FORM 6 - K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
As of 11/6/2007
Ternium S.A.
(Translation of Registrant's name into English)
Ternium S.A.
46a, Avenue John F. Kennedy
L-1855 Luxembourg
(Address of principal executive offices)
Indicate by check mark whether the registrant files or
will file annual reports under cover Form 20-F
or 40-F.
Form 20-F X Form 40-F
--- ---
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12G3-2(b) under the Securities Exchange Act of 1934.
Yes No X
--- ---
If "Yes" is marked, indicate below the file number
assigned to the registrant in connection with Rule
12g3-2(b):
Not applicable
The attached material is being furnished to the Securities and Exchange
Commission pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange
Act of 1934, as amended.
This report contains Ternium S.A.'s consolidated financial statements as of
September 30, 2007.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TERNIUM S.A.
By: /s/ Roberto Philipps By: /s/ Daniel Novegil
-------------------- ---------------------
Name: Roberto Philipps Name: Daniel Novegil
Title: Chief Financial Officer Title: Chief Executive Officer
Dated: November 6, 2007
TERNIUM S.A.
CONSOLIDATED CONDENSED INTERIM
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2007 AND 2006
46a, Avenue John F. Kennedy, 2nd floor
L - 1855
R.C.S. Luxembourg : B 98 668
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ternium S.A.:
We have reviewed the accompanying consolidated condensed balance sheet of
Ternium S.A. and its subsidiaries as of September 30, 2007, and the related
consolidated condensed statements of income and of changes in shareholders'
equity for the nine-month periods ended September 30, 2007 and 2006 and the
consolidated condensed statements of cash flows for the nine-month periods ended
September 30, 2007 and 2006. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed interim financial statements
for them to be in conformity with International Financial Reporting Standards.
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2006, and the related consolidated statements of income, of changes
in shareholders' equity and of cash flows for the year then ended (not presented
herein), and in our report dated February 27, 2007 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet information
as of December 31, 2006, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived
Buenos Aires, Argentina
November 6, 2007
PRICE WATERHOUSE & CO. S.R.L.
by (Partner)
-----------------------------
Marcelo D. Pfaff
TERNIUM S.A.
Consolidated condensed interim financial statements as of September 30, 2007
and for the nine-month periods ended September 30, 2007 and 2006
(All amounts in USD thousands)
CONSOLIDATED CONDENSED INTERIM INCOME STATEMENTS
Three-month period Nine-month period
ended September 30, ended September 30,
----------------------------- -----------------------------
Notes 2007 2006 2007 2006
----- -------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
Net sales 3 2,343,350 1,740,373 6,102,707 4,979,044
Cost of sales 3 & 4 (1,700,955) (1,078,486) (4,233,585) (3,143,844)
-------------- -------------- -------------- --------------
Gross profit 3 642,395 661,887 1,869,122 1,835,200
Selling, general and administrative expenses 3 & 5 (225,345) (152,479) (588,174) (458,565)
Other operating income (expenses), net 3 15,511 (1,203) 17,654 775
-------------- -------------- -------------- --------------
Operating income 3 432,561 508,205 1,298,602 1,377,410
Interest expense (46,825) (27,652) (76,682) (91,671)
Interest income 14,891 15,415 39,739 40,559
Other financial expenses, net 6 (131,072) (74,954) (295,252) (267,821)
Equity in (losses) earnings of associated companies (2,021) 4,767 (3,412) 3,845
-------------- -------------- -------------- --------------
Income before income tax expense 267,534 425,781 962,995 1,062,322
Income tax expense (53,535) (71,747) (182,416) (224,594)
-------------- -------------- -------------- --------------
Net income for the period 213,999 354,034 780,579 837,728
-------------- -------------- -------------- --------------
Attributable to:
Equity holders of the Company 159,819 257,378 618,878 655,022
Minority interest 54,180 96,656 161,701 182,706
-------------- -------------- -------------- --------------
213,999 354,034 780,579 837,728
-------------- -------------- -------------- --------------
Weighted average number of shares outstanding 2,004,743,442 2,004,743,442 2,004,743,442 1,913,947,510
Basic and diluted earnings per share for profit
attributable to the equity holders of the Company
(expressed in USD per share) 0.08 0.13 0.31 0.34
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. These consolidated condensed interim financial
statements should be read in conjunction with our audited Consolidated Financial
Statements and notes for the fiscal year ended December 31, 2006.
-2-
TERNIUM S.A.
