FORM 6 - K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
As of 2/19/2015
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 Ö 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 Ö
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
Not applicable
The attached material is being furnished to the Securities and Exchange Commission pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange Act of 1934, as amended.
This report contains Ternium S.A.’s consolidated financial statements as of December 31, 2014.
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/ Daniel Novegil Name: Daniel Novegil Title: Chief Executive Officer
By: /s/ Pablo Brizzio
Name: Pablo Brizzio
Title: Chief Financial Officer
Dated: February 19, 2015
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 |
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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Page | |
|
| |
Consolidated Income Statements for the years ended December 31, 2014, 2013 and 2012 |
2 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 |
3 | |
Consolidated Statements of Financial Position as of December 31, 2014 and 2013 |
4 | |
Consolidated Statements of Changes in Equity for the years ended December 31, 2014, 2013 and 2012 |
5 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 |
8 | |
Index to the Notes to the Consolidated Financial Statements |
9 | |
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Page 1 of 73
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.
Page 2 of 73
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) | |||
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.
Page 3 of 73
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 | ||||||||
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Page 4 of 73
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) |
|||||||||||||
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.Page 5 of 73
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) |
|||||||||||||
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.Page 6 of 73
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) |
|||||||||||||
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.
Page 7 of 73
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.
Page 8 of 73
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 |
10 |
2 |
Basis of presentation |
11 |
3 |
Acquisition of business – Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS |
15 |
4 |
Accounting policies |
17 |
5 |
Segment information |
37 |
6 |
Cost of sales |
40 |
7 |
Selling, general and administrative expenses |
41 |
8 |
Labor costs (included in cost of sales and selling, general and administrative expenses) |
41 |
9 |
Other operating income (expenses), net |
41 |
10 |
Other financial income (expenses), net |
42 |
11 |
Income tax expense |
42 |
12 |
Property, plant and equipment, net |
44 |
13 |
Intangible assets, net |
45 |
14 |
Investments in non-consolidated companies |
46 |
15 |
Receivables, net - non-current and current |
48 |
16 |
Trade receivables, net – non-current and current |
49 |
17 |
Inventories, net |
49 |
18 |
Cash, cash equivalents and other investments |
50 |
19 |
Allowances and provisions – non-current and current |
50 |
20 |
Deferred income tax |
51 |
21 |
Other liabilities – non-current and current |
53 |
22 |
Derivative financial instruments |
55 |
23 |
Borrowings |
57 |
24 |
Contingencies, commitments and restrictions on the distribution of profits |
59 |
25 |
Related party transactions |
63 |
26 |
Other required disclosures |
64 |
27 |
Recently issued accounting pronouncements |
65 |
28 |
Financial risk management |
66 |
29 |
Subsequent events |
73 |
|
|
|
Page 9 of 73
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.
Page 10 of 73
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.
Page 11 of 73
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)
Company |
Country of Organization |
Main activity |
Percentage of ownership | |||||||
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% |
Page 12 of 73
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)
Company |
Country of Organization |
Main activity |
Percentage of ownership | |||||||
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% |
Page 13 of 73
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.
Page 14 of 73
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.
Page 15 of 73
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 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 | |
(1) This percentage of interest is calculated considering treasury shares. |
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.
Page 16 of 73
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.
Page 17 of 73
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”.
Page 18 of 73
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.
Page 19 of 73
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.
Page 20 of 73
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.
Page 21 of 73
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.
Page 22 of 73
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.
Page 23 of 73
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.
Page 24 of 73
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.
Page 25 of 73
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.
Page 26 of 73
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.
Page 27 of 73
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.
Page 28 of 73
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.
Page 29 of 73
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.
Page 30 of 73
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.
Page 31 of 73
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".
Page 32 of 73
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.
Page 33 of 73
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.
Page 34 of 73
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.
Page 35 of 73
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.
Page 36 of 73
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.
Page 37 of 73
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 | |||
|