedges for each of the years presented are included below:

 

     Cash flow hedges  
     Gross amount      Income tax      Total  
        
  

 

 

    

 

 

    

 

 

 

At December 31, 2012

  (270   81      (189
  

 

 

    

 

 

    

 

 

 

(Decrease) / Increase

  1,805      (541   1,264   

Reclassification to income statement

  —        —        —     
  

 

 

    

 

 

    

 

 

 

At December 31, 2013

  1,535      (460   1,075   
  

 

 

    

 

 

    

 

 

 

(Decrease) / Increase

  (2,876   863      (2,013

Reclassification to income statement

  748      (225   523   
  

 

 

    

 

 

    

 

 

 

At December 31, 2014

  (593   178      (415
  

 

 

    

 

 

    

 

 

 

The gross amount of the pre-tax reserve recorded in other comprehensive income at December 31, 2014 (amounting to a loss of USD 0.6 million) is expected to be reclassified to the income statements in accordance to the payments of interests in connection with the borrowings hedged by these derivative contracts, during 2015 and up to the end of the life of the borrowing in 2022.

(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 2013 and 2014, Prosid Investments entered into several non-deliverable forward agreements to manage the exchange rate exposure generated by Siderar’s debt in ARS against USD. As of December 31, 2014, the notional amount on these agreements amounted to USD 280.3 million.

Furthermore, during 2014, Ferrasa S.A.S. has entered into non-deliverable forward agreements to manage the exposure of certain trade receivables denominated in its local currency. As of December 31, 2014, the notional amount on these agreements was USD 2.0 million.

The net fair values of the exchange rate derivative contracts as of December 31, 2014 and December 31, 2013 were as follows:

 

                   Fair value at December 31,  

Currencies

   Contract      Notional amount      2014      2013  

ARS/USD

     ND Forward         2.5 billion ARS         4,338         —     

COP/USD

     ND Forward         4.8 billion COP         (34      —     
        

 

 

    

 

 

 
  4,304      —     
        

 

 

    

 

 

 

USD: US dollars; COP: Colombian pesos; ARS: Argentine pesos.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

23. BORROWINGS

 

     As of December 31,  
     2014      2013  

(i) Non-current

     

Bank borrowings

     906,161         1,212,070   

Less: debt issue costs

     (5,550      (7,190
  

 

 

    

 

 

 
  900,611      1,204,880   
  

 

 

    

 

 

 

(ii) Current

Bank borrowings

  1,266,126      800,791   

Less: debt issue costs

  (1,918   (2,847
  

 

 

    

 

 

 
  1,264,208      797,944   
  

 

 

    

 

 

 

    

  

 

 

    

 

 

 

Total Borrowings

  2,164,819      2,002,824   
  

 

 

    

 

 

 

The maturity of borrowings is as follows:

 

     Expected Maturity Date  
     2015      2016      2017 and
thereafter
     At December 31, (1)  
              2014      2013  

Fixed Rate

     784,860         10,334         958         796,152         486,955   

Floating Rate

     479,348         329,434         559,885         1,368,667         1,515,869   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1,264,208      339,768      560,843      2,164,819      2,002,824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As most borrowings incorporate floating rates that approximate market rates and the contractual repricing occurs mostly every 1 month, the fair value of the borrowings approximates their carrying amount and it is not disclosed separately.

The weighted average interest rates – which incorporate instruments denominated mainly in US dollars and Argentina pesos and which do not include the effect of derivative financial instruments nor the devaluation of these local currencies – at year-end were as follows:

 

     As of December 31,  
     2014     2013  

Bank borrowings

     4.64     4.89

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, 2014 and 2013, respectively.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

23. BORROWINGS (continued)

 

Breakdown of borrowings by currency is as follows:

 

          As of December 31,  

Currencies

   Contract    2014      2013  

USD

   Floating      1,268,691         1,391,298   

USD

   Fixed      497,970         150,790   

ARS

   Floating      —           152   

ARS

   Fixed      278,840         313,366   

COP

   Floating      99,976         124,418   

CRC

   Fixed      2,963         6,975   

GTQ

   Fixed      16,379         15,825   
     

 

 

    

 

 

 
  2,164,819      2,002,824   
     

 

 

    

 

 

 

USD: US dollars; ARS: Argentine pesos; COP: Colombian pesos; GTQ: Guatemalan quetzales; CRC: Costa Rican colon.