Consolidated condensed interim financial statements as of September 30, 2007
and for the nine-month periods ended September 30, 2007 and 2006
(All amounts in USD thousands)
CONSOLIDATED CONDENSED BALANCE SHEETS
Notes September 30, 2007 December 31, 2006
----- ------------------ -----------------
(Unaudited)
ASSETS
Non-current assets
Property, plant and equipment, net 7 7,180,247 5,420,683
Intangible assets, net 8 1,571,279 551,587
Investments in associated companies 47,718 16,285
Other investments, net 14,706 13,387
Deferred tax assets 298,225 36,439
Receivables, net 93,435 9,205,610 78,903 6,117,284
------------ ------------- ---------- -----------
Current assets
Receivables 277,864 175,818
Derivative financial instruments 1,065 7,852
Inventories, net 1,982,507 1,241,325
Trade receivables, net 1,046,971 577,866
Other investments, net 115,227 -
Cash and cash equivalents 1,078,750 4,502,384 643,352 2,646,213
----------- ---------- ---------- -----------
Non-current assets classified as held for sale 17,000 7,042
---------- -----------
Total assets 13,724,994 8,770,539
---------- -----------
EQUITY
Capital and reserves attributable to the company's
equity holders 4,281,862 3,757,558
Minority interest 1,857,346 1,729,583
---------- -----------
Total equity 6,139,208 5,487,141
LIABILITIES
Non-current liabilities
Provisions 57,381 60,543
Deferred income tax 1,508,543 985,155
Other liabilities 351,261 274,566
Trade payables 6,837 7,229
Borrowings 3,763,569 5,687,591 548,401 1,875,894
----------- ---------- ---------- -----------
Current liabilities
Current tax liabilities 221,351 103,195
Other liabilities 248,087 158,374
Trade payables 1,052,147 621,754
Derivative financial instruments 6,399 15,487
Borrowings 370,211 1,898,195 508,694 1,407,504
----------- ---------- ---------- -----------
Total liabilities 7,585,786 3,283,398
---------- -----------
Total equity and liabilities 13,724,994 8,770,539
---------- -----------
Contingencies, commitments and restrictions on the distribution of profits are
disclosed in Note 10.
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. These consolidated condensed interim financial
statements should be read in conjunction with our audited Consolidated Financial
Statements and notes for the fiscal year ended December 31, 2006.
-3-
TERNIUM S.A.
Consolidated condensed interim financial statements as of September 30, 2007
and for the nine-month periods ended September 30, 2007 and 2006
(All amounts in USD thousands)
CONSOLIDATED CONDENSED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Attributable to the Company's equity holders (1)
---------------------------------------------------------------------------------------------------
Capital
Initial stock
public Revaluation issue Currency
Capital offering and other discount translation Retained Minority Total
stock expenses reserves (2) adjustment earnings Total interest Equity
---------------------------------------------------------------------------------------------------
Balance at January 1,
2007 2,004,744 (23,295) 2,047,199 (2,324,866) (121,608) 2,175,384 3,757,558 1,729,583 5,487,141
Currency translation
adjustment 5,663 5,663 (14,927) (9,264)
Net income for the
period 618,878 618,878 161,701 780,579
---------------------------------------------------------------------------------------------------
Total recognized
income for the
period 5,663 618,878 624,541 146,774 771,315
Dividends paid in
cash and other
distributions (100,237) (100,237) (100,237)
Dividends paid in
cash and other
distributions by
subsidiary companies (20,000) (20,000)
Contributions from
minority
shareholders in
consolidated
subsidiaries 1,119 1,119
Acquisition of
business (130) (130)
---------------------------------------------------------------------------------------------------
Balance at September
30, 2007 2,004,744 (23,295) 1,946,962 (2,324,866) (115,945) 2,794,262 4,281,862 1,857,346 6,139,208
---------------------------------------------------------------------------------------------------
Balance at January 1,
2006 1,396,552 (5,456) 1,462,137 (2,298,048) (92,691) 1,379,960 1,842,454 1,733,465 3,575,919
Currency translation
adjustment (61,524) (61,524) (19,128) (80,652)
Net income for the
period 655,022 655,022 182,706 837,728
---------------------------------------------------------------------------------------------------
Total recognized
income for the
period (61,524) 655,022 593,498 163,578 757,076
Dividends paid in
cash and other
distributions
by subsidiary
companies (27,175) (27,175)
Acquisition of
business (24,338) (24,338) (22,853) (47,191)
Contributions from
shareholders 33,801 43,100 (26,818) 50,083 (46,998) 3,085
Conversion of
Subordinated
Convertible Loans 302,962 302,962 605,924 605,924
Initial Public
Offering 271,429 (17,839) 271,429 525,019 525,019
---------------------------------------------------------------------------------------------------
Balance at September
30, 2006 2,004,744 (23,295) 2,055,290 (2,324,866) (154,215) 2,034,982 3,592,640 1,800,017 5,392,657
---------------------------------------------------------------------------------------------------
(1) Shareholders' equity determined in accordance with accounting principles
generally accepted in Luxembourg is disclosed in Note 10 (iii).
