Form 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
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o |
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Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934 |
or
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þ |
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Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2008 |
or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
or
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Shell company report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
Commission file number: 001-32734
TERNIUM S.A.
(Exact Name of Registrant as Specified in its Charter)
N/A
(Translation of registrants name into English)
Grand Duchy of Luxembourg
(Jurisdiction of incorporation or organization)
46a, Avenue John F. Kennedy 2nd floor
L-1855 Luxembourg
(Address of registrants registered office)
Beatriz Rodriguez Salas
46A, Avenue John F. Kennedy 2nd floor
L-1855 Luxembourg
Tel. +352 26 68 31 52, Fax. +352 26 68 31 53, e-mail: luxembourg@ternium.com
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered |
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American Depositary Shares
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New York Stock Exchange |
Ordinary Shares, par value USD1.00 per share
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New York Stock Exchange* |
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* |
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Ordinary shares of Ternium S.A. are not listed for trading but only in connection with the
registration of American Depositary Shares which are evidenced by American Depositary Receipts. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
None
Indicate the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report.
2,004,743,442 ordinary shares, par value USD1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes þ No o
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Yes o No þ
Notechecking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer þ Accelerated Filer o Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
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U.S. GAAP o
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International Financial Reporting Standards as issued
by the International Accounting Standards Board þ
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Other o |
If Other has been checked in response to the previous question indicate by check mark
which financial statement item the registrant has elected to follow
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Please send copies of notices and communications from the Securities and Exchange Commission to:
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Cristian J.P. Mitrani
Mitrani, Caballero, Rosso Alba, Francia,
Ojam & Ruiz Moreno Abogados
Alicia Moreau de Justo 400, 3 rd Floor
C1007AAH Buenos Aires, Argentina
(54-11) 4590-8600
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Robert S. Risoleo, Esq.
Sullivan & Cromwell LLP
1701 Pennsylvania Avenue. N.W.
Washington, D.C. 20006
(202) 956-7500 |
CERTAIN DEFINED TERMS
In this annual report, unless otherwise specified or if the context so requires:
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References to the Company refer exclusively to Ternium S.A., a Luxembourg joint stock
corporation (société anonyme holding); |
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References in this annual report to Ternium, we, us or our refer to Ternium S.A.
and its consolidated subsidiaries; |
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References to Amazonia are to Consorcio Siderurgia Amazonia, S.L. Unipersonal, a Spanish
holding company and a subsidiary of the Company that, prior to the nationalization of Sidor,
held a 59.73% interest in Sidor; |
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References to Sidor are to Sidor, C.A., a Venezuelan corporation and formerly a
subsidiary of the Company. See note 29 to our audited consolidated financial statements
included elsewhere in this annual report and Item 4. Information on the CompanyA. History
and Development of the CompanySidor Nationalization Process; |
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References to the Ternium companies are to the Companys manufacturing subsidiaries,
namely Siderar S.A.I.C., an Argentine corporation (Siderar), and Ternium México, S.A. de
C.V., a Mexican corporation (Ternium Mexico), and their respective subsidiaries. |
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References to Ylopa are to Ylopa Serviços de Consultadoría Lda., a company organized
under the laws of Portugal and registered in the Madeira Free Zone; |
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References to Usiminas are to Usinas Siderurgicas de Minas Gerais S/AUSIMINAS, a
company organized under the laws of Brazil and an indirect shareholder of the Company; |
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References to Tenaris are to Tenaris S.A., a Luxembourg joint stock corporation (société
anonyme holding) and a shareholder of the Company; |
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References to San Faustín are to San Faustín N.V., a Netherlands Antilles corporation and
the Companys indirect controlling shareholder; |
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References to the Ternium network or Ternium Internacional are to an international
group of companies that market and provide worldwide distribution services for products
offered primarily by Ternium. |
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References to ADSs are to the American Depositary Shares which are evidenced by American
Depositary Receipts; |
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References to tons are to metric tons; one metric ton is equal to 1,000 kilograms,
2,204.62 pounds or 1.102 U.S. (short) tons; and |
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References to billions are to thousands of millions, or 1,000,000,000. |
2
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
Accounting Principles
We prepare our consolidated financial statements in conformity with International Financial
Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
IFRS differ in certain significant respects from generally accepted accounting principles in the
United States, commonly referred to as U.S. GAAP.
3
Currencies
In this annual report, unless otherwise specified or the context otherwise requires:
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dollars, U.S. dollars or USD each refers to the United States of America dollar; |
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Argentine pesos or ARP each refers to the Argentine peso; |
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Venezuelan bolívares fuertes or VEF each refers to the Venezuelan bolívar fuerte; and |
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Mexican pesos or MXN each refers to the Mexican peso; |
On December 31, 2008, the exchange rate between the Argentine peso and the U.S. dollar (as
published by Banco Central de la República Argentina, or the Argentine Central Bank), was
ARP3.4537=USD1.00; the noon buying rate for the Venezuelan bolívar fuerte as certified for customs
purposes by the Federal Reserve Bank of New York was VEB2.1446=USD 1.00; and the noon buying rate
for the Mexican peso as published by the Federal Reserve Bank of New York was MXN13.8320=USD1.00.
Those rates may differ from the actual rates used in preparation of the Companys consolidated
financial statements. We do not represent that any of these currencies could have been or could be
converted into U.S. dollars or that U.S. dollars could have been or could be converted into any of
these currencies.
Rounding; Comparability of Data
Certain monetary amounts, percentages and other figures included in this annual report have been
subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be
the arithmetic aggregation of the figures that precede them, and figures expressed as percentages
in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic
aggregation of the percentages that precede them.
Our Internet Site is Not Part of this Annual Report
We maintain an Internet site at www.ternium.com. Information contained in or otherwise accessible
through this website is not a part of this annual report. All references in this annual report to
this Internet site are inactive textual references to this URL, or uniform resource locator and
are for your informational reference only. We assume no responsibility for the information
contained on this site.
4
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This annual report and any other oral or written statements made by us to the public may
contain forward-looking statements within the meaning of and subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. This annual report contains
forward-looking statements, including with respect to certain of our plans and current goals and
expectations relating to Terniums future financial condition and performance.
Sections of this annual report that by their nature contain forward-looking statements
include, but are not limited to, Item 3. Key Information, Item 4. Information on the Company,
Item 5. Operating and Financial Review and Prospects and Item 11. Quantitative and Qualitative
Disclosures About Market Risk.
We use words such as aim, will likely result, will continue, contemplate, seek to,
future, objective, goal, should, will pursue, anticipate, estimate, expect,
project, intend, plan, believe and words and terms of similar substance to identify
forward-looking statements, but they are not the only way we identify such statements. All
forward-looking statements are managements present expectations of future events and are subject
to a number of factors and uncertainties that could cause actual results to differ materially from
those described in the forward-looking statements. These factors, which could cause actual results
to differ materially from those described in the forward-looking
statements, include the risks
related to our business discussed under Item 3. Key InformationD. Risk Factors, among them, the
following:
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the impact of the global economic crisis currently underway; |
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uncertainties about the degree of growth in the number of consumers in the markets
in which Ternium operates and sells its products; |
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changes in the pricing environments in the countries in which Ternium operates; |
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the impact in the markets in which Ternium operates of existing and new
competitors, including competitors that offer less expensive products and services,
desirable or innovative products, or have extensive resources or better financing, and
whose presence may affect Terniums customer mix, revenues and profitability; |
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increases in the prices of raw materials, other supplies or energy or difficulties
in acquiring raw materials or other supplies or energy supply cut-offs; |
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the policies of, and the economic, political and social conditions in, the
countries in which Ternium operates or other countries which have an impact on Terniums
business activities or investments; |
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inflation or deflation and foreign exchange rates in the countries in which Ternium
operates; |
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volatility in interest rates; |
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the performance of the financial markets globally and in the countries in which
Ternium operates; |
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changes in domestic and foreign laws, regulations and taxes; |
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regional or general changes in asset valuations; |
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our ability to successfully implement our business strategy or to grow through
acquisitions, greenfield projects, joint ventures and other investments; and |
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other factors or trends affecting the flat and long steel industry generally and
our financial condition in particular. |
By their nature, certain disclosures relating to these and other risks are only estimates and
could be materially different from what actually occurs in the future. As a result, actual future
gains or losses that may affect Terniums financial condition and results of operations could
differ materially from those that have been estimated. You should not place undue reliance on the
forward-looking statements, which speak only as of the date of this annual report. Except as
required by law, we are not under any obligation, and expressly disclaim any obligation, to update
or alter any forward-looking statements, whether as a result of new information, future events or
otherwise.
5
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
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Selected Financial Data |
The selected consolidated financial data (or selected combined consolidated financial data, as
applicable) set forth below have been derived from our audited consolidated financial statements
(or combined consolidated financial statements, as applicable) for each of the years and at the
dates indicated. Our consolidated financial statements were prepared in accordance with IFRS, as
issued by IASB, and were audited by Price Waterhouse & Co. S.R.L., Argentina, an independent
registered public accounting firm that is a member firm of PricewaterhouseCoopers.
The audited consolidated financial statements of Ternium as of December 31, 2007, and for the years
ended December 31, 2007 and 2006, and the audited consolidated financial data of Ternium as of
December 31, 2007, 2006 and 2005, and for the years then ended, included in this annual report,
vary significantly from the results and other financial data shown in the financial statements and
financial data included in prior annual reports as a result of the de-consolidation of Sidor as
from April 1, 2008. As from that date, Ternium ceased consolidating Sidors results and other
financial data and classified its investment in Sidor as an available-for-sale financial asset,
with Sidors results and cash flows during each period prior to April 1, 2008 being presented as
discontinued operations. For more information on the Sidor nationalization process and its
accounting treatment, see note 29 to our audited consolidated financial statements included
elsewhere in this annual report and Item 4. Information on the CompanyA. History and Development
of the CompanySidor Nationalization Process.
Ternium obtained control over Grupo Imsa (as defined below) on July 26, 2007. The audited
consolidated financial statements of Ternium as of December 31, 2008, and for the year then ended,
included in this annual report consolidate the results and other financial data of Grupo Imsa for
the entire year, and the audited consolidated financial statements of Ternium as of December 31,
2007, and for the year then ended, included in this annual report consolidate the results and other
financial data of Grupo Imsa beginning July 26, 2007. Accordingly, Terniums results and other
financial data for the year ended December 31, 2008 varied significantly from the results and other
financial data for the year ended December 31, 2007, and the results and other financial data of
each such year varied significantly from the results and other financial data for the years ended
December 31, 2006, 2005 and 2004.
Ternium acquired Hylsamex (as defined below) on August 22, 2005. The audited consolidated
financial statements of Ternium as of December 31, 2008 and 2007, and for the years ended December
31, 2008, 2007 and 2006, included in this annual report consolidate the results and other financial
data of Hylsamex for such years, and the audited consolidated financial data of Ternium as of
December 31, 2005, and for the year then ended, included in this annual report consolidate the
results and other financial data of Hylsamex beginning August 22, 2005. Accordingly, Terniums
results and other financial data for the years ended December 31, 2008, 2007 and 2006 varied
significantly from the results and other financial data for the year ended December 31, 2005, and
the results and other financial data of each such year varied significantly from the results and
other financial data for the year ended December 31, 2004.
The audited combined consolidated financial data of Ternium as of December 31, 2004 and for the
year then ended combine and consolidate the results and other financial data of each of Siderar,
Ylopa and Ternium Internacional, and recognize the investment in Amazonia (which at that time
consolidated Sidor) under the equity method, as of
each such dates and for each of the years then ended, on the basis that such companies were under
the common control of San Faustín as of each such dates and for each such years. The effect of this
presentation is to show the combined historical results, financial condition and other data of the
flat and long manufacturing, processing and distribution businesses of various companies under the
common control of San Faustín as though these companies had been our subsidiaries at the dates and
during the years presented.
For a discussion of the currencies used in this annual report, exchange rates and accounting
principles affecting the financial information contained in this annual report, see Presentation
of Certain Financial and Other InformationAccounting Principles and Currencies.