Ternium’s most significant borrowings as of December 31, 2014, were those incurred under Ternium México’s syndicated loan facilities, in order to improve its maturity profile in 2013 and in relation to the Grupo Imsa transaction in July 2007, and under Tenigal’s syndicated loan facility, in order to finance the construction of its hot-dipped galvanizing mill in Pesquería, Mexico:

 

               In USD million       

Date

   Borrower    Type    Original principal
amount
     Outstanding
principal amount as
of December 31, 2014
     Maturity

November 2013

   Ternium Mexico    Syndicated loan      800         800       November 2018

Years 2012 and 2013

   Tenigal    Syndicated loan      200         200       July 2022

The main covenants on these loan agreements are limitations on liens and encumbrances, limitations on the sale of certain assets and compliance with financial ratios (i.e. leverage ratio and interest coverage ratio). As of December 31, 2014, Ternium was in compliance with all of its covenants.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

24. 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 and other contingencies

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

The Argentine tax authority (Administración Federal de Ingresos Públicos, or “AFIP”) has challenged the deduction from income of certain disbursements treated by Siderar as expenses necessary to maintain industrial installations, alleging that these expenses should have been treated as investments or improvements subject to capitalization. Accordingly, AFIP made income tax assessments against Siderar with respect to fiscal years 1995 through 1999.

As of December 31, 2014, Siderar’s aggregate exposure under these assessments (including principal, interest and fines) amounts to approximately USD 11.4 million. Siderar appealed each of these assessments before the National Tax Court, which, in successive rulings, reduced the amount of each of the assessments made by AFIP; the National Tax Court decisions were, however, further appealed by both Siderar and AFIP.

On May 15, 2014, Siderar was notified of a new National Tax Court ruling approving the AFIP assessment for fiscal year 1997 in an amount of approximately USD 0.8 million (including principal and interest); as the Tax Court did not grant a stay with respect to this decision, Siderar paid the full amount of the ruling, reserving its right to seek reimbursement of that payment.

Based on the recent National Tax Court decision, management believes that there could be an additional potential cash outflow in connection with this assessment and, as a result, Siderar recognized a provision which, as of December 31, 2014, amounts to USD 0.6 million.

(b) Companhia Siderúrgica Nacional (CSN) – Tender offer litigation

In 2013, the Company was notified of a lawsuit filed in Brazil by Companhia Siderúrgica Nacional (CSN) and various entities affiliated with CSN against Ternium Investments S.à r.l., its subsidiary Siderar, and Confab Industrial S.A., a Brazilian subsidiary of Tenaris S.A. The entities named in the CSN lawsuit had acquired a participation in Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS (Usiminas) in January 2012. The CSN lawsuit alleges that, under applicable Brazilian laws and rules, the acquirers were required to launch a tag-along tender offer to all non-controlling holders of Usiminas ordinary shares for a price per share equal to 80% of the price per share paid in such acquisition, or BRL 28.8, and seeks an order to compel the acquirers to launch an offer at that price plus interest. If so ordered, the offer would need to be made to 182,609,851 ordinary shares of Usiminas not belonging to Usiminas’ control group; Ternium Investments and Siderar’s respective shares in the offer would be 60.6% and 21.5%.

On September 23, 2013, the first instance court issued its decision finding in favor of the defendants and dismissing the CSN lawsuit. The claimants appealed the court decision and the defendants filed their response to the appeal. It is currently expected that the court of appeals will issue its judgment on the appeal within 2015.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

24. CONTINGENCIES, COMMITMENTS AND RESTRICTIONS ON THE DISTRIBUTION OF PROFITS (continued)

 

Ternium is aware that on November 10, 2014, CSN filed a separate complaint with Brazil’s securities regulator Comissão de Valores Mobiliários (CVM) on the same grounds and with the same purpose as the lawsuit referred to above. The CVM proceeding is underway and the Company has not yet been served with process or requested to provide its response.