(2) Represents the difference between book value of non-monetary contributions
received from shareholders under Luxembourg GAAP and IFRS.
Dividends may be paid by Ternium to the extent distributable retained
earnings calculated in accordance with Luxembourg law and regulations exist.
Therefore, retained earnings included in these consolidated condensed interim
financial statements may not be wholly distributable. See Note 10 (iii).
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. These consolidated condensed interim financial
statements should be read in conjunction with our audited Consolidated
Financial Statements and notes for the fiscal year ended December 31, 2006.
-4-
TERNIUM S.A.
Consolidated condensed interim financial statements as of September 30, 2007
and for the nine-month periods ended September 30, 2007 and 2006
(All amounts in USD thousands)
CONSOLIDATED CONDENSED INTERIM CASH FLOW STATEMENTS
Nine-month period
Notes ended September 30,
----- -----------------------
2007 2006
-----------------------
(Unaudited)
Cash flows from operating activities
Net income for the period 780,579 837,728
Adjustments for:
Depreciation and amortization 7 & 8 400,821 318,460
Income tax accruals less payments (357,606) 4,307
Equity in losses (earnings) of associated companies 3,412 (3,845)
Interest accruals less payments 34,076 (10,736)
Changes in provisions (15,738) 31,680
Changes in working capital 120,012 (274,111)
Others 75,078 35,094
----------- -----------
Net cash provided by operating activities 1,040,634 938,577
----------- -----------
Cash flows from investing activities
Capital expenditures 7 & 8 (305,975) (280,090)
Changes in trust funds - 5,185
Acquisition of business (1,727,178) (103,055)
Increase in other investments (115,227) -
Proceeds from the sale of property, plant and equipment 7,056 987
----------- -----------
Net cash used in investing activities (2,141,324) (376,973)
----------- -----------
Cash flows from financing activities
Dividends paid in cash and other distributions (100,237) -
Dividends paid in cash and other distributions by subsidiary companies (20,000) (27,175)
Contributions from shareholders - 3,085
Contributions from minority shareholders in consolidated subsidiaries 1,119 -
Net proceeds from Initial Public Offering - 525,019
Proceeds from borrowings 4,061,965 123,207
Repayments of borrowings (2,586,322) (1,124,792)
----------- -----------
Net cash provided by (used in) financing activities 1,356,525 (500,656)
----------- -----------
----------- -----------
Increase in cash and cash equivalents 255,835 60,948
----------- -----------
Movement in cash and cash equivalents
At January 1, (1) 633,002 754,980
Acquisition of business 190,087 -
Effect of exchange rate changes (174) (591)
Increase in cash and cash equivalents 255,835 60,948
----------- -----------
Cash and cash equivalents at September 30, 1,078,750 815,337
----------- -----------
Non-cash transactions
Conversion of debt instruments into shares - 605,924
(1) In addition, the Company has restricted cash for USD 10,350 at December 31,
2006.
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. These consolidated condensed interim financial
statements should be read in conjunction with our audited Consolidated Financial
Statements and notes for the fiscal year ended December 31, 2006.
-5-
TERNIUM S.A.
Consolidated condensed interim financial statements as of September 30, 2007
and for the nine-month periods ended September 30, 2007 and 2006
(All amounts in USD thousands)
INDEX TO THE NOTES TO THE CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
1 General information and basis of presentation
2 Accounting policies
3 Segment information
4 Cost of sales
5 Selling, general and administrative expenses
6 Other financial expenses, net
7 Property, plant and equipment, net
8 Intangible assets, net
9 Distribution of dividends
10 Contingencies, commitments and restrictions on the distribution of profits
11 Acquisition of business: Grupo Imsa S.A.B. de C.V. ("Grupo Imsa")
12 Related party transactions
13 Recent accounting pronouncements
-6-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements
1 General information and basis of presentation
Ternium S.A. (the "Company" or "Ternium"), a Luxembourg Corporation (Societe
Anonyme), was incorporated on December 22, 2003 under the name of Zoompart
Holding S.A. to hold investments in flat and long steel manufacturing and
distributing companies. The extraordinary shareholders' meeting held on August
18, 2005, changed the corporate name to Ternium S.A.
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"). As from February
1, 2006, the Company's shares are listed in the New York Stock Exchange.
The name and percentage of ownership of subsidiaries that have been included in
consolidation in these Consolidated Condensed Interim Financial Statements is
disclosed in Note 2 to the audited Consolidated Financial Statements for the
year ended December 31, 2006.
These Consolidated Condensed Interim Financial Statements have been prepared in
accordance with IAS 34, "Interim Financial Reporting". These Consolidated
Condensed Interim Financial Statements should be read in conjunction with the
audited Consolidated Financial Statements for the year ended December 31, 2006,
which have been prepared in accordance with International Financial Reporting
Standards ("IFRS").