6
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In thousands of U.S. dollars |
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For the year ended December 31, |
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(except number of shares and per share data) |
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2008 |
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2007(2) |
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2006(2) |
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2005(1) (2) |
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2004(1) (2) |
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Selected consolidated income statement data |
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Continuing operations |
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Net sales |
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8,464,885 |
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5,633,366 |
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4,484,918 |
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2,690,450 |
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1,615,181 |
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Cost of sales |
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(6,128,027 |
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(4,287,671 |
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(3,107,629 |
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(1,787,848 |
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(965,004 |
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Gross profit |
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2,336,858 |
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1,345,695 |
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1,377,289 |
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902,602 |
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650,177 |
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Selling, general and administrative expenses |
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(669,473 |
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(517,433 |
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(370,727 |
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(243,993 |
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(132,882 |
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Other operating income (expenses), net |
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8,662 |
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8,514 |
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(4,739 |
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(57,338 |
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(3,124 |
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Operating income |
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1,676,047 |
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836,776 |
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1,001,823 |
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601,271 |
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514,171 |
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Interest expense |
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(136,111 |
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(133,109 |
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(96,814 |
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(60,686 |
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(18,257 |
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Interest income |
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32,178 |
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41,613 |
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33,903 |
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17,786 |
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8,911 |
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Other financial income (expenses), net |
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(693,192 |
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(38,498 |
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(40,432 |
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33,514 |
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211,635 |
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Equity in earnings (losses) of associated companies |
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1,851 |
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434 |
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671 |
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153 |
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209,201 |
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Income before income tax expense |
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880,773 |
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707,216 |
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899,151 |
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592,038 |
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925,661 |
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Income tax (expense) benefit
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Current and deferred income tax expense |
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(258,969 |
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(297,838 |
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(353,044 |
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(233,113 |
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(177,486 |
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Reversal of deferred statutory profit sharing |
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96,265 |
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Income from continuing operations |
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718,069 |
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415,871 |
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546,107 |
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358,925 |
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748,175 |
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Discontinued operations |
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Income from discontinued operations |
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157,095 |
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579,925 |
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444,468 |
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715,900 |
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Net income for the year(3) |
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875,164 |
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995,796 |
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990,575 |
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1,074,825 |
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748,175 |
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Attributable to: |
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Equity holders of the Company |
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715,418 |
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784,490 |
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795,424 |
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706,418 |
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457,339 |
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Minority interest |
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159,746 |
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211,306 |
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195,151 |
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368,407 |
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290,836 |
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875,164 |
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995,796 |
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990,575 |
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1,074,825 |
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748,175 |
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Depreciation and amortization |
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413,541 |
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355,271 |
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251,371 |
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160,145 |
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99,192 |
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Weighted average number of shares outstanding(4) |
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2,004,743,442 |
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2,004,743,442 |
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1,936,833,060 |
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1,209,476,609 |
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1,168,943,632 |
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Basic earnings per share for profit attributable to the
equity holders of the Company (4) |
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0.36 |
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0.39 |
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0.41 |
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0.58 |
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0.39 |
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Diluted earnings per share for profit attributable to the
equity holders of the Company |
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0.36 |
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0.39 |
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0.41 |
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0.54 |
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0.39 |
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Dividends per share declared |
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0.05 |
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0.05 |
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|
|
|
|
|
Income from continuing operations per
share (3) |
|
|
0.36 |
|
|
|
0.21 |
|
|
|
0.28 |
|
|
|
0.30 |
|
|
|
0.39 |
|
|
|
|
(1) |
|
Combined consolidated financial information on the basis of common control. See note 2 to our
audited consolidated financial statements. |
|
(2) |
|
Certain comparative amounts for 2007, 2006, 2005 and 2004 have been reclassified to conform
to changes in presentation in the current period. |
|
(3) |
|
International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as
shown in the income statement not exclude minority interest. Earnings per share and Income
from continuing operations per share, however, continue to be calculated on the basis of
income attributable solely to the equity holders of the Company. |
|
(4) |
|
In October 2005, Usiminas exchanged its 5.3% equity interest in Siderar, its 16.6% equity
interest in Amazonia and its 19.1% equity interest in Ylopa and other items for 227,608,254
new shares of the Company. Upon the consummation of this exchange, capital increased to
USD1,396.6 million, represented by 1,396,551,886 shares of USD1.00 nominal value each.
Pursuant to provisions contained in certain subordinated convertible loan agreements, on
February 6, 2006, the Company exchanged such subordinated convertible loans (including
interest accrued thereon through January 31, 2006) for Company shares at a conversion price of
USD2 per share, resulting in the issuance of 302,962,261 new shares to a wholly-owned
subsidiary of San Faustin on February 9, 2006. As provided in a certain corporate
reorganization agreement, on February 9, 2006, after the settlement of the Companys initial
public offering, a wholly-owned subsidiary of San Faustín contributed all of its assets and
liabilities to the Company in exchange for 959,482,775 newly-issued shares of the Company,
which contribution included, among other items, the San Faustin subsidiarys right to receive
302,962,261 new shares of the Company in connection with the conversion of the subordinated
convertible loans described above, and 374,272,579 existing shares of the Company then held by
such San Faustin subsidiary that were cancelled upon receipt by the Company. In connection
with the over-allotment described in note 1 to our audited consolidated financial statements,
on March 1, 2006, the Company issued 22,981,360 new shares. Upon consummation of the
transactions discussed above, as of December 31, 2006, the capital of the Company was
increased to USD2,004.7 million, represented by 2,004,743,442 shares, each having a nominal
value of USD1.00. Terniums combined earnings per share for the year ended December 31, 2004
have been calculated based on the assumption that 1,168,943,632 shares were issued and
outstanding in such year. For fiscal years 2008, 2007, 2006 and 2005, the weighted average of
shares outstanding totaled 2,004,743,442, 2,004,743,442, 1,936,833,060 and 1,209,476,609
shares, respectively. |
|
(5) |
|
Diluted earnings per share have been calculated giving effect to the conversion of certain
subordinated convertible loans. See note 1 to our audited consolidated financial statements. |
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars |
|
At December 31, |
|
(except number of shares and per share data) |
|
2008 |
|
|
2007(2) |
|
|
2006(2) |
|
|
2005(1) (2) |
|
|
2004(1) (2) |
|
Selected consolidated balance sheet data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
5,491,408 |
|
|
|
8,553,123 |
|
|
|
6,029,383 |
|
|
|
6,029,823 |
|
|
|
1,728,410 |
|
Property, plant and equipment, net |
|
|
4,212,313 |
|
|
|
6,776,630 |
|
|
|
5,335,030 |
|
|
|
5,377,831 |
|
|
|
1,244,691 |
|
Other non-current assets(3) |
|
|
1,279,095 |
|
|
|
1,776,493 |
|
|
|
694,353 |
|
|
|
651,992 |
|
|
|
483,719 |
|
Current assets |
|
|
5,179,839 |
|
|
|
5,095,959 |
|
|
|
2,628,870 |
|
|
|
2,518,958 |
|
|
|
918,220 |
|
Cash and cash equivalents |
|
|
1,065,552 |
|
|
|
1,125,830 |
|
|
|
643,291 |
|
|
|
765,506 |
|
|
|
194,875 |
|
Other current assets |
|
|
4,108,954 |
|
|
|
3,200,987 |
|
|
|
1,978,537 |
|
|
|
1,750,292 |
|
|
|
723,345 |
|
Non-current assets classified as held for sale |
|
|
5,333 |
|
|
|
769,142 |
|
|
|
7,042 |
|
|
|
3,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
10,671,247 |
|
|
|
13,649,082 |
|
|
|
8,658,253 |
|
|
|
8,548,781 |
|
|
|
2,646,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital and reserves attributable to the
Companys equity holders(4) |
|
|
4,597,370 |
|
|
|
4,452,680 |
|
|
|
3,757,558 |
|
|
|
1,842,454 |
|
|
|
1,026,725 |
|
Minority interest |
|
|
964,094 |
|
|
|
1,805,243 |
|
|
|
1,626,119 |
|
|
|
1,633,881 |
|
|
|
745,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
3,374,964 |
|
|
|
5,401,549 |
|
|
|
1,867,892 |
|
|
|
3,683,755 |
|
|
|
359,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
2,325,867 |
|
|
|
3,676,072 |
|
|
|
546,601 |
|
|
|
2,396,807 |
|
|
|
1,008 |
|
Deferred income tax |
|
|
810,160 |
|
|
|
1,327,768 |
|
|
|
982,091 |
|
|
|
1,047,038 |
|
|
|
337,473 |
|
Other non-current liabilities |
|
|
238,937 |
|
|
|
397,709 |
|
|
|
339,200 |
|
|
|
239,910 |
|
|
|
21,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
1,734,819 |
|
|
|
1,989,610 |
|
|
|
1,406,684 |
|
|
|
1,388,691 |
|
|
|
515,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
941,460 |
|
|
|
406,239 |
|
|
|
507,241 |
|
|
|
510,820 |
|
|
|
121,998 |
|
Other current liabilities |
|
|
793,359 |
|
|
|
1,369,608 |
|
|
|
899,443 |
|
|
|
877,871 |
|
|
|
393,271 |
|
Liabilities directly associated with
non-current assets classified as held for
sale |
|
|
|
|
|
|
213,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,109,783 |
|
|
|
7,391,159 |
|
|
|
3,274,576 |
|
|
|
5,072,446 |
|
|
|
874,779 |
|
Total equity and liabilities |
|
|
10,671,247 |
|
|
|
13,649,082 |
|
|
|
8,658,253 |
|
|
|
8,548,781 |
|
|
|
2,646,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding(5) |
|
|
2,004,743,442 |
|
|
|
2,004,743,442 |
|
|
|
2,004,743,442 |
|
|
|
1,396,551,886 |
|
|
|
1,168,943,632 |
|
|
|
|
(1) |
|
Combined consolidated financial information on the basis of common control. See note 2 to our
audited consolidated financial statements. |
|
(2) |
|
Certain comparative amounts for 2007, 2006, 2005 and 2004 have been reclassified to conform
to changes in presentation in the current period. |
|
(3) |
|
As of December 31, 2008, 2007, 2006 and 2005, includes goodwill related to the acquisition of
our Mexican subsidiaries for a total amount of USD683.7, USD850.7, USD397.9 million and
USD399.7 million, respectively. See note 3 to our audited consolidated financial statements. |
|
(4) |
|
The Companys common stock as of December 31, 2008, 2007, 2006, 2005, and 2004 was
represented by 2,004,743,442, 2,004,743,442, 2,004,743,442, 1,396,551,886 and 1,168,943,632,
par value USD1.00 per share, for a total amount of USD2,004.7 million, USD2,004.7 million,
USD2,004.7 million, USD1,396.6 million and USD1,168.9 million. |
|
(5) |
|
As described in note 28 to our audited consolidated financial statements, after the
completion of the Companys initial public offering, the conversion of certain subordinated
convertible loans, the exercise of the over-allotment option granted to the underwriters of
the initial public offering and the consummation of the transactions contemplated in a
corporate reorganization agreement, 2,004,734,442 shares were outstanding. In October 2005,
Usiminas exchanged its 5.3% equity interest in Siderar, its 16.6% equity interest in Amazonia
and its 19.1% equity interest in Ylopa and other items for 227,608,254 new shares of the
Company. Upon the consummation of this exchange, capital increased to USD1,396.6 million,
represented by 1,396,551,886 shares of USD1.00 nominal value per share. Pursuant to provisions
contained in certain subordinated convertible loan agreements, on February 6, 2006, the
Company exchanged such subordinated convertible loans (including interest accrued thereon
through January 31, 2006) for Company shares at a conversion price of USD2 per share,
resulting in the issuance of 302,962,261 new shares to a wholly-owned subsidiary of San
Faustin on February 9, 2006. As provided in the corporate reorganization agreement, on
February 9, 2006, after the settlement of the Companys initial public offering, a
wholly-owned subsidiary of San Faustín contributed all of its assets and liabilities to the
Company in exchange for 959,482,775 newly-issued shares of the Company, wich contribution
included, among other items, the San Faustin subsidiarys right to receive 302,962,261 new
shares of the Company in connection with the conversion of the subordinated convertible loans
described above, and 374,272,579 existing shares of the Company then held by such San Faustin
subsidiary that were cancelled upon receipt by the Company. In connection with the
over-allotment described in note 1 to our audited consolidated financial statements, on March
1, 2006, the Company issued 22,981,360 new shares. Upon consummation of the transactions
discussed above, as of December 31, 2006, the capital was increased to USD2,004.7 million,
represented by 2,004,743,442 shares, each having a nominal value of USD1.00. |
8
|
B. |
|
Capitalization and Indebtedness |
Not applicable.
|
C. |
|
Reasons for the Offer and Use of Proceeds |
Not applicable.