Finally, on December 11, 2014, CSN filed a claim with Brazil’s antitrust regulator Consejo Administrativo de Defesa Econômica (CADE). In its claim, CSN alleges that the antitrust clearance request related to the January 2012 acquisition, which was approved by CADE without restrictions in August 2012, contained a false and deceitful description of the acquisition aimed at frustrating the minority shareholders’ right to a tag-along tender offer, and requests that CADE investigate and reopen the antitrust review of the acquisition and suspend the Company’s voting rights in Usiminas until the review is completed. The case is currently under review by CADE’s Administrative Tribunal.

Ternium believes that all of CSN’s claims and allegations are groundless and without merit, as confirmed by several opinions of Brazilian legal counsels and previous decisions by CVM, including a February 2012 decision determining that the above mentioned acquisition did not trigger any tender offer requirement, and, more recently, the first instance court decision on this matter first referred to above. Accordingly, no provision was recorded in these Consolidated Financial Statements.

(c) Shareholder claims relating to the October 2014 acquisition of Usiminas shares

Following Ternium’s October 2, 2014 announcement of its acquisition of 51.4 million ordinary shares of Usiminas from PREVI, the CVM has been analyzing, at the request of Usiminas’ shareholders, whether, as a result of this acquisition, Ternium would be required under applicable Brazilian laws and rules to launch a mandatory tender offer to all non-controlling holders of Usiminas ordinary shares for a fair price. Ternium has presented its reasons and the CVM’s analysis is currently ongoing. While no decision has yet been adopted, it is expected that the CVM will issue its decision in the first quarter of 2015; any such decision would, however, be subject to administrative appeal. As indicated in its October 2, 2014 announcement, Ternium believes that the transaction did not trigger any tender offer requirement. In any event, if the CVM were to determine that Ternium’s purchase of Usiminas shares exceeded the threshold that triggers a mandatory tender offer requirement, Ternium may elect to sell to third parties any shares acquired in excess of the threshold so determined, in which case no tender offer would be required either.

(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 52.5 million and is due to terminate in 2018.

(b) Siderar, within the investment plan, has entered into several commitments to acquire new production equipment for a total consideration of USD 79.2 million.

(c) Siderar assumed fixed commitments for the purchase of raw materials for a total amount of USD 123.8 million to be expended during the next three years.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

24. CONTINGENCIES, COMMITMENTS AND RESTRICTIONS ON THE DISTRIBUTION OF PROFITS (continued)

 

(d) 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 40.2 million to satisfy Siderar’s current production needs through 2021, and to make incremental purchases of these gases for an aggregate amount of USD 133.8 million to satisfy the requirements through 2030.

(e) On December 20, 2000, Hylsa (Ternium Mexico’s predecessor) entered into a 25-year contract with Iberdrola Energia Monterrey, S.A. de C.V. (“Iberdrola”), a Mexican subsidiary of Iberdrola Energía, S.A., for the supply to four of Ternium Mexico’s plants of a contracted electrical demand of 111.2 MW. Iberdrola currently supplies approximately 23% of Ternium Mexico’s electricity needs under this contract. Although the contract was to be effective through 2027, on April 28, 2014, Ternium Mexico and Iberdrola entered into a new supply contract and terminated the previous one. In consideration of the termination of the previous contract, Iberdrola has granted Ternium Mexico a credit of USD 750 thousand per MW of the 111.2 MW contracted capacity, resulting over time in a total value of USD 73.5 million. In addition, Iberdrola agreed to recognize to Ternium México USD 15 million through discounted rates. As a result of the above mentioned credit and discount, the company expects to incur in electricity rates comparable to those obtained in the past under the previous contract’s terms for a period that is estimated to be approximately 2 years. Following such period, Ternium Mexico’s rates under the contract will increase to market rates with a 2.5% discount; however, Ternium Mexico will be entitled to terminate the contract without penalty.

(f) Several Ternium Mexico’s subsidiaries which have facilities throughout the Mexican territory are parties to a long term energy purchase agreement for purchased capacity of electricity 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 114.8 million and the contract will terminate in 2018.