Certain comparative amounts have been reclassified to conform to changes in
presentation in the current period.
The preparation of consolidated condensed interim financial statements requires
management to make estimates and assumptions that might affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the balance sheet dates, and also the reported amounts of
revenues and expenses for the reported periods. Actual results may differ from
these estimates.
Material intercompany transactions and balances have been eliminated in
consolidation. However, the fact that the functional currency of the Company's
subsidiaries differ, results in the generation of foreign exchange gains
(losses) that are included in the consolidated condensed interim income
statement under "Other financial expenses, net".
These Consolidated Condensed Interim Financial Statements were approved by the
Board of Directors of Ternium on November 6, 2007.
2 Accounting policies
The accounting policies used in the preparation of these Consolidated Condensed
Interim Financial Statements are consistent with those used in the audited
Consolidated Financial Statements for the year ended December 31, 2006.
Recently issued accounting pronouncements were applied by the Company as from
their respective dates.
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
minority 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
beginning January 1, 2007 and will be redeemed by the Company ten years after
grant date. As of September 30, 2007, the outstanding liability corresponding to
the Program amounts to USD 2.3 million.
-7-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
3 Segment information
Primary reporting format - business segments
Business segments: for management purposes, the Company is organized on a
worldwide basis into the following segments: flat steel products, long steel
products and others.
The flat steel products segment comprises the manufacturing and marketing of hot
rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes,
hot dipped galvanized and electrogalvanized sheets, pre-painted sheets and other
tailor-made products to serve its customers' requirements.
The long steel products segment comprises the manufacturing and marketing of
billets (steel in its basic, semifinished state), wire rod and bars.
The other products segment includes products other than flat and long steel,
mainly metal building systems and components, insulated panels, iron ore and pig
iron.
Flat steel Long steel
products products Other Total
--------------------------------------------
(Unaudited)
Nine-month period ended September 30, 2007
Net sales 4,746,826 1,095,334 260,547 6,102,707
Cost of sales (3,289,787) (746,651) (197,147) (4,233,585)
----------- ---------- --------- -----------
Gross profit 1,457,039 348,683 63,400 1,869,122
Selling, general and administrative expenses (460,491) (107,055) (20,628) (588,174)
Other operating income, net 11,247 5,000 1,407 17,654
----------- ---------- --------- -----------
Operating income 1,007,795 246,628 44,179 1,298,602
Depreciation - PP&E 306,704 54,218 9,497 370,419
Flat steel Long steel
products products Other Total
--------------------------------------------
(Unaudited)
Nine-month period ended September 30, 2006
Net sales 3,819,686 964,737 194,621 4,979,044
Cost of sales (2,399,672) (634,250) (109,922) (3,143,844)
----------- ---------- --------- -----------
Gross profit 1,420,014 330,487 84,699 1,835,200
Selling, general and administrative expenses (360,973) (87,668) (9,924) (458,565)
Other operating (expenses) income, net (2,900) 681 2,994 775
----------- ---------- --------- -----------
Operating income 1,056,141 243,500 77,769 1,377,410
Depreciation - PP&E 250,626 44,128 9,217 303,971
-8-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
3 Segment information (continued)
Secondary reporting format - geographical segments
The secondary reporting format is based on a geographical location. Ternium
sells its products to three main geographical areas: South and Central America,
North America, and Europe and others. The North American segment comprises
principally United States, Canada and Mexico. The South and Central American
segment comprises principally Argentina, Brazil, Colombia, Venezuela and
Ecuador.