You should carefully consider the risks and uncertainties described below, together with all other
information contained in this annual report, before making any investment decision. Any of these
risks and uncertainties could have a material adverse effect on our business, financial condition
and results of operations, which could in turn affect the price of the Companys shares and ADSs.
Risks Relating to the Steel Industry
The downturn in the global economy that accelerated during the second half of 2008 has caused
a sharp reduction in worldwide demand for steel, and a protracted global recession or a depression
would have a material adverse effect on the steel industry and Ternium.
Ternums activities and results are affected by international economic conditions, as well as
by national and regional economic conditions in the markets where Ternium operates and/or sells its
products. Starting in September 2008, a steep downturn in the global economy, sparked by
uncertainty in credit markets and deteriorating consumer confidence, has sharply reduced demand for
steel products. This has had, and continues to have, a pronounced negative effect on Terniums
business and results of operations.
If global macroeconomic conditions continue to deteriorate, the outlook of steel producers
will worsen further. In particular, a significant and prolonged recession or depression in the
United States and Europe, or significantly slower growth or the spread of recessionary conditions
to emerging economies that are substantial consumers of steel (such as China, Brazil, Russia and
India, as well as emerging Asian markets, the Middle East and the Commonwealth of Independent
States (CIS) regions) would exact a heavy toll on the steel industry. Continued financial
weakness among substantial consumers of steel products, such as the automotive industry and the
construction industry, or the bankruptcy of any large companies in such industries, would
exacerbate the negative trend in market conditions.
Protracted declines in steel consumption caused by poor economic conditions in one or more of
our major markets or by the deterioration of the financial condition of our customers would have a
material adverse effect on the demand for our products and on our results. Ternium has announced
and is implementing a number of measures in response to the market downturn and the worldwide
collapse in the demand for steel products, which measures include the postponement of target
completion dates for previously announced investments and projects, temporary cuts in steel
production to accelerate inventory reduction, and other measures aimed at reducing costs and
improving productivity. These initiatives may not prove sufficientin terms of cost-reduction or
in realigning Terniums production levels with reduced demandto maintain Teriums profitability
going forward.
A protracted fall in steel prices would have a material adverse effect on the results of
Ternium, as could price volatility.
Steel prices are volatile and are sensitive to trends in cyclical industries, such as the
automotive, construction, appliance and machinery industries, which are the significant markets for
Terniums products. In the past, substantial price decreases during periods of economic weakness
have not always been offset by commensurate price increases during periods of economic strength.
After rising during 2007 and through the boreal summer of 2008, steel prices in global markets fell
sharply beginning in the late boreal summer of 2008 as a result of collapsing demand and the
resulting excess supply in the industry. The fall in prices during this period adversely affected
the results of steel producers generally, including Ternium, as a result of lower revenues and
writedowns of finished steel products and raw material inventories. For example, in the second half
of 2008, Ternium wrote down inventories in an amount of USD200 million, and in the first quarter of
2009, it recorded an additional USD123.1 million inventory writedown. Although prices are expected
to stabilize at some point, the timing and extent of price recovery or return to prior levels
cannot be predicted. An eventual rebound in steel prices will likely depend on a
broad recovery from the current global economic downturn, although the length and nature of
business cycles affecting the steel industry have historically been unpredictable.
9
In addition, the steel industry is highly competitive with respect to price, product quality,
customer service and technological advances, and competition has frequently limited the ability of
steel producers to raise the price of finished products to recover higher raw material and energy
costs. Moreover, in some cases, the governments of some countries are reluctant to accept price
increases of products which are used as raw materials for the manufacture of other goods, as such
increases could ultimately impact the inflation rate and in the prices paid by end consumers of
those goods (e.g., tinplate for cans); in some other cases, governments restrict the ability of
companies to pass on to the domestic markets any increases in international prices. Accordingly,
any increased purchase costs of raw materials and energy might not be recoverable through increased
product prices.
A protracted downturn in steel prices would materially and adversely affect Terniums revenues
and profitability.
Excess capacity, resulting in part from expanded production in China and other developing
economies in recent years, may hamper the steel industrys recovery and prolong the downward cycle.
In addition to economic conditions and prices, the steel industry is affected by other factors
such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. As
demand for steel has surged in China, India, the CIS and other emerging markets, steel production
capacity in these markets has also surged, and China is now the largest worldwide steel producing
country by a significant margin. In 2006, China became a net exporter of steel, exerting downward
pressure on steel prices in the European and U.S. markets in that year, though its exports then
slowed in 2007. In the second half of 2008, capacity expansion in the Chinese mills slowed and
capacity utilization rates declined, resulting in decreased exports.
Historically, the steel industry has suffered from substantial over-capacity. Currently, as
the economic crisis widens, there are signs of excess capacity in all steel markets, which is
impacting steel prices across all of our markets. Accordingly, it is possible in the context of the
current downturn that the industrys excess capacity will result in an extended period of depressed
prices and industry weakness.
Ternium has already made significant production cuts in response to the current economic
crisis, as have other steel producers. Ternium also expects that consolidation in the steel sector
in recent years should, as a general matter, help producers maintain a more consistent performance
through the down cycle by preventing investment overlaps and increasing producers efficiency,
economies of scale and bargaining power with customers and suppliers. These actions and trends,
however, may not suffice to address the adverse consequences of an extended over-capacity scenario.
Sales and revenues may fall as a result of fluctuations in industry inventory levels.
Inventory levels of steel products held by companies that purchase Terniums products can vary
significantly from period to period. These fluctuations can temporarily affect the demand for
Terniums products, as customers draw from existing inventory during periods of low investment in
construction and the other industry sectors that purchase Terniums products and accumulate
inventory during periods of high investment and, as a result, these companies may not purchase
additional steel products or maintain their current purchasing volume. Accordingly, Ternium may not
be able to increase or maintain its current levels of sales volumes or prices.
10
Price fluctuations or shortages in the supply of raw materials, other supplies and energy
could adversely affect Terniums profits.
Like other manufacturers of steel-related products, Terniums operations require substantial
amounts of raw materials and energy from domestic and foreign suppliers. In particular, the Ternium
companies consume large quantities of iron ore, scrap, ferroalloys, electricity, coal, natural gas,
oxygen and other gases in operating their blast and electric furnaces. In addition, Ternium is a
large consumer of slabs, hot and cold rolled steel, and semi-finished steel forms that are used as
inputs in the production process. Also, the availability and price of a significant portion of the
raw materials and energy Ternium requires are subject to market conditions and government
regulation
affecting supply and demand. For example, shortages of natural gas in Argentina and the
consequent supply restrictions imposed by the government could lead to higher costs of production
and eventually to production cutbacks at Terniums facilities in Argentina. See Risks Relating
to the Countries in Which We OperateArgentinaRestrictions on the supply of energy to Terniums
operations in Argentina could curtail Terniums production and negatively impact Terniums results
of operations. In the past, Ternium has been able to procure sufficient supplies of raw materials
and energy inputs to meet its production needs; however, it could be unable to procure adequate
supplies in the future. Any protracted interruption, discontinuation or other disruption of the
supply of principal inputs to the Ternium companies (including as a result of strikes, lockouts or
other problems) would result in lost sales and would have a material adverse effect on Terniums
business. For example, during 2007 Companhia Vale do Rio Doce (CVRD), our main supplier of iron
ore, was unable to provide us with the quantities of iron ore required for our Argentine
operations; in addition, there was limited transportation capacity from Brazil to Argentina through
the Paraguay and Parana rivers. For further information related to raw materials and energy
requirements, Item 4. Information on the CompanyB. Business OverviewRaw Materials and
Energy.
The Ternium companies depend on a limited number of key suppliers.
The Ternium companies depend on certain key suppliers for their requirements of raw materials
and energy. The Ternium companies have entered into long-term contracts for the supply of a
substantial portion of their principal inputs, and it is expected that they will maintain and,
depending on the circumstances, renew these contracts. However, if any of the key suppliers fails
to deliver or there is a failure to renew these contracts, the Ternium companies could face limited
access to raw materials and energy, higher costs and delays resulting from the need to obtain their
raw material and energy requirements from other suppliers. As an example, in 2007 CVRD, our main
supplier of iron ore, was unable to provide Siderar with the quantities or iron ore that it
required, forcing Siderar to import iron ore from our Mexican subsidiary.
Intense competition could cause Ternium to lose its share in certain markets and adversely
affect its sales and revenues.
The market for Terniums steel products is highly competitive, particularly with respect to
price, quality and service. In both the global and regional markets, Ternium competes against other
global and local producers of flat and long steel products, which in some cases have greater
financial and operating resources. Competition from global and regional steel manufacturers with
expanded production capacity such as Arcelor Mittal and new market entrants, especially from China
and the CIS, could result in significant price competition, declining margins and reductions in
sales volumes and revenues.
Terniums larger competitors could use their resources against Ternium in a variety of ways,
including by making additional acquisitions, implementing modernization programs, expanding their
production capacity, investing more aggressively in product development, and displacing demand for
Terniums products in certain markets. To the extent that these producers become more efficient,
Ternium could confront stronger competition and could fail to preserve its current share of the
relevant geographic or product markets. In addition, there has been a trend in recent years toward
steel industry consolidation among Terniums competitors, and smaller competitors in the steel
market today could become larger competitors in the future. For example, in June 2006, Mittal Steel
and Arcelor merged to create the worlds largest steel company, Arcelor Mittal; in April 2007, Tata
Steel completed the acquisition of Corus; and in July 2007, Gerdau acquired Chaparral Steel.
Regional players in Terniums markets have also experienced consolidation through acquisitions; for
example, Siderperu was acquired by Gerdau in 2006, Sicartsa of Mexico was acquired by Arcelor
Mittal in December 2006 and Aceria Paz del Rio of Colombia was acquired by Votorantim in March
2007. For further information please see Item 4. Information on the CompanyB. Business
OverviewCompetition.
Moreover, competition from alternative materials (including plastic, aluminum, ceramics,
glass, wood and concrete) could adversely affect the demand for, and consequently the market prices
of, certain steel products and, accordingly, could affect Terniums sales volumes and revenues.
Competition in the global and regional markets could also be affected by antidumping and
countervailing duties imposed on some producers in major steel markets and by the removal of
barriers to imported products in
those countries where the Ternium companies direct their sales. For further information please
refer to Item 4. Information on the CompanyRegulationTrade regulations.
11
Risks Relating to our Business
Following the completion of the Sidor nationalization process, Ternium is exposed to credit
concentration risk with Venezuela.
On May 7, 2009, the Company completed the transfer of its entire 59.7% interest in Sidor to
Corporación Venezolana de Guayana, or CVG, a Venezuelan state-owned entity. The Company agreed to
receive an aggregate amount of US$1.97 billion as compensation for its Sidor shares. Of that
amount, CVG paid US$400 million in cash on that date. The balance was divided in two tranches: the
first tranche, of US$945 million, will be paid in six equal quarterly installments (the first such
installment being due on August 7, 2009), while the second tranche will be paid at maturity in
November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI
crude oil price over its May 6, 2009 level. For more information on the Sidor nationalization
process, see note 29 to our audited consolidated financial statements included elsewhere in this
annual report and Item 4. Information on the CompanyA. History and Development of the
CompanySidor Nationalization Process. These receivables are unsecured. Accordingly, we have
significant credit concentration risk related to these receivables with Venezuela.
If Ternium does not successfully implement its business strategy, its opportunities for growth
and its competitive position could be adversely affected.
Ternium plans to continue implementing its business strategy of further integrating the
operating and marketing activities of the Ternium companies, developing value-added products,
providing services to a wider range of clients in the local and export markets, gain further access
to iron ore and other inputs, increasing its steel production and continuing to pursue strategic
acquisition opportunities. Any of these components or Terniums overall business strategy could be
delayed or abandoned or could cost more than anticipated, any of which could impact its competitive
position and reduce its revenue and profitability. For example, Ternium could fail to develop its
commercial network and lose market share in its export markets. Even if Ternium successfully
implements its business strategy, it may not yield the desired goals.
Recent and future acquisitions, greenfield projects, significant investments and strategic
alliances could disrupt Terniums operations and adversely affect its profits. Ternium may not
realize the benefits it expects from these business decisions.