(g) Following the maturity of a previously existing railroad freight services agreement during 2013, in April 2014, Ternium México and Ferrocarril Mexicano, S. A. de C. V. (“Ferromex”) entered into a new railroad freight services agreement pursuant to which Ferromex will transport Ternium Mexico’s products through railroads operated by Ferromex for a term of five years through 2019. Subject to Ternium’s board approval, both Ternium Mexico and Ferromex would be required to make (within a period of 36 months) certain investments to improve the loading and unloading of gondolas. Ternium Mexico’s total investment commitment would amount to approximately USD 15.5 million, while Ferromex’s would amount to approximately USD 5.4 million. Under the agreement, Ternium Mexico has guaranteed to Ferromex a minimum average transport load of 200 metric tons per month in any six-month period.

In the event that the actual per-month average transport loads in any six-month period were lower than such guaranteed minimum, Ternium Mexico would be required to compensate Ferromex for the shortfall so that Ferromex receives a rate equivalent to a total transport load of 1,200 metric tons for such six-month period. However, any such compensation will not be payable if the lower transport loads were due to adverse market conditions, or to adverse operating conditions at Ternium Mexico’s facilities.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

24. CONTINGENCIES, COMMITMENTS AND RESTRICTIONS ON THE DISTRIBUTION OF PROFITS (continued)

 

(h) Techgen is a party to transportation capacity agreements with Kinder Morgan Gas Natural de Mexico, S. de R.L. de C.V., Kinder Morgan Texas Pipeline LLC and Kinder Morgan Tejas Pipeline LLC for a purchasing capacity of 150,000 MMBtu/Gas per day starting on June 1, 2016 and ending on May 31, 2036. As of December 31, 2014, the outstanding value of this commitment was approximately USD 285 million. Ternium’s exposure under the guarantee in connection with these agreements amounts to USD 136.7 million, corresponding to the 48% of the agreements’ outstanding value as of December 31, 2014.

(i) Techgen is a party to a contract with GE Power Systems, Inc. and General Electric International Operations Company, Inc Mexico Branch for the purchase of power generation equipment and other services related to the equipment for an outstanding amount of approximately USD 238 million. These agreements required Techgen to issue stand-by letters of credit up to an amount of USD 47.5 million. Ternium’s exposure under the guarantee in connection with these stand-by letters of credit issued by Techgen is of USD 15.5 million.

(j) Ternium issued a Corporate Guarantee covering 48% of the obligations of Techgen under a syndicated loan agreement between Techgen and several banks led by Citigroup Global Markets Inc., Credit Agricole Corporate and Investment Bank, and Natixis, New York Branch acting as joint bookrunners. The loan agreement amounted to USD 800 million and the proceeds will be used by Techgen in the construction of the facility. As of December 31, 2014, disbursements under the loan agreement amounted USD 440 million, as a result the amount guaranteed by Ternium was approximately USD 211 million. If the loan is disbursed in full, the amount guaranteed by Ternium will be approximately USD 384 million. The main covenants under the Corporate Guarantee are limitations on the sale of certain assets and compliance with financial ratios (e.g. leverage ratio). As of December 31, 2014, Techgen was in compliance with all of its covenants.

(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, 2014, this reserve reached the above-mentioned threshold.

As of December 31, 2014, Ternium may pay dividends up to USD 5.4 billion in accordance with Luxembourg law and regulations.

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

 

     As of
December 31,
2014
 

Share capital

     2,004,743   

Legal reserve

     200,474   

Non distributable reserves

     1,414,122   

Accumulated profit at January 1, 2014

     5,687,690   

Loss for the year

     (289,975
  

 

 

 

Total shareholders’ equity under Luxembourg GAAP

  9,017,054   
  

 

 

 

 

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TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

25. RELATED PARTY TRANSACTIONS

As of December 31, 2014, Techint owned 62.02% of the Company’s share capital and Tenaris held 11.46% of the Company’s share capital. Each of Techint and Tenaris were controlled by San Faustin S.A., a Luxembourg company (“San Faustin”). Rocca & Partners Stichting Administratiekantoor Aandelen San Faustin (“RP STAK”), a Dutch private foundation (Stichting), held 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 24.