South and Europe
Central North and
America America others Total
--------- --------- ------- ---------
(Unaudited)
Nine-month period ended September 30, 2007
Net sales 3,421,719 2,532,508 148,480 6,102,707
Depreciation - PP&E 242,709 127,680 30 370,419
Nine-month period ended September 30, 2006
Net sales 2,794,155 2,126,954 57,935 4,979,044
Depreciation - PP&E 204,665 99,298 8 303,971
4 Cost of sales
Nine-month period
ended September 30,
-----------------------
2007 2006
----------- -----------
(Unaudited)
Inventories at the beginning of the year 1,241,325 1,000,119
Acquisition of business (see Note 11) 655,845 8,180
Plus: Charges for the period
Raw materials and consumables used and other movements 2,996,141 2,315,129
Services and fees 148,755 112,694
Labor cost 456,815 354,924
Depreciation of property, plant and equipment 359,144 292,492
Amortization of intangible assets 13,051 10,187
Maintenance expenses 286,776 242,915
Office expenses 6,461 5,988
Freight and transportation 23,952 18,816
Insurance 9,189 7,597
(Recovery) provision for obsolescence (4,194) 26,274
Recovery from sales of scrap and by-products (65,046) (37,559)
Others 87,878 53,157
Less: Inventories at the end of the period (1,982,507) (1,267,069)
----------- -----------
Cost of sales 4,233,585 3,143,844
----------- -----------
-9-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
5 Selling, general and administrative expenses
Nine-month period
ended September 30,
---------------------------------
2007 2006
------------- ------------
(Unaudited)
Services and fees 47,623 37,872
Labor cost 153,901 108,665
Depreciation of property plant and equipment 11,275 11,479
Amortization of intangible assets 17,351 4,302
Maintenance expenses 13,835 12,409
Taxes 51,038 41,750
Office expenses 21,083 23,252
Freight and transportation 252,528 203,744
Insurance 1,298 1,011
Recovery for impairment of trade receivables (3,942) (1,896)
Others 22,184 15,977
------------- ------------
Selling, general and administrative expenses 588,174 458,565
------------- ------------
6 Other financial expenses, net
Nine-month period
ended September 30,
--------------------------
2007 2006
----------- ----------
(Unaudited)
Net foreign exchange transaction losses and change in fair value of derivative instruments (35,404) (22,176)
Debt issue costs (6,834) (12,770)
Loss from Participation Account (231,315) (215,707)
Others (21,699) (17,168)
----------- ----------
Other financial expenses, net (295,252) (267,821)
----------- ----------
7 Property, plant and equipment, net
Nine-month period
ended September 30,
----------------------------
2007 2006
------------- -------------
(Unaudited)
At the beginning of the year 5,420,683 5,463,871
Currency translation differences (38,786) (85,708)
Transfers (11,443) (9,632)
Additions 277,094 266,804
Disposals (5,582) (4,323)
Increase due to business acquisition (see Note 11) 1,908,700 47,825
Depreciation charge (370,419) (303,971)
------------- -------------
At the end of the period 7,180,247 5,374,866
------------- -------------
-10-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
8 Intangible assets, net
Nine-month period
ended September 30,
--------------------------------
2007 2006
---------------- -------------
(Unaudited)
At the beginning of the year 551,587 552,882
Currency translation differences (8,306) (10,604)
Additions 28,881 13,961 (1)
Increase due to business acquisition (see Note 11) 508,194 -
Goodwill generated in the acquisition of Grupo Imsa (see Note 11) 521,325 -
Amortization charge (30,402) (14,489)
---------------- -------------
At the end of the period 1,571,279 541,750
---------------- -------------
(1) Includes USD 675 thousand corresponding to goodwill derived from the
acquisition of additional shares of Hylsamex.
9 Distribution of dividends
During the annual general shareholders meeting held on June 6, 2007, the
shareholders approved the consolidated financial statements and unconsolidated
annual accounts for the year ended December 31, 2006 and a distribution of
dividends of USD 0.05 per share (USD 0.50 per ADS), or USD 100.2 million. The
dividends were paid on June 12, 2007.
10 Contingencies, commitments and restrictions on the distribution of profits
This note should be read in conjunction with Note 28 to the Company's audited
Consolidated Financial Statements for the year ended December 31, 2006.
Significant changes or events since the date of the annual report are as
follows:
(i) Consorcio Siderurgia Amazonia Ltd .- PDVSA-Gas C.A. claim
In June 2004, the arbitration proceedings brought by Sidor against PDVSA Gas,
C.A. (on the basis that PDVSA Gas had charged Sidor higher than agreed-upon
prices in its supplies of gas against the application of the most favored client
clause) were resolved in Sidor's favor. Accordingly, in its financial statements
at December 31, 2004, Sidor reversed the USD41.4 million provision it had
recorded at December 31, 2003. In July 2004, PDVSA Gas, C.A. filed an appeal
with the Venezuelan courts seeking to void the arbitral award. Sidor believes
that applicable Venezuelan law does not allow the courts to void an arbitral
award under the circumstances and that the likelihood of loss thereunder is
remote. Accordingly, Sidor did not record any liabilities in connection with the
appeal. At September 30, 2007, Sidor's potential exposure under this litigation
amounted to USD 151.8 million.
(ii)Grupo Imsa - Commitments:
(a) On December 16, 2004, Grupo Imsa entered into a ten-year steel slab supply
agreement (the "Agreement") with Corus UK Limited ("Corus") together with Grupo
Marcegaglia (Italy), Duferco International (Switzerland), Donkuk Steel (South
Korea) (collectively referred to as the "Off-takers"). During the term of the
contract, Grupo Imsa through one of its subsidiaries, will be entitled to
purchase 15.4% of the production of Corus' Teeside plant, estimated between 3.2
and 3.6 million tons of steel slab per year. This represents approximately 20%
of Grupo Imsa's actual steel slab needs. The Agreement also establishes a supply
schedule for each of the Off-takers.