A key element of Terniums business strategy is to identify and pursue growth-enhancing
strategic opportunities. As part of this growth strategy, Ternium has acquired interests in various
companies, including Hylsamex, one of the main steel producers in Mexico; and Grupo Imsa, another
leading producer with operations in Mexico, the United States and Guatemala.
We will continue to consider other capital investments, strategic acquisitions, greenfield
projects and alliances from time to time. However, any such project will depend upon market and
financing conditions. We must necessarily base any assessment of potential capital investments,
acquisitions, greenfield projects and alliances on assumptions with respect to operations,
profitability and other matters that may subsequently prove to be incorrect. Our recent and future
acquisitions, investments and alliances may not perform in accordance with our expectations and
could adversely affect our operations and profitability. Furthermore, we may fail to find suitable
acquisition targets or fail to consummate our acquisitions under favorable conditions, or could be
unable to successfully integrate any acquired businesses into our operations. Moreover, we may also
acquire, as part of future acquisitions, assets unrelated to our business, and we may not be able
to integrate them or sell them under favorable terms and conditions.
These risks, and the fact that integration of any acquired businesses will require a
significant amount of the time and resources of Terniums management and employees, could disrupt
Terniums ongoing business and could have a material adverse effect on its business, financial
condition and results of operations.
12
Ternium may be required to record a significant charge to earnings if it must reassess its
goodwill or other amortizable intangible assets.
In accordance with IFRS, management must test all of Terniums goodwill, intangible assets
with an indefinite useful life and intangible assets not yet available for use annually for
impairment, or more frequently if there are indicators of impairment, and recognize a non-cash
charge in an amount equal to the impairment. We recorded goodwill in connection with the
acquisition of our Mexican subsidiaries, the balance of which, as of December 31, 2008, amounted to
USD683.7 million. If Terniums management were to determine in the future that the goodwill from
the acquisition of our Mexican subsidiaries was impaired, Ternium would be required to recognize a
non-cash charge to write down the value of this goodwill, which would adversely affect Terniums
financial condition and results of operations.
Labor disputes at Terniums operating subsidiaries could result in work stoppages and
disruptions to Terniums operations.
A substantial majority of Terniums employees at its manufacturing subsidiaries are
represented by labor unions and are covered by collective bargaining or similar agreements, which
are subject to periodic renegotiation. Strikes or work stoppages could occur prior to or during the
negotiations leading to new collective bargaining agreements, during wage and benefits negotiations
or, occasionally, during other periods for other reasons.
In Argentina, in early 2009, following a decrease in the level of activity since the last
quarter of 2008 due to the global economic downturn, Siderar downsized contractor and subcontractor activities
and temporary personnel, triggering adverse reactions from the construction workers union and the
steelworkers union. More recently, negotiations between Siderar and the steelworkers union
regarding the annual bonuses related to results have been in progress for over three months, and
the unions have called for work stoppages and other measures. For more information on the
collective bargaining agreement applicable to most of Siderars employees in Argentina, see Item 6.
Directors, Senior Management and EmployeesD. EmployeesArgentina. In Mexico, even though the
various measures that Terniums Mexican subsidiaries have taken in order to become more competitive
have not resulted in significant labor unrest thus far, Ternium could suffer plant stoppages or
strikes as a result of future workforce reductions in connection with its productivity improvement
and cost reduction plans. Ternium may not be able to maintain a satisfactory relationship with its
employees, and any future stoppage, strike, disruption of operations or new collective bargaining
agreements could result in lost sales and could increase Terniums costs. For more information on
labor relations, see Item 6. Directors, Senior Management and EmployeesD. Employees.
Terniums related party transactions with companies controlled by San Faustín may not always
be on terms as favorable as those that could be obtained from unaffiliated third parties.
Some of Terniums sales and purchases are made to and from other companies controlled by San
Faustín. These sales and purchases are primarily made in the ordinary course of business, and we
believe that they are made on terms no less favorable than those we could obtain from unaffiliated
third parties. Ternium will continue to engage in related party transactions in the future, and
these transactions may not be on terms as favorable as those that could be obtained from
unaffiliated third parties. For information concerning the principal transactions between Ternium
and related parties, see Item 7. Major Shareholders and Related Party TransactionsB. Related
Party Transactions.
The global economic downturn may affect our ability to comply with some covenants under our
principal financing facility, triggering a need to modify or replace our loan agreements on less
favorable terms.
As of March 31, 2009, our outstanding debt balances totaled USD2.94 billion, consisting of
USD863 million of short-term indebtedness (including the current portion of long-term debt) and
USD2.07 billion of long-term indebtedness. The main covenants in our principal financing facility
are limitations on liens and encumbrances, limitations on the sale or other dispositions of certain
material assets, and compliance with financial ratios (e.g., leverage ratio and interest coverage
ratio). As of December 31, 2008, we were in compliance with all covenants under our loan
agreements. The current global recession and the resulting decline in the demand for steel and
steel products, coupled with fluctuations in foreign currency exchange rates and other regulatory,
business, economic and
other factors (some of which are at least partially outside of our control), may affect our
ability to comply with some covenants in the future, mainly due to their impact on our earnings.
Such circumstances could trigger a need to modify or replace those loan agreements on less
favorable terms, which could adversely affect our flexibility, cash flow and results. There can be
no assurance that we would be able to modify or replace those loan agreements on satisfactory terms
or at all. If we were unable to accomplish those actions, our loan agreements could become
immediately due and payable.
13
A significant rise in interest rates or any limitation in the Ternium companies ability to
hedge against interest rate fluctuations and other financial risks could adversely affect Terniums
business and results.
Changes in interest rates affect the amount of Terniums interest payments as well as the
value of its fixed rate debt. Most of Terniums long-term borrowings are at variable rates, and
accordingly, Ternium is exposed to the risk of increased interest expense in the event of a
significant rise in interest rates. As of March 31, 2009, Terniums total indebtedness was USD2.94
billion and, as stated above, most of it has variable rates.
In addition, a substantial rise in interest rates in developed economies such as the United
States of America could adversely affect the economies in the countries where Ternium conducts its
operations and markets its products.
In the ordinary course of business, the Ternium companies from time to time enter into
interest rate derivatives agreements to manage their exposure to interest rate changes. Future
regulatory or financial restrictions in the countries where Ternium operates may affect its ability
to mitigate its exposure to interest rate fluctuations and other financial risks, and thus cause an
adverse impact on Terniums results of operations and financial condition.
Changes in exchange rates or any limitation in the Ternium companies ability to hedge against
exchange rate fluctuations could adversely affect Terniums business and results.
The operations of the Ternium companies expose them to the effects of changes in foreign
currency and exchange rates. Most of Terniums business is carried out in currencies other than the
U.S. dollar. As a result of this foreign currency exposure, exchange rate fluctuations impact the
Ternium companies results and net worth as reported in their income statements and balance sheets
in the form of both translation risk and transaction risk.
In the ordinary course of business, the Ternium companies from time to time enter into
exchange rate derivatives agreements to manage their exposure to exchange rate changes. Future
regulatory or financial restrictions in the countries where Ternium operates may affect its ability
to mitigate its exposure to exchange rate fluctuations, and thus cause an adverse impact on
Terniums results of operations and financial condition.
Risks Relating to our Mining Activities
Iron ore is one of the principal raw materials used by Terniums operating subsidiaries.
Ternium has equity interests in two iron ore mining companies in Mexico: a 100% interest in Las
Encinas and a 50% interest in Peña Colorada, which operates Mexicos largest iron ore mine. In
addition, Ternium may expand its mining activities if and when market conditions show signs of
improvement. Our present and future mining activities are or would be subject to particular risks,
as follows:
Our mining activities depend on governmental concessions and on our ability to reach and
maintain lease agreements (or other agreements for the use of land) with the owner of the real
estate where the mines are located.
Our mining activities are subject to specific regulations and depend on concessions and
authorizations granted by governmental authorities. Amendments to applicable law and regulations
may change the terms pursuant to which we are required to pursue our exploration, mining and
mineral processing activities. Such amendments may require modifications to the processes and
technologies used in our mining activities, leading to unexpected capital expenditures. If the
relevant government authority determines that we are not in compliance with our obligations as
concessionaires, it may terminate our concession. Furthermore, in order to explore or exploit mines
it is necessary to
obtain the right to occupy and use the land where the mines are situated. Even though
government regulations frequently establish provisions intended to facilitate the establishment of
such rights, in some cases it may be difficult to reach and maintain agreements with the owners or
such agreements may be excessively onerous. If we are unable to establish use and occupancy rights,
our mining activities may be seriously compromised.
14
Our exploration activities are subject to uncertainties as to the result of such exploration;
even if the exploration activities lead to the discovery of mineral deposits, the effective
exploitation of such deposits remains subject to several risks.
Exploration activities are highly speculative, involve substantial risks and may be
unproductive. We may incur in substantial costs for exploration which do not yield the expected
results. The failure to find sufficient and adequate reserves could adversely affect our business.
In addition, even if mineral deposits are discovered, our ability to pursue exploitation activities
may be delayed for a long time during which market conditions may vary. Significant resources and
time needed to be invested in order to establish mineral resources through exploration, define the
appropriate processes that shall be undertaken, obtain environmental licenses, concessions and
other permits, build the necessary facilities and infrastructure for greenfield properties and
obtain the ore or extract the metals from the ore. If a project does not turn out to be
economically feasible by the time we are able to exploit it, we may incur in substantial
write-offs.
Our expected costs for exploration or exploitation activities may vary significantly and
affect our expected results.
We may be subject to increased costs or delays in the acquisition of adequate equipment for
the exploration and exploitation activities and/or involving metallurgical and other technological
processes arising during the mines exploitation. We may also fail to obtain any necessary permits,
or experience significant delays in connection with the issuance of such permits. Adverse mining
conditions, whether permanent or temporary, may lead to a significant increase on our costs and/or
affect our ability to produce the expected quantities of mineral. Communities living near areas
where we operate may take actions to oppose and interfere with our activities. All of the above may
adversely hamper our ability to conduct our mining activities as planned and affect our expected
results.
Risks Relating to the Structure of the Company
As a holding company, the Companys ability to pay cash dividends depends on the results of
operations and financial condition of its subsidiaries and could be restricted by legal,
contractual or other limitations.
The Company conducts all of its operations through subsidiaries. Dividends or other
intercompany transfers of funds from those subsidiaries are the Companys primary source of funds
to pay its expenses, debt service and dividends and to repurchase shares or ADSs. The Company does
not and will not conduct operations at the holding company level.
The ability of the Companys subsidiaries to pay dividends and make other payments to the
Company will depend on their results of operations and financial condition and could be restricted
by, among other things, applicable corporate and other laws and regulations, including those
imposing foreign exchange controls, and agreements and commitments of such subsidiaries. If
earnings and cash flows of the Companys operating subsidiaries are substantially reduced, the
Company may not be in a position to meet its operational needs or to pay dividends. In addition,
the Companys ability to pay dividends is subject to legal and other requirements and restrictions
in effect at the holding company level. For example, the Company may only pay dividends out of net
profits, retained earnings and distributable reserves and premiums, each as defined and calculated
in accordance with Luxembourg laws and regulations.
15
The Companys controlling shareholder may be able to take actions that do not reflect the will or best interests
of other shareholders.
As of May 29, 2009, San Faustín beneficially owned 60.64% and Tenaris, which is also controlled by San Faustín,
held 11.46% of our outstanding voting stock. Rocca & Partners controls a significant portion of the voting power of San
Faustín and has the ability to influence matters affecting, or submitted to a vote of, the shareholders of San Faustín.
As a result, Rocca & Partners is indirectly able to elect a substantial majority of the members of the Companys board
of directors and has the power to determine the outcome of most actions requiring shareholder approval, including,
subject to the requirements of Luxembourg law, the payment of dividends. The decisions of the controlling shareholder
may not reflect the will or best interests of other shareholders. For example, the Companys articles of association
permit the board of directors to waive, limit or suppress preemptive rights in certain cases. Accordingly, our
controlling shareholder may cause our board of directors to approve an issuance of shares for consideration without
preemptive rights, thereby diluting the minority interest in the Company. See Risk FactorsRisks Relating to our
ADSsHolders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain
cases.
Remaining minority interests in Siderar could delay or impede our ability to complete our
strategy.