The following transactions were carried out with related parties:

 

     Year ended December 31,  
     2014      2013      2012  

(i) Transactions

        

(a) Sales of goods and services

        

Sales of goods to non-consolidated parties

     1,675         23         171   

Sales of goods to other related parties

     224,909         210,622         216,392   

Sales of services and others to non-consolidated parties

     2,459         2,270         173   

Sales of services and others to other related parties

     1,273         2,004         616   
  

 

 

    

 

 

    

 

 

 
  230,316      214,919      217,352   
  

 

 

    

 

 

    

 

 

 

(b) Purchases of goods and services

Purchases of goods from non-consolidated parties

  200,167      228,065      399,495   

Purchases of goods from other related parties

  45,946      86,883      75,482   

Purchases of services and others from non-consolidated parties

  13,584      13,433      45,033   

Purchases of services and others from other related parties

  131,413      234,372      248,647   
  

 

 

    

 

 

    

 

 

 
  391,110      562,753      768,656   
  

 

 

    

 

 

    

 

 

 

(c) Financial results

Income with non-consolidated parties

  1,043      —        —     

Expenses with non-consolidated parties

  —        —        (308
  

 

 

    

 

 

    

 

 

 
  1,043      —        (308
  

 

 

    

 

 

    

 

 

 

(d) Dividends received

Dividends from non-consolidated parties

  1,858      207      4,718   
  

 

 

    

 

 

    

 

 

 
  1,858      207      4,718   
  

 

 

    

 

 

    

 

 

 

(e) Other income and expenses

Income (expenses), net with non-consolidated parties

  6,051      4,597      —     

Income (expenses), net with other related parties

  (640   —        —     
  

 

 

    

 

 

    

 

 

 
  5,411      4,597      —     
  

 

 

    

 

 

    

 

 

 

 

     As of December 31,  
     2014      2013  
(ii) Year-end balances              

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

      transactions

     

Receivables from non-consolidated parties

     6,357         5,218   

Receivables from other related parties

     20,497         24,802   

Advances from non-consolidated parties

     7         —     

Advances to suppliers with other related parties

     498         330   

Payables to non-consolidated parties

     (24,626      (40,244

Payables to other related parties

     (39,895      (35,451
  

 

 

    

 

 

 
  (37,162   (45,345
  

 

 

    

 

 

 

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

25. RELATED PARTY TRANSACTIONS (continued)

 

(iii) Officers and Directors’ compensation

During the year ended December 31, 2014 the cash compensation of Officers and Directors amounted to USD 12,924. In addition, Officers received 1.059.320 Units for a total amount of USD 2,793 in connection with the incentive retention program mentioned in note 4 (n)(3).

 

26. OTHER REQUIRED DISCLOSURES

 

  (a) Statement of comprehensive income

 

     Cash flow hedges      Currency
translation

adjustment
 
     Gross
amount
     Income
tax
     Total     

At December 31, 2012

     (270      81         (189      (1,530,411
  

 

 

    

 

 

    

 

 

    

 

 

 

(Decrease) / Increase

  1,805      (541   1,264      (503,305

Reclassification to income statement

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013

  1,535      (460   1,075      (2,033,716
  

 

 

    

 

 

    

 

 

    

 

 

 

(Decrease) / Increase

  (2,876   863      (2,013   (459,768

Reclassification to income statement

  748      (225   523      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014

  (593   178      (415   (2,493,484
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (b) Statement of cash flows

 

     Year ended December 31,  
     2014      2013      2012  

(i) Changes in working capital (1)

        

Inventories

     (357,023      (115,843      20,250   

Receivables and others

     4,760         78,797         (86,319

Trade receivables

     (90,725      58,332         38,219   

Other liabilities

     30,640         58,591         (41,456

Trade payables

     (138,632      34,734         92,839   
  

 

 

    

 

 

    

 

 

 
  (550,980   114,611      23,533   
  

 

 

    

 

 

    

 

 

 

(ii) Income tax accrual less payments

Tax accrued (Note 11)

  363,708      349,426      261,227   

Taxes paid

  (378,634   (373,603   (220,197
  

 

 

    

 

 

    

 

 

 
  (14,926   (24,177   41,030   
  

 

 

    

 

 

    

 

 

 

(iii) Interest accruals less payments

Interest accrued

  117,866      132,113      150,302   

Interest paid

  (112,704   (148,982   (149,486
  

 

 

    

 

 

    

 

 

 
  5,162      (16,869   816   
  

 

 

    

 

 

    

 

 

 

 

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

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

27. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The following standards, amendments to standards and interpretations are not mandatory for the financial year beginning January 1, 2014 and have not been early adopted:

International Financial Reporting Standard 15, “Revenue from contracts with customers”

In May 2014, the IASB issued IFRS 15, “Revenue from contracts with customers”, which sets out the requirements in accounting for revenue arising from contracts with customers and which is based on the principle that revenue is recognized when control of a good or service is transferred to the customer. IFRS 15 must be applied annual periods beginning on or after January 1, 2017.