As per the Agreement, Grupo Imsa is committed to make predetermined cash
payments during the term of the contract in addition to the purchase price paid
for the steel slab, as follows: (i) an initial payment of USD14.3 million, (ii)
twenty semi-annual payments distributed proportionately in different percentages
until 2014 for a total of USD16.5 million, and (iii) additional payments for
future capital investments in Corus' Teeside plant amounting to approximately
USD15.1 million. All the payments described in (i) and (ii) above have been made
prior to the acquisition of Grupo Imsa by Ternium.
-11-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
10 Contingencies, commitments and restrictions on the distribution of profits
(continued)
(b) On April 5, 2000, several subsidiaries of Grupo Imsa which have facilities
throughout the Mexican territory, entered into a 15-year energy purchase
agreement for approximately 90 MW of electricity with Tractebel Energia de
Monterrey, S. de R.L. de C.V.
(c) On September 1, 1995, Grupo Imsa (through Steelscape, Inc., one of its
subsidiaries located in the United States of America) entered into a fifty-year
operating lease agreement with the Port of Kalama for the lease of land for a
facility located in Kalama. Grupo Imsa's subsidiary has the option to extend the
term of this lease for three consecutive ten-year periods. Under this lease with
the Port of Kalama, the Company is responsible for removing its personal
property and an environmental evaluation must be conducted at the expense of the
Company. The land lease with the Port of Kalama included a free rent period and
increasing rent payments and the Company is responsible for removing machinery,
equipment and office furniture and restoring the premises to a suitable
condition at the end of the lease term.
(d) On January 19, 2006, Grupo Imsa (through Industrias Monterrey S.A. de C.V)
entered into an agreement with Gas Industrial de Monterrey, S.A. de C.V (GIMSA),
under which GIMSA agrees to supply natural gas to two of Grupo Imsa's plants,
based on an Annual Firm Base which is established 45 days before the
commencement of the following service year and is determined based on Grupo
Imsa's daily needs for the relevant period. Grupo Imsa has the obligation to
purchase the agreed volume, which is subject to changes according to written
communications, as established in the agreement. The price is determined on a
monthly basis pursuant to the methodology approved by the Energy Regulatory
Commission for prices applicable to the area.
(e) On April 1, 2003, Grupo Imsa (through Industrias Monterrey S.A. de C.V.)
entered into a contract with PEMEX GAS and Petroquimica Basica for the supply of
natural gas to one of Grupo Imsa's plants located in Monclova, based on an
annual program established 30 days before the commencement of the following
service year. This annual program is agreed based on Grupo Imsa's needs during
the relevant period and Grupo Imsa has the obligation to purchase this agreed
volume, which is subject to renegotiation according to the agreement. The
reference price is determined based on the average of the quoted prices of
several indexes plus transportation and service costs depending on the areas or
cities.
(iii) Restrictions on the distribution of profits
Under the credit agreements entered into to finance the acquisition of Hylsamex,
the Company and its affiliates had some restrictions to the payment of dividends
in excess of certain amounts, among other limitations (see Note 3e) to the
audited Consolidated Financial Statements for the year ended December 31, 2006).
As of September 30, 2007, Ternium S.A. and Siderar S.A.I.C. have fully repaid
these loans, and at the same time the guarantees and restrictions imposed by the
financing contracts were released.
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 equals 10% of the share capital. At September 30, 2007, this
reserve reached the above-mentioned threshold.
Ternium may pay dividends to the extent that it has distributable retained
earnings and distributable reserves calculated in accordance with Luxembourg law
and regulations. Therefore, retained earnings included in the consolidated
financial statements may not be wholly distributable.
-12-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
10 Contingencies, commitments and restrictions on the distribution of profits (
continued)
Shareholders' equity under Luxembourg law and regulations comprises the
following captions:
At September 30,
2007
----------------
(Unaudited)
Share capital 2,004,744
Legal reserve 200,474
Distributable reserves 301,912
Non distributable reserves 1,414,122
Accumulated profit at January 1, 2007 499,842
Profit for the period 631,084
----------------
Total shareholders' equity under
Luxembourg GAAP 5,052,178
----------------
11 Acquisition of business: Grupo Imsa S.A.B. de C.V. ("Grupo Imsa")
On April 29, 2007, Ternium entered into an agreement with Grupo IMSA S.A.B. de
C.V. ("Grupo Imsa") and Grupo Imsa's controlling shareholders under which
Ternium obtained control of Grupo Imsa for a total consideration (equity value)
of approximately USD 1.7 billion.
Under the agreement, Ternium, through its wholly owned subsidiary Ternium
Internacional Espana S.L.U., made a cash tender offer under applicable Mexican
law for all of the issued and outstanding share capital of Grupo Imsa at a price
of US$ 6.40 per share. Pursuant to the tender offer, Ternium acquired 25,133,856
shares representing 9.3% of the issued and outstanding capital of the company.