We do not own one hundred percent of the interests in certain of our subsidiaries. As of March
31, 2009, approximately 25.97% of Siderar was held by the Administración Nacional de la Seguridad
Social (ANSeS), Argentinas governmental social security agency, approximately 8.78% was publicly
held, and approximately 4.31% was held by certain Siderar employees. ANSeS became a shareholder of
Siderar in the last quarter of 2008 as a
result of the nationalization of Argentinas private pension system, which caused assets under
administration of Argentinas private pension fundsincluding significant interests in publicly
traded companies, such as Siderar, held by such fundsto be transferred to ANSeS.
The existence of a minority interest in Siderar could prevent Ternium from taking actions
that, while beneficial to the Company, might not be beneficial to Siderar considered separately. As
a result, we could be delayed or impeded in the full implementation of our strategy or the
maximization of Terniums competitive strengths.
The Companys tax-exempt status will terminate on December 31, 2010. If we are unable to
mitigate the consequences of the termination of the preferential tax regime applicable to the
Company, in the future we may be subject to a higher tax burden and holders of our shares or ADSs
may be subject to tax withholdings.
The Company was established as a société anonyme holding under Luxembourgs 1929 holding
company regime and the billionaire provisions relating thereto. 1929 holding companies are exempt
from Luxembourg corporate income tax over income derived from low tax jurisdictions and withholding
tax over dividends distributions to holders of our shares and ADSs. Following a decision by the
European Commission, the Grand-Duchy of Luxembourg terminated its 1929 holding company regime,
effective January 1, 2007. However, under the implementing legislation, pre-existing
publicly-listed companies including the Company are entitled to continue benefiting from their
current tax regime until December 31, 2010. If we are unable to mitigate the consequences of the
termination of the preferential tax regime, in the future we may be subject to a higher tax burden
and holders of our shares or ADSs may be subject to tax withholdings.
Risks Relating to the Countries in Which We Operate
Negative economic, political and regulatory developments in certain markets where Ternium has
a significant portion of its operations and assets could hurt Terniums financial condition,
revenues and sales volume and disrupt its manufacturing operations, thereby adversely affecting its
results of operations and financial condition.
The results of Terniums operations are subject to the risks of doing business in emerging
markets, principally in Argentina and Mexico, and have been, and could in the future be, affected
from time to time to varying degrees by political developments, events, laws and regulations, such
as forced divestiture of assets; restrictions on production, imports and exports; interruptions to
essential energy inputs; exchange and/or transfer restrictions; inflation; devaluation; war or
other international conflicts; civil unrest and local security concerns that threaten the safe
operation of company facilities; direct and indirect price controls; tax increases; changes in
interpretation or application of tax laws and other retroactive tax claims or challenges;
expropriation of property; changes in laws or regulations; cancellation of contract rights; delays
or denial of governmental approvals; and environmental regulations. Both the likelihood of such
occurrences and their overall effect upon Ternium vary greatly from country to country and are not
predictable. Realization of these risks could have an adverse impact on the results of operations
and financial condition of Terniums subsidiaries located in the affected country. For example, in
April 2008, the Venezuelan government announced its intention to nationalize Sidor. For more
information on the Sidor nationalization process, see Item 4. Information on the CompanyA.
History and Development of the CompanySidor Nationalization Process.
16
Argentina
Ternium has significant manufacturing operations and assets located in Argentina and a
significant portion of its sales are made in Argentina. Terniums main revenues from its Argentine
operations, therefore, are indirectly related to market conditions in Argentina and to changes in
Argentinas gross domestic product, or GDP, and per capita disposable income. Accordingly,
Terniums business could be materially and adversely affected by economic, political, fiscal and
regulatory developments in Argentina.
Economic and political instability, which resulted in a severe recession in 2002, may occur in
the future, thereby adversely affecting our business, financial condition and results.
Our business and results of operations in Argentina have closely followed macroeconomic
conditions. Domestic sales of our Argentine subsidiary were severely affected by Argentinas
recession during 2001 and 2002. The domestic economic recovery over the 2003 2008 period, with
sustained growth in industrial activity, agriculture, construction and a significant improvement in
the automobile industry, increased our Argentine domestic sales. During the last quarter of 2008,
however, the downturn in the global economy reached the Argentine economy and had a significant
adverse impact on the sales of our Argentine subsidiary in its domestic market.
The Argentine economy is currently facing significant challenges. As further discussed below,
inflation increased significantly since 2005, and the economy has been affected by supply
constraints. Capital investment in general has lagged due to political uncertainties and
governmental actions, including price controls, export taxes, the nationalization of Argentinas
private pension system and other measures limiting the conduct of business in the private sector.
Declining capital investment may affect growth and, accordingly, cause the demand for our local
subsidiarys products in the domestic market to drop. While the Argentine government has announced
a number of measures with the purpose of softening the downturns impact on the economys activity
level while maintaining the employment level, Argentinas economy may suffer if such measures are
not successfully implemented or otherwise fail to attain their stated objectives. In addition, if
the current economic downturn continues, Argentinas lack of financing alternatives could
significantly impair the countrys ability to sustain the economys activity level, foster economic
growth and/or avert a new sovereign default.
Economic conditions in Argentina have deteriorated rapidly in the past and may deteriorate
rapidly in the future. The Argentine economy may not continue to grow and economic instability may
return. Our business and operations in Argentina could be adversely affected by rapidly changing
economic conditions in Argentina or by the Argentine governments policy response to such
conditions.
Inflation may escalate and undermine economic growth in Argentina, thereby adversely affecting
our results of operations and financial position.
In the past, inflation has undermined the Argentine economy and the governments ability to
stimulate economic growth. During 2002, the Argentine Consumer Price Index (CPI) increased by
41%, and the Wholesale Price Index (WPI) increased by 118.2%. According to official inflation
data published by the Instituto Nacional de Estadística y Censos (INDEC), Argentinas national
statistics institute, inflation slowed in 2003, with a 3.7% increase in the CPI and a 2% increase
in the WPI. Beginning in 2004, both indexes began showing significant year-over-year increases in
local prices, signaling a trend characteristic of an inflationary economy. According to the INDEC,
CPI increased by 6.1% in 2004, 12.3% in 2005, 9.8% in 2006, 8.5% in 2007 and 7.2% in 2008, whereas
WPI went up by 7.9% in 2004, 10.6% in 2005, 7.1% in 2006, 14.4% in 2007 and 9.4% in 2008. As noted
above, Argentinas inflation indicators have been subject to changes in calculation in recent years
and may not be consistent with the past or may not adequately reflect increases in cost. Moreover,
since such changes were implemented, the official inflation figures published by the INDEC have
been disputed by independent economists.
17
In the absence of a corresponding increase in prices received by our Argentine subsidiary from
the sale of their products, sustained inflation in Argentina would negatively impact its results of
operations and financial position. In addition, a return to a high inflation economy could
undermine Argentinas cost competitiveness abroad if not offset by an Argentine peso devaluation,
while also negatively affecting the economys activity and employment levels. Uncertainty about
future inflation may contribute to slow the economic activity level by reducing the economys
growth. Argentine inflation rate volatility makes it impossible to estimate with reasonable
certainty the extent to which activity levels and results of operations of our Argentine subsidiary
could be affected by inflation in the future.
Measures implemented by the Argentine government could negatively affect the liquidity of the
local capital markets, thereby limiting our ability to obtain local financing for our Argentine
operations.
On November 20, 2008, Argentina overhauled its social security system, eliminating the dual
pension system implemented in 1994 and replacing it by an integrated public pension system
administered by the ANSeS. Under the former system, employees could opt to continue making social
security contributions to the government-administered pension system or have such contributions
deposited in individual, separate accounts managed by private funds known as Administradoras de
Fondos de Jubilaciones y Pensiones, or AFJPs. The AFJPs were
required to invest such funds in different types of financial instruments, such as government
bonds, mutual funds, corporate stocks, and other securities, subject to certain limitations and
requirements set forth in applicable regulations. The new law mandated that all funds and
investments under the AFJPs administration be transferred to the ANSeS for such entity to
administer them as a single public pension fund, and ordered that all future social security
contributions be made to such public pension fund. The AFJPs had approximately USD23 billion in
assets under their administration, and were the largest investors in the countrys capital markets.
The Argentine governments decision to nationalize the private pension funds has negatively
affected the liquidity of the local capital markets, thereby limiting the ability of Argentine
companiesincluding our Argentine subsidiaryto obtain local financing for their operations.
Moreover, this measure may discourage future investments in the country, which could have an
adverse impact on the economys activity level and growth and thus affect our sales and results of
operations. We cannot give any assurances that the Argentine government will not take other,
similar measures in the future, nor can we predict the impact that any such measures may have on
our results of operations or financial condition.
The Argentine Central Bank has imposed restrictions on the transfer of funds outside of
Argentina and other exchange controls in the past and may do so in the future, which could prevent
Ternium from paying dividends or other amounts from cash generated by its Argentine operations.
In 2001 and 2002 and until February 7, 2003, the Argentine Central Bank restricted Argentine
individuals and corporations from transferring U.S. dollars abroad without its prior approval. In
2003 and 2004, the government reduced some of these restrictions, including those requiring the
Argentine Central Banks prior authorization for the transfer of funds abroad in order to pay
principal and interest on debt obligations. Nevertheless, significant government controls and
restrictions remain in place. Increasingly during 2008 and into 2009, the Argentine government has
been imposing new restrictions on foreign exchange outflows, including through certain transactions
on securities traded locally. Recently, the Argentine government has prohibited one regulated
company from paying dividends overseas. The existing controls and restrictions, and any additional
restrictions of this kind that may be imposed in the future, could impair Terniums ability to
transfer funds generated by Terniums Argentine operations in U.S. dollars outside Argentina to
fund the payment of dividends or other amounts and to undertake investments and other activities
that require payments in U.S. dollars.
On June 10, 2005, the Argentine government issued Decree No. 616/2005 establishing certain
restrictions on capital inflows into Argentina, including by requiring that any principal payment
obligation on external financial debtexcluding, subject to compliance with certain requirements,
export financings and debt securities publicly traded in Argentinaof Argentine residents
(including private Argentine entities) have a maturity of at least 365 days from the date of
receipt of the proceeds thereof, and that 30% of the amount of such proceeds be deposited in a
non-transferable, non-interest bearing account with an Argentine bank for 365 days. These
restrictions could affect Terniums ability to finance its investments and operations in Argentina.
In addition, our Argentine subsidiary is currently required to repatriate U.S. dollars collected in
connection with exports from Argentina (including U.S. dollars obtained through advance payment and
pre-financing facilities) into Argentina and convert them into Argentine pesos at the market-based
floating exchange rate applicable on the date of repatriation. In October 2008, the time periods
for the repatriation of export revenues credited in foreign currency overseas were, in practice,
substantially shortened.
18
The above restrictions and requirements, and any additional restrictions or requirements that
may be imposed in the future, expose Ternium to the risk of losses arising from fluctuations in the
exchange rate of the Argentine peso. For additional information on current Argentine exchange
controls and restrictions, see Item 10. Additional InformationD. Exchange Controls.
The Argentine government has increased taxes on Terniums operations in Argentina and could
further increase the fiscal burden on its operations in Argentina in the future.
Since 1992, the Argentine government has not permitted the application of an inflation
adjustment on the value of fixed assets for tax purposes. Since the substantial devaluation of the
Argentine peso in 2002, the amounts that the Argentine tax authorities permit Ternium to deduct as
depreciation for its past investments in plant, property and equipment have been substantially
reduced, resulting in a higher effective income tax charge. In addition, in
2002, the Argentine government imposed a 5% tax on the export of manufactured products. If the
Argentine government continues to increase the tax burden on Terniums operations in Argentina,
Terniums results of operation and financial condition could be adversely affected.
Restrictions on the supply of energy to Terniums operations in Argentina could curtail
Terniums production and negatively impact Terniums results of operations.