International Financial Reporting Standard 9, “Financial instruments”

In July 2014, the IASB issued IFRS 9, “Financial instruments”, which replaces the guidance in IAS 39. It includes requirements on the classification and measurement of financial assets and liabilities, as well as an expected credit losses model that replaces the current incurred loss impairment model. IFRS 9 must be applied on annual periods beginning on or after January 1, 2018.

Amendments to IFRS 10, “Consolidated financial statements” and IAS 28, “Investments in associates and joint ventures”

In September 2014, the IASB issued the Amendments to IFRS 10, “Consolidated financial statements” and IAS 28, “Investments in associates and joint ventures”, which addresses inconsistency between the requirements of both standards in dealing with the sale or contribution of assets between an investor and its associate or joint venture. These amendments must be applied annual periods beginning on or after January 1, 2016.

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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT

 

  1) Financial risk factors

Ternium’s activities expose the Company to a variety of risks: market risk (including the effects of changes in foreign currency exchange rates, interest rates and commodities prices), credit risk and liquidity risk.

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

 

  1.1) Market Risk

(i) Foreign exchange rate risk

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

Ternium 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, 2014. These balances include intercompany positions where the intervening parties have different functional currencies.

 

USD million

Exposure to

   Functional currency  
   USD      ARS  

US dollar (USD)

     —           67   

EU euro (EUR)

     (0      3   

Argentine peso (ARS)

     (7      —     

Mexican peso (MXN)

     (298      —     

Colombian peso (COP)

     (40      —     

Other currencies

     (1      —     

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

The main relevant exposures correspond to:

(a) Argentine peso vs. US dollar

A change of 1% in the exchange rate of the Argentine peso against the US dollar would have generated a pre-tax gain of USD 0.6 million and a pre-tax loss of USD 0.2 million as of December 31, 2014 and 2013, respectively.

(b) Mexican peso vs. US dollar

A change of 1% in the exchange rate of the Mexican peso against the US dollar would have generated a pre-tax gain of USD 2.9 million and USD 2.7 million as of December 31, 2014 and 2013, respectively.

(c) Colombian peso vs. US dollar

A change of 1% in the exchange rate of the Colombian peso against the US dollar would have generated a pre-tax gain of USD 0.4 million and USD 0.5 million as of December 31, 2014 and 2013, respectively.

We estimate that if the Argentine peso, Mexican peso and Colombian peso had weakened simultaneously by 1% against the US dollar with all other variables held constant, total pre-tax income for the year would have been USD 3.9 million higher (USD 2.9 million higher as of December 31, 2013), as a result of foreign exchange gains/losses on translation of US dollar-denominated financial position, mainly trade receivables, trade payables and other liabilities.

Considering the same variation of the currencies against the US dollar of all net investments in foreign operations amounting to USD 2.4 billion, the currency translation adjustment included in total equity would have been USD 24.1 million lower (USD 23.4 million lower as of December 31, 2013, arising mainly from the adjustment on translation of the equity related to the Argentine peso and the Brazilian real.

(ii) Interest rate risk

Ternium manages its exposure to interest rate volatility through its financing alternatives and hedging instruments. Borrowings issued at variable rates expose the Company to the risk of increased interest expense in the event of a raise in market interest rates, while borrowings issued at fixed rates expose the Company to a variation in its fair value. The Company’s interest-rate risk mainly arises from long-term borrowings that bear variable-rate interest that is partially fixed through different derivative transactions, such as 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 do not include the effect of derivative financial instruments nor the devaluation of the local currencies, was 4.64% and 4.89% for 2014 and 2013, 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, 2014 and 2013, respectively.