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.
Accordingly, Ternium now owns all of Grupo Imsa's issued and outstanding share
capital.
Grupo Imsa is a steel manufacturer with operations in Mexico, the United States
and Guatemala. It has an annual production capacity of 2.2 million tons of hot
rolled coils, 1.8 million tons of cold rolled products and 1.7 million tons of
coated products. In addition, Grupo Imsa produces panels and other steel
products.
The initial accounting for the acquisition of Grupo Imsa has been determined
provisionally as the Company still needs to perform additional procedures to
estimate the fair value of certain identifiable assets and liabilities.
-13-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
11 Acquisition of business: Grupo Imsa S.A.B. de C.V. ("Grupo Imsa") (continued)
The acquired business contributed revenues of USD 581.9 million to the Company
in the period ended September 30, 2007. The book value of net assets acquired
totals USD 543.9 million. The fair value of assets and liabilities arising from
acquisition are as follows:
USD Thousand
-----------------------
Book value Fair value
----------- -----------
(Unaudited)
Property, plant and equipment 1,416,686 1,908,700
Intangible assets 74,377 508,194
Inventories 639,127 655,845
Cash and cash equivalents 190,087 190,087
Deferred Tax Liabilities (286,817) (578,791)
Pension Benefits (17,518) (17,518)
Provisions (10,011) (10,011)
Borrowings (1,565,486) (1,565,486)
Other assets and liabilities, net 103,504 114,703
----------- -----------
Net 543,949 1,205,723
----------- -----------
Goodwill, representing the excess of the purchase price paid over the fair value
of identifiable assets, liabilities and contingent liabilities acquired, totaled
USD 521.3 million.
The transactions were financed primarily through the incurrence of debt as
follows:
o Ternium made several borrowings in an aggregate principal amount of USD 125
million under a loan facility (the "Ternium Facility") with a syndicate of
banks led by Calyon New York Branch as administrative agent, the proceeds of
which were primarily used to finance the above described tender offer.
Ternium's loans under the Ternium Facility will be repaid in nine
consecutive and equal semi-annual installments commencing on July 26, 2008.
o Ternium's subsidiary Hylsa S.A. de C.V. ("Hylsa") made several borrowings in
an aggregate principal amount of 3,485 million under a loan facility (the
"Hylsa Facility") with a syndicate of banks led by Calyon New York Branch as
administrative agent, the proceeds of which were primarily used to finance
the above described capital reduction by Grupo Imsa, to refinance existing
indebtedness of Grupo Imsa and Hylsa and to pay taxes, fees and expenses
related to the transactions.
Grupo Imsa assumed on August 3, 2007 certain of Hylsa's loans under the Hylsa
Facility, as well as a portion of Hylsa's remaining unused commitments.
Following the assumption date:
o Hylsa's debt under the Hylsa Facility amounted to USD 2,070 million in
principal amount, and Grupo Imsa's debt under that facility amounted to USD
1,415 million in principal amount; and
o Grupo Imsa's unused commitment under the facility amounted to USD 140
million.
The loans of each of Hylsa and Grupo Imsa are divided in two tranches of equal
principal amount. Tranche A loans will be repaid in seven equal semi-annual
installments beginning on January 26, 2009, while tranche B loans will be repaid
in one installment due on July 26, 2012.
Each of the Ternium Facility and the Hylsa Facility contains covenants customary
for transactions of this type, including limitations on liens and encumbrances,
restrictions on investments and capital expenditures, limitations on the sale of
certain assets and compliance with financial ratios (e.g., leverage ratio and
interest coverage ratio). There are no limitations to the payment of dividends
under either facility, except in case of non compliance of the above mentioned
covenants.
-14-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
12 Related party transactions
The Company is controlled by San Faustin N.V., a Netherlands Antilles
corporation, which has 70.52% of the Company's voting rights, either directly or
indirectly. The ultimate controlling entity of the Company is Rocca & Partners,
a British Virgin Islands corporation.