As a result of several years of recession, the forced pesification of U.S. dollar-based
tariffs into Argentine pesos at a one-to-one exchange rate and the subsequent freeze of gas and
electricity tariffs, there has been a lack of investment in gas and electricity supply and
transport capacity in Argentina in recent years. Over the course of the last several years, demand
for natural gas has increased substantially, driven by a recovery in economic conditions and low
prices in comparison with alternative fuel sources. Although the Argentine government is taking a
number of measures to alleviate the short-term impact of supply restrictions on residential and
industrial users and has taken several measures intended to address the situation in the medium-
and long-term, supply restrictions and shortages may continue in the future. Two new power plants
became operational during 2008 and are expected to increase system capacity by 8%. These plants are
currently still under construction and operating at 50% of their capacity, and are expected to be
completed in 2009. If the measures that the Argentine government is taking to alleviate the
short-term impact of the crisis prove to be insufficient, or if the investment that is required to
increase natural gas generation, energy production and transportation capacity and power generation
capacity over the medium and long term fails to materialize on a timely basis, Terniums production
in Argentina (or that of its main suppliers), could be curtailed, and Terniums sales and revenues
could decline. Although Ternium is taking measures, such as the purchase of alternative fuels such
as fuel oil, to limit the effect of supply restrictions on its operations in Argentina, such
efforts may not be sufficient to avoid any impact on Terniums production in Argentina (or that of
its main suppliers) and Ternium may not be able to similarly limit the effect of future supply
restrictions. See Risks Relating to the Steel IndustryPrice fluctuations or shortages in the
supply of raw materials and energy could adversely affect Terniums profits above.
Mexico
Ternium has significant manufacturing operations and assets located in Mexico and a majority
of its sales are made in Mexico. Terniums main revenues derived from its Mexican operations,
therefore, are indirectly related to market conditions in Mexico and to changes in its GDP and per
capita disposable income. Terniums business could be materially and adversely affected by
economic, political and regulatory developments in Mexico.
Economic conditions and government policies in Mexico could negatively impact Terniums
business and results of operation.
In the past, Mexico has experienced several periods of slow or negative economic growth, high
inflation, high interest rates, currency devaluation and other economic problems. Furthermore, the
Mexican national economy tends to reflect changes in the economic environment in the United States.
If problems such as the current deterioration in Mexicos economic conditions continue, or social
instability, political unrest, reduction in government spending or other adverse social
developments reemerge in the future, they could lead to continued volatility in the foreign
exchange and financial markets, and, depending on their severity and duration, could adversely
affect the business, results of operations, financial condition, liquidity or prospects of Ternium.
Moreover, adverse economic conditions in Mexico could result in higher interest rates accompanied
by reduced opportunities for refunding or refinancing, increased raw materials and operating costs,
reduced domestic consumption of Terniums products, decreased operating results and delays in
capital expenditures dependent on U.S. dollar purchases of equipment.
19
Further devaluation of the Mexican peso could have a negative impact on Terniums results.
Ternium has Mexican peso-denominated revenues from domestic sales in Mexico, which represent a
considerable portion of Terniums overall revenues. In addition, a significant portion of our
Mexican subsidiaries costs are denominated in U.S. dollars. As a result, a major portion of
Terniums income is affected by the fluctuation of the Mexican peso against the U.S. dollar. If the
Mexican peso depreciates, as occurred in Mexico during the
fourth quarter of 2008 and the beginning of 2009, the results from our Mexican operations,
when measured in U.S. dollar terms, will be lower, thus affecting our operating margin and
financial condition.
Changes in the Mexican tax system could have an adverse effect on Terniums Mexican
operations.
On September 14, 2007, the Mexican Congress passed a tax reform act, which created a new flat
tax (the impuesto empresarial a tasa única or IETU) which, effective January 1, 2008, replaced
the Mexican assets tax (the impuesto al activo or IMPAC.) The act also established certain
temporary and operational limits for the recoverability of assets tax credits. The IETU works as a
corporate income tax supplement and is levied on income received. Ternium Mexico consolidates its
various subsidiaries for purposes of determination and payment of Mexican corporate income tax.
However, consolidation is not permitted for purposes of determination and payment of the new flat
tax, nor is it possible to apply corporate income tax credits against IETU liabilities. These
changes in the Mexican tax system may affect our Mexican subsidiaries tax burden and the
application or recoverability of certain of their tax credits. For more information, see note 3 to
our audited consolidated financial statements included elsewhere in this annual report.
Certain Regulatory Risks and Litigation Risks
International trade actions or regulations and trade-related legal proceedings could adversely
affect Terniums sales, revenues and overall business.
International trade-related legal actions and restrictions pose a constant risk for Terniums
international operations and sales throughout the world. Additionally, increased global trade
liberalization, with many countries forming free trade blocs or otherwise reducing restrictions on
imported goods, including flat steel products, and excess global steel capacity have increased
competition in many markets in which Ternium sells flat steel products. Such risks and increased
competition are likely to continue into the foreseeable future. Also, since we obtained control
over Grupo Imsa we have become a significant consumer of slabs, which we buy from various suppliers
in Mexico and overseas. Imports of slabs into Mexico are, subject to certain conditions, brought
under lower import duties or through a temporary import regime. Should slabs imports into Mexico
grow, we may not be able to make such imports under the lower duty regime, or the Mexican
government may increase the applicable duties or impose restrictions in the quantities allowed to
be imported.
Increased trade liberalization has reduced certain of Terniums imported input costs and
increased Terniums access to many foreign markets. However, greater trade liberalization in its
domestic markets is increasing competition for Ternium in such markets. In recent times, as a
consequence of the global downturn, the number of antidumping and countervailing actions limiting
trade has increased substantially. Accordingly, producers from certain countries find themselves
excluded from certain markets and in need to find alternatives for their excess production.
Terniums domestic market share could be further eroded in the face of foreign imports if tariffs
and other barriers are reduced or eliminated in Terniums domestic markets. Terniums increased
exports to foreign markets where import barriers have been reduced may not completely offset
domestic market share losses resulting from increased foreign competition.
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Countries can impose restrictive import duties and other restrictions on imports under various
national trade laws. The timing and nature of countries imposition of trade-related restrictions
potentially affecting Terniums exports are unpredictable. Terniums international operations are
vulnerable to such trade actions or restrictions that surface in any country to which Ternium
exports or potentially could export. Trade restrictions on Terniums exports could adversely affect
Terniums ability to sell products abroad and, as a result, Terniums profit margins, financial
condition and overall business could suffer.
One significant source of trade restrictions results from countries imposition of so-called
antidumping and countervailing duties, as well as safeguard measures. These duties can
severely limit or altogether impede an exporters ability to export to important markets. In
several of Terniums major export destinations, such as the United States of America or Europe,
safeguard duties and other protective measures have been imposed against a broad array of steel
imports in certain periods of excess global production capacity, as is currently the case.
Furthermore, certain domestic producers have filed antidumping and/or countervailing duty actions
against particular steel imports. Some of these actions have led to restrictions on Terniums
exports of certain types of steel
products to some steel markets. As domestic producers filing of such actions is largely
unpredictable, additional antidumping, countervailing duty or other such import restrictions could
be imposed in the future, limiting Terniums export sales to and potential growth in those markets.
See Item 4. Information on the CompanyB. Business OverviewRegulationTrade regulations.
Potential environmental, product liability and other claims could create significant
liabilities for Ternium that could adversely affect its business, financial condition, results of
operations and prospects.
Some of the activities for which the Ternium companies supply products, such as canning for
consumption, construction and the automotive industry are subject to inherent risks that could
result in death, personal injury, property damage or environmental pollution. Furthermore,
Terniums products are also sold to, and used in, certain safety-critical appliances.
Correspondingly, defects in Terniums products or an inconsistency with the specifications of an
order or the requirements of an application, could result in death, personal injury, property
damage, environmental pollution, damage to equipment or disruption to a customers production
lines. Actual or claimed defects in the products of the Ternium companies could give rise to claims
against Ternium or its subsidiaries for losses and expose it to claims for damages, including
significant consequential damages. In addition, the Ternium companies are subject to a wide range
of local, provincial and national laws, regulations, permits and decrees relating to the protection
of human health and the environment, and remediation or other environmental claims could be
asserted against Ternium. The insurance maintained by Ternium may not be adequate or available to
protect it in the event of a claim or its coverage could be canceled or otherwise terminated. A
major claim for damages related to products sold could have a material adverse effect on Terniums
business, financial condition, results of operations or prospects.
Risks Relating to our ADSs
The market price for our ADSs could be highly volatile.
Volatility in the price of our ADSs may be caused by factors outside of our control and may be
unrelated or disproportionate to Terniums operating results. In particular, announcements of
potentially adverse developments, such as proposed regulatory changes, new government
investigations or the commencement or threat of litigation against Ternium, as well as announced
changes in Terniums business plans or those of its competitors could adversely affect the trading
price of our ADSs, regardless of the likely outcome of those developments or proceedings. Broad
market and industry factors could adversely affect the market price of our ADSs, regardless of its
actual operating performance. As an example of this volatility, the price of our ADSs reached
USD45.99 on June 6, 2008, before falling to USD4.55 on November 20, 2008, and then recovering to a
closing price of USD 17.42 on June 18, 2009.
Furthermore, the trading price of our ADSs could suffer as a result of developments in
emerging markets. Although the Company is organized as a Luxembourg corporation, almost all of its
assets and operations are located in Latin America. Financial and securities markets for companies
with a substantial portion of their assets and operations in Latin America are, to varying degrees,
influenced by political, economic and market conditions in emerging market countries. Although
market conditions are different in each country, investor reaction to developments in one country
can have significant effects on the securities of issuers with assets or operations in other
emerging markets, including Argentina and Mexico.
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In deciding whether to purchase, hold or sell our ADSs, you may not be able to access as much
information about us as you would in the case of a U.S. company.
There may be less publicly available information about us than is regularly published by or
about U.S. issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies
may not be as extensive as those in effect in the United States, and Luxembourg law and regulations
in respect of corporate governance matters might not be as protective of minority shareholders as
state corporation laws in the United States. Furthermore, IFRS, the accounting standards in
accordance with which we prepare our consolidated financial statements differ in certain material
aspects from the accounting standards used in the United States.
Holders of our ADSs may encounter difficulties in the exercise of dividend and voting rights.
You may encounter difficulties in the exercise of some of your rights as a shareholder if you
hold ADSs rather than shares. If we make a distribution in the form of securities, the depositary
is allowed, at its discretion, to sell that right to acquire those securities on your behalf and
instead distribute the net proceeds to you. Also, under certain circumstances, such as our failure
to provide the depositary with voting materials on a timely basis, you may not be able to vote by
giving instructions to the depositary. In the circumstances specified in the deposit agreement, if
the depositary does not receive voting instructions from the holder of ADSs or the instructions are
not in proper form, then the depositary shall deem such holder to have instructed the depositary to
give, and the depositary shall give, a proxy to a person designated by the Company with respect to
that amount of shares underlying such ADSs to vote that amount of
shares underlying such ADSs in
favor of any proposals or recommendations of the Company (including any recommendation by the
Company to vote that amount of shares underlying such ADSs on any issue in accordance with the
majority shareholders vote on that issue) as determined by the appointed proxy. No instruction
shall be deemed given and no proxy shall be given with respect to any matter as to which the
Company informs the depositary that (x) it does not wish such proxy given, (y) substantial
opposition exists, or (z) the matter materially and adversely affects the rights of the holders of
ADSs.
Holders of our shares and ADSs in the United States may not be able to exercise preemptive
rights in certain cases.
Pursuant to Luxembourg corporate law, existing shareholders of the Company are generally
entitled to preemptive subscription rights in the event of capital increases and issues of shares
against cash contributions. Under the Companys articles of association, the board of directors has
been authorized to waive, limit or suppress such preemptive subscription rights until October 26,
2010. The Company, however, may issue shares without preemptive rights only if the newly-issued
shares are issued:
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for, within, in conjunction with or related to, an initial public offering of the
shares of the Company on one or more regulated markets (in one or more instances); |
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for consideration other than cash; |
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upon conversion of convertible bonds or other instruments convertible into shares
of the Company; provided, however, that the pre-emptive subscription rights of the then
existing shareholders shall apply in connection with any issuance of convertible bonds or
other instruments convertible into shares of the Company for cash; and |
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subject to a certain maximum percentage, as compensation to directors, officers,
agents or employees of the Company, its direct or indirect subsidiaries or its
affiliates, including without limitation the direct issuance of shares or the issuance of
shares upon exercise of options, rights convertible into shares or similar instruments
convertible or exchangeable into shares issued or created to provide compensation or
incentives to directors, officers, agents or employees of the Company, its direct or
indirect subsidiaries or its affiliates. |
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For further details, see Item 10. Additional InformationB. Memorandum and Articles of
Association.