Ternium’s total variable interest rate debt amounted to USD 1,369 million (63.2% of total borrowings) at December 31, 2014 and USD 1,516 million (75.7% of total borrowings) at December 31, 2013.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

If interest rates on the aggregate average notional of US dollar denominated borrowings held during 2014, excluding borrowings with derivatives contracts mentioned in Note 22 (a), had been 100 basis points higher with all other variables held constant, total pre-tax income for the year ended December 31, 2014 would have been USD 20.7 million lower (USD 20.2 million lower as of December 31, 2013).

(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 24(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 invests in financial assets with a minimum credit rating of investment grade established by an international qualification agency renowned in the financial market, in line with corporate investment portfolio policies. Approximately 80.7% of the Company’s liquid financial assets correspond to investment grade rated instruments as of December 31, 2014, in comparison with approximately 80.9% as of December 31, 2013.

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, 2014, trade receivables total USD 720.3 million. These trade receivables are collateralized by guarantees under letter of credit and other bank guarantees of USD 10.6 million, credit insurance of USD 424.3 million and other guarantees of USD 7.2 million.

As of December 31, 2014, trade receivables of USD 656.4 million were fully performing.

As of December 31, 2014, trade receivables of USD 75.3 million were past due.

The amount of the allowance for doubtful accounts was USD 11.4 million as of December 31, 2014.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

The carrying amounts of the Company’s trade and other receivables as of December 31, 2014, are denominated in the following currencies:

 

Currency    USD
million
 

US dollar (USD)

     562   

EU euro (EUR)

     16   

Argentine peso (ARS)

     30   

Mexican peso (MXN)

     190   

Colombian peso (COP)

     80   

Other currencies

     2   
  

 

 

 
  880   
  

 

 

 

 

  1.3) Liquidity risk

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

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

 

USD million    2015      2016      2017      2018      Thereafter  

Borrowings

     1,264         340         238         223         100   

Interests to be accrued (1)

     36         16         8         5         2   

Trade payables and other liabilities

     540         7         6         6         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1,840      363      252      234      117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

As of December 31, 2014, total borrowings less cash and cash equivalents and other current investments amounted to USD 1,801.5 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 0.26 and 0.24 as of December 31, 2014 and 2013, 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.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

As of December 31, 2014 (in USD thousands)

   Loans and
receivables
     Assets at fair
value through
profit and loss
     Available for
sale
     Total  

(i) Assets as per statement of financial position

           

Receivables

     35,599         —           —           35,599   

Derivative financial instruments

     —           4,338         —           4,338   

Trade receivables

     720,305         —           —           720,305   

Other investments

     67,492         47,555         34,948         149,995   

Cash and cash equivalents

     16,246         197,057         —           213,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  839,642      248,950      34,948      1,123,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2014 (in USD thousands)

   Derivatives      Other financial
liabilities
     Available for
sale
     Total  

(ii) Liabilities as per statement of financial position

           

Other liabilities

     —           32,493         —           32,493   

Trade payables

     —           541,330         —           541,330   

Derivative financial instruments

     1,376         —           —           1,376   

Borrowings

     —           2,164,819         —           2,164,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1,376      2,738,642      —        2,740,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013 (in USD thousands)

   Loans and
receivables
     Assets at fair
value through
profit and loss
     Available for
sale
     Total  

(i) Assets as per statement of financial position

           

Receivables

     39,575         —           —           39,575   

Derivative financial instruments

     —           1,535         —           1,535   

Trade receivables

     673,207         —           —           673,207   

Other investments

     58,198         111,305         —           169,503   

Cash and cash equivalents

     2,002         305,216         —           307,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  772,982      418,056      —        1,191,038   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013 (in USD thousands)

   Derivatives      Other financial
liabilities
     Available for
sale
     Total  

(ii) Liabilities as per statement of financial position

           

Other liabilities

     —           44,841         —           44,841   

Trade payables

     —           689,092         —           689,092   

Borrowings

     —           2,002,824         —           2,002,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  —        2,736,757      —        2,736,757   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value by Hierarchy

Following the requirements contained in IFRS 13, Ternium categorizes each class of financial instrument measured at fair value in the statement of financial position into three levels, depending on the significance of the judgment associated with the inputs used in making the fair value measurements:

 

    Level 1 comprises financial assets and financial liabilities whose fair values have been determined on the basis of quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

    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).