The following transactions were carried out with related parties:
Nine-month period
ended September, 30
--------------------------
2007 2006
----------- -----------
(Unaudited)
(i)Transactions
(a)Sales of goods and services
Sales of goods to associated parties 52 1,905
Sales of goods to other related parties 86,130 66,146
Sales of services and others to associated parties 1,652 2,169
Sales of services and others to other related parties 3,055 858
----------- -----------
90,889 71,078
----------- -----------
(b)Purchases of goods and services
Purchases of goods from associated parties 38,751 62,570
Purchases of goods from other related parties 31,384 30,717
Purchases of services and others from associated parties 16,346 2,316
Purchases of services and others from other related parties 137,103 120,837
----------- -----------
223,584 216,440
----------- -----------
(c)Financial results
Income with associated parties 2,802 2,832
Income with other related parties 12 31
Expenses with other related parties - (1,815)
----------- -----------
2,814 1,048
----------- -----------
At September At December
30, 2007 31, 2006
------------------------------
(Unaudited)
(ii)Period-end balances
(a) Arising from sales/purchases of goods/services
Receivables from associated parties 39,439 67,558
Receivables from other related parties 41,196 48,533
Payables to associated parties (6,142) (5,588)
Payables to other related parties (34,367) (48,032)
-------------- --------------
40,126 62,471
-------------- --------------
b) Other investments
-------------- --------------
Time deposit 12,625 11,249
-------------- --------------
(c) Financial debt
-------------- --------------
Borrowings with other related parties - (2,161)
-------------- --------------
-15-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
13 Recent accounting pronouncements
(i) International Accounting Standard 23 (revised 2007), "Borrowing Costs"
In March 2007, the International Accounting Standards Board issued International
Accounting Standard 23 (revised 2007), "Borrowing Costs" (the "Standard"). The
Standard provides that borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset form part of the
cost of that asset, while all other borrowing costs shall be recognized as an
expense.
The Standard supersedes IAS 23 (revised 1993) and is applicable for annual
periods beginning on or after 1 January 2009. Earlier application is permitted.
If an entity applies the Standard from a date before 1 January 2009, it shall
disclose that fact.
The Company's management has not assessed the potential impact that the
application of the Standard may have on the Company's financial condition or
results of operations.
(ii) IFRIC Interpretation 13, Customer Loyalty Programmes
In June 2007, International Financial Reporting Interpretations Committee
("IFRIC") issued IFRIC Interpretation 13 "Customer Loyalty Programmes" ("IFRIC
13"). IFRIC 13 applies to customer loyalty award credits that:
(a) an entity grants to its customers as part of a sales transaction (i.e. a
sale of goods, rendering of services or use by a customer of entity assets);
and
(b) subject to meeting any further qualifying conditions, the customers can
redeem in the future for free or discounted goods or services.
IFRIC 13 addresses accounting by the entity that grants award credits to its
customers.
An entity shall apply IFRIC 13 for annual periods beginning on or after July 1,
2008, although earlier application is permitted. If an entity applies IFRIC 13
for a period beginning before July 1, 2008, it shall disclose that fact.
The Company's management estimates that the application of IFRIC 13 will not
have a material effect on the Company's financial condition or results of
operations.
(iii) IFRIC Interpretation 14, IAS 19 -The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction
In July 2007, IFRIC issued IFRIC Interpretation 14 "IAS 19 -The Limit on a
Defined Benefit Asset, Minimum Funding Requirements and their Interaction"
("IFRIC 14"). IFRIC 14 applies to all post-employment defined benefits and other
long-term employee defined benefits and addresses the following issues:
(a) when refunds or reductions in future contributions should be regarded as
available in accordance with paragraph 58 of IAS 19;
(b) how a minimum funding requirement might affect the availability of
reductions in future contributions; and
(c) when a minimum funding requirement might give rise to a liability.
An entity shall apply this Interpretation for annual periods beginning on or
after January 1, 2008. Earlier application is permitted.
-16-
TERNIUM S.A.
Notes to the Consolidated Condensed Interim Financial Statements (Contd.)
13 Recent accounting pronouncements (continued)
The Company's management has not assessed the potential impact that the
application of IFRIC 14 may have on the Company's financial condition or results
of operations.
(iv) International Accounting Standard 1 (revised 2007), "Presentation of
Financial Statements"
In September 2007, the International Accounting Standards Board issued
International Accounting Standard 1 Revised, "Presentation of Financial
Statements" ("IAS 1 Revised"). IAS 1 Revised sets overall requirements for the
presentation of financial statements, guidelines for their structure and minimum
requirements for their content. The main changes introduced by IAS 1 Revised in
respect of the previous version of IAS 1 include the following:
(a) a complete set of financial statements shall include a statement of
financial position as at the beginning of the earliest comparative period
whenever the entity retrospectively applies an accounting policy or makes a
retrospective restatement;
(b) changes in equity arising from transactions with owners in their capacity as
owners shall be reported separately from non-owners changes in equity;
(c) an entity shall disclose income tax relating relating to each component of
other comprehensive income; and
(d) the option to present distributions to equity holders (dividends) in the
income statement is no longer available
IAS 1 Revised is applicable for annual periods beginning on or after January 1,
2009, although earlier application is permitted.
The Company's management has not assessed the potential impact that the
application of IAS 1 Revised may have on the Company's financial condition or
results of operations.
Roberto Philipps
Chief Financial Officer
-17-