Furthermore, holders of our shares and ADSs in the United States may, in any event, not be
able to exercise any preemptive rights, if granted, for shares unless those shares are registered
under the U.S. Securities Act of 1933, as amended (the Securities Act) with respect to those
rights or an exemption from registration is available. We intend to evaluate, at the time of any
rights offering, the costs and potential liabilities associated with the exercise by holders of
shares and ADSs of the preemptive rights for shares, and any other factors we consider appropriate
at the time, and then to make a decision as to whether to register additional shares. We may decide
not to register any additional share, requiring a sale by the depositary of the holders rights and
a distribution of the proceeds thereof. Should the depositary not be permitted or otherwise be
unable to sell preemptive rights, the rights may be allowed to lapse with no consideration to be
received by the holders of the ADSs.
It may be difficult to obtain or enforce judgments against the Company in U.S. courts or
courts outside of the United States.
The Company is a corporation organized under the laws of Luxembourg, and most of its assets
are located outside of the United States of America. Furthermore, most of the Companys directors
and officers named in this annual report reside outside the United States of America. As a result,
investors may not be able to effect service of process within the United States of America upon the
Company or its directors or officers or to enforce against the Company or them in U.S. courts
judgments predicated upon the civil liability provisions of U.S. federal securities law. Likewise,
it may be difficult for a U.S. investor to bring an original action in a Luxembourg court
predicated upon the civil liability provisions of the U.S. federal securities laws against the
Company, its directors or its officers. There is also uncertainty with regard to the enforceability of
original actions in courts outside the United States of civil liabilities predicated upon the civil
liability provisions of U.S. federal securities laws. Furthermore, the enforceability in courts
outside the United States of judgments entered by U.S. courts predicated upon the civil liability
provisions of U.S. federal securities law will be subject to compliance with procedural
requirements under applicable local law, including the condition that the judgment does not violate
the public policy of the applicable jurisdiction.
Item 4. Information on the Company
Overview
Ternium is a leading steel company in Latin America, manufacturing and processing a wide range of
flat and long steel products for customers active in the construction, home appliances, capital
goods, container, food, energy and automotive industries. Ternium has a production capacity of
finished steel products of approximately 9.6 million tons per year, and produced nearly 6.4 million
tons of crude steel in 2008. The Company believes that it is a low-cost steel producer due to its
integrated operations, state-of-the-art steel production facilities, access to diversified sources
of raw materials and other production inputs and operating efficiencies.
Ternium produces and distributes a broad range of semi-finished and finished steel products,
including value-added steel products such as tinplate, cold rolled coils and sheets, galvanized and
electrogalvanized sheets, pre-painted sheets, welded pipes, hot rolled pickled and annealed and
tailor-made flat products. Ternium also produces long steel products such as bars and wire rod.
Ternium primarily sells its steel products in the regional markets of North, Central and South
America, where its manufacturing facilities are located, allowing it to provide specialized
products and delivery services to its clients. We believe that Ternium is the leading supplier of
flat steel products in Argentina, a leading supplier of flat steel products in Mexico and a
significant competitor in the Mexican market for long steel products, and a competitive player in
the international steel market for flat and long steel products. Ternium maintains a presence in
Europe through its network of commercial offices, which allows it to reach clients outside its
regional markets and place products in case of slower demand in domestic economies, achieve
improved effectiveness in the supply of its products and in the procurement of steel for its
manufacturig facilities, and maintain a fluid commercial relationship with its clients by providing
continuous services and assistance.
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In 2008, approximately 61.8% of Terniums sales were made to North America, 36.7% to South and
Central America, and 1.5% to Europe and other markets. Terniums net sales were USD8,464.9 million,
gross profit was USD2,336.9 million, and net income attributable to equity holders was USD715.4
million, which amounts reflect the de-consolidation of Sidor since April 1, 2008, and the
consolidation of all the other subsidiaries for the full fiscal year.
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History and Development of the Company |
The Company
Our legal and commercial name is Ternium S.A. The Company was organized as a joint stock
corporation (societé anonyme holding) under the laws of the Grand-Duchy of Luxembourg on December
22, 2003. Our registered office is located at 46a, Avenue John F. Kennedy, L-1855 Luxembourg,
telephone number +352 2668 31 52. Our agent for U.S. federal securities law purposes is Ternium
International U.S.A. Corporation, located at 2200 West Loop South, 8thfloor, Houston, TX
77027, United States of America.
Ternium
Terniums origins began in September 1961 with the founding of Propulsora Siderúrgica, or
Propulsora, by San Faustíns predecessor in Argentina. Propulsora began its operations as a
producer of cold rolled coils in December 1969 and in the early 1990s began to evolve through a
series of strategic investments aimed at transforming Propulsora into an integrated steel producer.
In 1993, Propulsora merged with Aceros Parana (a company formed by the Argentine government in
connection with the privatization of Somisa, at that time the main integrated producer of flat
steel in Argentina), Aceros Paranas subsidiary Sidercrom, a tin plate processing company, and two
other steel industry subsidiaries of Propulsora (Aceros Revestidos and Bernal). After the merger,
Propulsora changed its name to Siderar S.A.I.C. San Faustin held a controlling interest in Siderar,
with the remainder being held by Usiminas, certain former employees of Somisa, and the public.
In December 1997, Amazonia (a consortium formed by San Faustín, Siderar, Usiminas, Hylsamex and
Sivensa) won the bid in the privatization of 70% of the shares of Sidor, the largest steel company
in the Andean Community, while Venezuela retained the remaining 30%. The continuing world-wide
steel production crisis, the deterioration of the financial markets, the appreciation of the
Venezuelan Bolívar and other adverse factors negatively affected Sidor and Amazonia, which
undertook debt restructurings in 2000 and 2003. In the 2003 restructuring, Amazonias interest in
Sidor was reduced to 59.7%, while Venezuela increased its interest to 40.3%. In addition, Ylopa (an
entity formed by San Faustín, Siderar, Tenaris, Usiminas and Hylsamexs former controlling
shareholder) provided financial assistance to Sidor under a participation account agreement.
Subsequently, Venezuela transferred a 19.9% interest in Sidor to present and former employees of
Sidor under the terms of a special employee participation plan.
As a part of a multiple-step corporate reorganization in 2005, San Faustín reorganized its
investments in flat and long steel manufacturing, processing and distribution businesses by
contributing its controlling interests in Siderar, Sidor (through Amazonia and Ylopa) and Ternium
Internacional to the Company. On August 22, 2005, we acquired, together with Siderar, an indirect
99.3% interest in the Mexican company Hylsamex, S.A. de C.V. (Hylsamex) and its subsidiaries and
the equity stakes owned by Hylsamexs former controlling shareholder, Alfa, S.A. de C.V., in
Amazonia and Ylopa. We subsequently purchased additional shares of Hylsamex in the open market,
subject to applicable law, thereby increasing our and Siderars direct and indirect interest in
Hylsamex to 99.8%. In 2005, each of Tenaris and Usiminas exchanged its interests in Amazonia, Ylopa
and, in the case of Usiminas, Siderar for shares of the Company, and Sivensa exchanged its interest
in Amazonia for shares of the Company.
On January 11, 2006, the Company launched an initial public offering of 24,844,720 American
Depositary Shares, each representing 10 shares of the Company (each an ADS), in the United
States. In connection with the offering, the Company granted the underwriters of the Companys
initial public offering an option to purchase up to 3,726,708 additional ADSs to cover
over-allotments in the sale of the ADSs. The offering was settled on February 6, 2006.
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On December 28, 2006, we acquired an additional 4.85% interest in Siderar from CVRD Internacional
S.A., a wholly-owned subsidiary of CVRD, thereby increasing our ownership in Siderar to 60.93%.
On April 29, 2007, the Company entered into an agreement with Grupo Imsa, S.A.B. de C.V. (Grupo
Imsa), a steel manufacturer with operations in Mexico, the United States and Guatemala, and Grupo
Imsas controlling shareholders pursuant to which Grupo Imsa came under our control on July 26,
2007. Under the agreement, the Company, through a wholly owned subsidiary, made a cash tender offer
under applicable Mexican law for all of the issued and outstanding share capital of Grupo Imsa.
Pursuant to the tender offer, we acquired 25,133,856 shares representing 9.3% of the issued and
outstanding capital of Grupo Imsa. Concurrently with the consummation of the tender offer, on July
26, 2007, all the shares of Grupo Imsa that were not tendered into the tender offer (including the
shares owned by Grupo Imsas majority shareholders), representing 90.7% of Grupo Imsas issued and
outstanding share capital were redeemed for cash pursuant to a capital reduction effected at the
same price per share. Accordingly, we now own all of Grupo Imsas issued and outstanding share
capital.
In 2007, Grupo Imsa was renamed as Ternium Mexico and, effective March 31, 2008, Hylsamex merged
with and into Ternium Mexico. In connection with this merger, Siderar became a shareholder of
Ternium Mexico with a 28.7% interest.
Sidor Nationalization Process
On March 31, 2008, the Company controlled approximately 59.7% of Sidor, while CVG, and Banco de
Desarrollo Económico y Social de Venezuela, or BANDES (a bank owned by the Venezuelan government),
held approximately 20.4% of Sidor and certain Sidor employees and former employees held the
remaining 19.9% interest.
Further to several threats of nationalization and various adverse interferences with management in
preceding years, on April 8, 2008, the Venezuelan government announced its intention to take
control over Sidor. On April 29, 2008, the National Assembly of Venezuela passed a resolution
declaring that the shares of Sidor, together with all of its assets, were of public and social
interest, and authorizing the Venezuelan government to take any action it deemed appropriate in
connection with any such assets, including expropriation.
On May 11, 2008, Decree Law 6058 of the President of Venezuela regulating the steel production
activity in the Guayana region in Venezuela (the Decree), dated April 30, 2008, was published.
The Decree ordered that Sidor and its subsidiaries and associated companies be transformed into
state-owned enterprises (empresas del Estado), with Venezuela owning not less than 60% of their
share capital. The Decree required the Venezuelan government to create two committees: a transition
committee to be incorporated into Sidors management and to ensure that control over the current
operations of Sidor and its subsidiaries and associated companies was transferred to the government
on or prior to July 12, 2008, and a separate technical committee, composed of representatives of
the government and the private shareholders of Sidor and its subsidiaries and associated companies,
to negotiate over a 60-day period (extendable by mutual agreement) a fair price for the shares to
be transferred to Venezuela. The Decree also stated that, in the event the parties failed to reach
agreement by the expiration of the 60-day period, the Venezuelan Ministry of Basic Industries and
Mining would assume control and exclusive operation of, and the Executive Branch would order the
expropriation of the shares of, the relevant companies.
Upon expiration of the term contemplated under the Decree, on July 12, 2008, Venezuela, acting
through CVG, assumed operational control and complete responsibility for Sidors operations, and
Sidors board of directors ceased to function. However, negotiations between the Venezuelan
government and the Company regarding the terms of the compensation continued over several months,
and the Company retained formal title over the Sidor shares during that period.
On May 7, 2009, the Company completed the transfer of its entire 59.7% interest in Sidor to CVG.
The Company agreed to receive an aggregate amount of US$1.97 billion as compensation for its Sidor
shares. Of that amount, CVG paid US$400 million in cash on that date. The balance was divided in
two tranches: the first tranche, of US$945 million, will be paid in six equal quarterly
installments (the first such installment being due on August 7, 2009), while the second tranche
will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based
on the increase of the WTI crude oil price over its May 6, 2009 level.
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Our Business Strategy
Our main strategic objective is to enhance shareholder value by strengthening Terniums position as
a low cost producer of steel products in a manner consistent with minority shareholder rights,
while further consolidating Terniums position as a leading flat and long steel producer in Latin
America and a strong competitor in the Americas with strategic presence in several other major
steel markets.