The following table presents the assets and liabilities that are measured at fair value as of December 31, 2014 and 2013:

 

     Fair value measurement as of December 31, 2014
(in USD thousands):
 

Description

   Total      Level 1      Level 2  

Financial assets at fair value through profit or loss

        

Cash and cash equivalents

     197,058         197,057         —     

Other investments

     82,502         56,466         26,036   

Derivative financial instruments

     4,338         —           4,338   
  

 

 

    

 

 

    

 

 

 

Total assets

  283,898      253,524      30,374   
  

 

 

    

 

 

    

 

 

 

Financial liabilities at fair value through profit or loss

Derivative financial instruments

  1,376      —        1,376   
  

 

 

    

 

 

    

 

 

 

Total liabilities

  1,376      —        1,376   
  

 

 

    

 

 

    

 

 

 
     Fair value measurement as of December 31, 2013
(in USD thousands):
 

Description

   Total      Level 1      Level 2  

Financial assets at fair value through profit or loss

        

Cash and cash equivalents

     305,216         300,212         5,005   

Other investments

     111,305         64,971         46,334   

Derivative financial instruments

     1,535         —           1,535   
  

 

 

    

 

 

    

 

 

 

Total assets

  418,057      365,183      52,874   
  

 

 

    

 

 

    

 

 

 

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.

The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by Ternium is the current bid price. These instruments are included in Level 1 and comprise primarily corporate and sovereign debt securities.

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

The fair value of financial instruments that are not traded in an active market (such as certain debt securities, certificates of deposits with original maturity of more than three months, forward and interest rate derivative instruments) is determined by using valuation techniques which maximize the use of observable market data when available and rely as little as possible on entity specific estimates. If all significant inputs required to value an instrument are observable, the instrument is included in Level 2. Ternium values its assets and liabilities included in this level using bid prices, interest rate curves, broker quotations, current exchange rates, forward rates and implied volatilities obtained from market contributors as of the valuation date.

If one or more of the significant inputs are not based on observable market data, the instruments are included in Level 3. Ternium values its assets and liabilities in this level using observable market inputs and management assumptions which reflect the Company’s best estimate on how market participants would price the asset or liability at measurement date.

 

  3) Accounting for derivative financial instruments and hedging activities

Derivative financial instruments are initially recognized in the statement of financial position at cost and subsequently measured at fair value. Changes in fair value are disclosed under “Other financial income (expenses), net” line item in the 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, 2014, the effective portion of designated cash flow hedges amounts to USD (0.4) million (net of taxes) and is included as “Cash flow hedges” line item in the statement of comprehensive income.

The fair values of various derivative instruments used for hedging purposes are disclosed in Note 22. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.

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

 

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Table of Contents

TERNIUM S.A.

 

Consolidated Financial Statements as of December 31, 2014 and 2013

and for the years ended December 31, 2014, 2013 and 2012

 

 

28. FINANCIAL RISK MANAGEMENT (continued)

 

  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 incorporate floating rates that approximate market rates and the contractual repricing occurs mostly every 1 month, the fair value of the borrowings approximates their carrying amount and it is not disclosed separately.

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.

 

29. SUBSEQUENT EVENTS

On January 20, 2015, Ternium S.A. announced it has entered into a definitive agreement to acquire the remaining 46% minority interest in its Colombian subsidiary Ferrasa for a total consideration of USD 74 million. The transaction, which is subject to customary conditions, is expected to close in the second quarter of 2015. Prior to this transaction, Ternium was already fully consolidating Ferrasa’s assets and liabilities and results of operations.

Ferrasa is a leading long and flat steel products processor and distributor in Colombia and a scrap-based long steel manufacturer, with finished steel annual production capacity of approximately 480,000 tons and annual sales of close to 600,000 tons, of which approximately 70% are long products and 30% are flat and tubular products, used mainly in the construction sector. Ternium holds, since August 25, 2010, a 54% ownership interest in Ferrasa.

Ternium also has agreed to sell its 54% ownership interest in Ferrasa Panamá for a total consideration of USD 2 million. Ferrasa Panamá is a long steel products processor and distributor based in Panama, with annual sales of approximately 25,000 tons.

Pablo Brizzio

Chief Financial Officer

 

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