The main elements of this strategy are:
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Further integrate Terniums operations. We have changed our functional organization from
independent companies to one company organized under business units with specific functional
responsibilities. Integrating the operations of our subsidiaries has allowed Ternium to better
serve our clients, to increase the diversification of our products, to benefit from enhanced
flexibility and operative synergies and to rationalize our cost structure. |
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Enhance Terniums position as a low cost steel producer. We believe that further
integration of Terniums operating facilities should improve utilization levels of its plants,
increase efficiency and further reduce production costs from levels that we already consider
to be among the most competitive in the steel industry; |
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Implementing Terniums best practices. We believe that the implementation of Terniums
commercial and production best practices in acquired new businesses should generate additional
benefits and savings. For example, the implementation of Terniums cost control procedures and
performance analysis in Hylsamex improved control over its production variables and led to
cost savings; |
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Focus on higher margin value-added products. We intend to continue to shift Terniums
sales mix towards higher margin value-added products, such as cold rolled sheets and coated
and tailor-made products, and services, such as just-in-time delivery and inventory
management. In this regard, our Mexican acquisitions in 2005 and 2007 allowed Ternium to
expand its offerings of value-added products, such as galvanized products and panels; |
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Maximize the benefits arising from Terniums broad distribution network. We intend to
maximize the benefits arising from Terniums broad network of distribution, sales and
marketing services to reach clients in major steel markets with a comprehensive range of
value-added products and services and to continue to expand its customer base and improve its
product mix. For example, the acquisition of Hylsamex in 2005 allowed us to increase Terniums
participation in the North American market, and the Grupo Imsa transaction in 2007 further
increased such participation; and |
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Pursue strategic growth opportunities. We have a history of strategically growing our
businesses through acquisitions. In addition to strongly pursuing organic growth, we intend to
identify and pursue growth-enhancing strategic opportunities to consolidate Terniums presence
in its markets, gain further access to iron ore and other inputs, expand its offerings of
value-added products, increase its steel production and increase its distribution
capabilities. |
Our Competitive Strengths
We believe that the following competitive strengths distinguish Ternium from its competitors and
enhance its leading market position:
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State-of-the-art, low cost producer. The combination of a portfolio of state-of-the-art, low
cost steel production mills (one of which is fully integrated with iron ore mines), access to
diversified sources of raw materials and cost-competitive labor sources and operating
efficiencies makes Ternium a low cost producer of steel and a cost-competitve producer of
value-added products; |
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Strong market position and extensive market reach. Ternium has a leading participation in the
market for flat steel products in Argentina and in Mexico. The location of its production
facilities gives Ternium favorable access to some of the most important regional markets in
the Americas, including the North American Free Trade Agreement, or NAFTA, and Mercado Común
del Sur, or Mercosur; and |
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Experienced and committed management team. Our management team has extensive experience in,
and knowledge of, the steel industry, which enhances Terniums reputation in the global steel
markets. A large percentage of our senior managers have spent their entire careers working
within the steel businesses of San Faustin and its affiliates. Our management team has
substantial experience in increasing productivity and
reducing costs, as well as in identifying, evaluating and pursuing growth opportunities and
integrating acquisitions. |
Our Products
The Ternium companies produce mainly finished and semi-finished flat and long steel products which
are sold either directly to steel processors or to end-users, after different value-adding
processes. Flat steel products include hot rolled coils and sheets, cold rolled coils and sheets,
tin plate, hot dipped galvanized and electrogalvanized sheets and pre-painted sheets. Galvanized
and pre-painted sheets can be further processed into a variety of corrugated sheets, trapezoidal
sheets, corrugated and galvanized steel guard rails and drains and other tailor-made products to
serve its customers requirements. Long steel products include billets (steel in its basic,
semi-finished state), wire rod and bars.
Flat steel products
Slabs: Slabs are semi-finished steel forms that are used as inputs for the production of flat
steel products such as hot rolled coils, cold rolled coils, and the coated and tailor-made products
described below. A slab is different from a billet (the semi-finished product used for long steel
production) mainly in its dimensions. Both slabs and billets are generally continually casted. The
use of slabs is determined by its dimensions and by its chemical and metallurgical characteristics.
Hot rolled products: Hot rolled products are used by a variety of industrial consumers in
applications such as the manufacturing of wheels, auto parts, pipes, gas cylinders and containers.
They are also directly used for the construction of buildings, bridges and railroad cars, and for
the chassis of trucks and automobiles. Hot rolled products can be supplied as coils or as sheets
cut to a specific length. These products also serve as inputs for the production of cold rolled
products.
Cold rolled products: Cold rolled products are applied mainly to the automotive, home appliance
and capital goods industries, as well as to galvanizers, drummers, distributors and service
centers. Cold rolled coils are sold as coils or cut into sheets or blanks to meet customers needs.
Tin plate and tin free: Given its resistance to corrosion and its mechanical and chemical
characteristics, tin plate is mainly sold to the packaging industry for food canning, sprays and
paint containers. Tin plate and tin free are produced by coating cold rolled coils with a layer of
tin and thin crome, respectively, that is attached by an electroplating continous process.
Hot dipped galvanized and pre-painted sheets: Hot dipped galvanized sheets are produced by
adding a layer of zinc to cold rolled coils, which are afterwards cut into sheets. Galvanized
sheets can also be pre-painted, resulting in a product that is mainly sold to the construction
industry for building coverings, manufacturing of ceiling systems, panels, air conditioning ducts
and several other uses. Ternium also offers, under the trademark Zintroalum in Mexico and Cincalum
in Argentina, a distinctive type of galvanized product with coating composition that contains 55%
aluminum-zinc to improve product performance for construction industry, including rural, industrial
and marine sites.
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Electrogalvanized and pre-painted sheets: Electro-galvanized and pre-painted sheets are sold not
only to customers in the automotive and home appliance industries, but also to clients working in
the construction of road-defenses, sewage systems, bridges and other infrastructure projects.
Electro-galvanized and pre-painted sheets are produced from cold rolled coils by adding a layer of
zinc that is attached by an electroplating continous process, in one or both sides. The
electro-galvanized coils are subsequently cut and sold either as sheets or are further processed
with a color coating to produce pre-painted sheets. Electro-galvanization provides products with a
longer useful life and more resistance to corrosion.
Long steel products
Wire rod: Rods are round, thin, semi-finished steel products that are rolled from a billet and
coiled for further processing. Rods are commonly drawn into wire products or used to make bolts and
nails. Wire rod can be produced in different qualities according to clients demands.
Bars: Bars are long steel products that are rolled from billets. Two of the most common types of
bars produced are merchant bars and reinforcing bars (rebar). Merchant bars include specific shape
features such as rounds, flats, angles, squares and channels that are used by clients to
manufacture a wide variety of products such as furniture, stair railings and farm equipment. Rebar
is used to strengthen concrete highways, bridges and buildings.
Steel billets: Billets are semi-finished steel forms that are used as inputs in the production
of long steel products such as bars, channels or other structural shapes. A billet is different
from a slab mainly in its dimensions. Both billets and slabs are generally cast using the
continuous casting method. Following the completion of the Sidor nationalization process, we will
no longer produce significant volumes of billets. For more information on the recent developments
relating to the Sidor nationalization process, see Item 4. Information on the CompanyA. History
and Development of the CompanySidor Nationalization Process.
Other products
Steel pipes and tubular products: Welded steel pipe is typically used for the transport of
water, air, gas and other liquids. Tubular products include galvanized pipes for liquid conduction,
structural and industrial applications and light structural shapes which can be used for a variety
of applications, including the transport of other forms of gas and liquids under high pressure,
pipe for electrical cable conduits and also for oil and gas applications.
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Tubes for general use. These are finished square or round cross-section tubes (uncoated or
galvanized) mainly used in the automotive-part and automotive industries, bicycles, furniture,
home accessories, hospital equipment, posts for wire mesh garden and poultry tools. |
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Structural tubes. These are high-quality and multi-purpose products, recommended for
structures that need to withstand specific mechanical stress. Typical applications for these
tubes are scaffolding, handrails and guard-rails. |
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Tubes for mechanical applications. These are round shaped tubes (uncoated or galvanized)
mainly employed in assembled parts of agricultural machinery and industrial equipment. |
|
|
|
Conduction tubes. These tubes, available without protective anti-rust covering (black) or
galvanized, are used for conduction of water, air, gas and special fluids. |
|
|
|
Conduction electrical tubes (conduit). These are electrical-resistant, welded, round-shaped
tubes with coupling endings for either wall covered or uncovered internal building electrical
installations. |
|
|
|
Petrol tubes. Tubing of up to 6mm in thickness, in nominal interior diameters of 2 3/8 up to
6, specially designed for oil conduction applications or high-pressure liquids. |
28
Beams. Open and tubular section products obtained by roll forming of steel strips.
|
|
C section (purlins). These are open structural steel profiles with a C shape, utilized as
window frames, stilts, mainstays, crossbeams and other elements in structures. |
|
|
|
Z section (purlins). These are open structural steel profiles with a Z shape, utilized in
the construction industry for building structures. Due to its shape it can be overlapped and
stacked. |
|
|
|
Tubular section. These are small metallic beams used as supports, guides and crossbars for
installing windows, doors, frames and boards. |
Rollformed products: These are products obtained from the mechanical transformation of flat
steel and used mainly in the construction industry. Rollformed products include:
|
|
Insulated panels. Continuous-process-made panel, formed by a polyurethane foam layer between
two steel painted sheets. Thermal isolation and easy installing joints are their most
distinctive properties. There is a whole set of different shapes and sections for this
product. Widely and successfully applied in warehouses, commercial and industrial
refrigeration installations. Can also be used in grain storage, poultry and porcine
confinement facilities. |
|
|
|
Roofing and Cladding. Products made by roll-forming of pre-painted, galvanized and 55%
aluminum-zinc coated steels, in sinusoidal, trapezoidal and standing seam profiles. They are
mainly used for roofing and side walls for buildings of all kinds of constructions |
|
|
|
Roof tiles. Product manufactured from galvanized prepainted steel. Its main advantages are
that it is lighter, more resistant and waterproof and makes for a faster installation compared
to similar systems. It is similar in appearance to traditional tiling but has the durability
of coated steel. |
|
|
|
Steel Deck. Galvanized structural steel flooring system for modern rapid-installation
buildings. It optimizes construction times by eliminating the need for traditional framing, as
it allows for the simultaneous molding of terraces and mezzanine floorings with significant
savings in building time and costs. |
Pre-engineered metal building systems: These are steel construction systems for low-rise,
non-residential buildings. Include frames, secondary steel members, roofs and walls panels, as well
as finishings and accessories. All are precisely manufactured to meet or exceed the highest
standards of testing and certification.
We also produce pig iron and pellets.
Within each of the basic product categories there is a range of different items of varying
qualities and prices that are produced either to meet the particular requirements of end users or
sold as commodity items.
Production Facilities and Processes
Ternium operates state-of-the-art steelmaking facilities. We consider Ternium to be among the
lowest cost producers in the Americas, as a result of:
|
|
|
strategically located plants; |
|
|
|
|
favorable access to raw materials, some purchased under long-term contracts and
others available at proprietary mines, and access to cost competitive energy and labor
sources; |
|
|
|
|
operating history of almost 40 years, which translates into solid industrial
know-how; |
|
|
|
|
constant benchmarking and best-practices sharing among the different facilities;
and |
|
|
|
|
intensive use of information technology in its production processes. |
29
Our main steel production facilities are located in Argentina, Mexico, the United States and
Guatemala. The following map shows Terniums manufacturing centers and commercial network offices
around the world as of the date of this annual report.
Terniums aggregate production capacity of hot rolled steel products for the year ended December
31, 2008 was of approximately 9.6 million tons, of which 8.5 million tons correspond to flat steel
products and 1.1 million tons correspond to long steel products (wire rod and rebar.) In this
annual report, annual production capacity is calculated based on standard productivity, estimated
product mix allocations and considering the maximum number of possible working shifts and a
continued flow of supplies to the production process. These figures were significantly lower than
in 2007 due to the loss of Sidor in our industrial system.
30
Argentina
Terniums subsidiary Siderar is located in Argentina and conducts its operations through production
facilities at the seven locations described below. Each facility is owned by Siderar and located in
the Province of Buenos Aires, Argentina.
The following table presents the annual production capacity of the major operational units of the
facilities located in Argentina as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity |
|
|
|
|
|
|
|
(Thousand tons) |
|
|
4 |
|
|
Coke Oven Batteries |
|
|
1,270 |
|
|
1 |
|
|
Sinter Plant |
|
|
1,430 |
|
|
2 |
|
|
Blast Furnaces |
|
|
3,700 |
|
|
1 |
|
|
Continuous Casting |
|
|
2,850 |
|
|
1 |
|
|
Hot Rolling Mill |
|
|
2,750 |
|
|
2 |
|
|
Cold Rolling Mills |
|
|
1,610 |
|
|
1 |
|
|
Tinning Mill |
|
|
160 |
|
|
2 |
|
|
Galvanizing Mills |
|
|
530 |
|
|
1 |
|
|
Electro-galvanizing Mill |
|
|
120 |
|
|
1 |
|
|
Painting Facility |
|
|
65 |
|
|
2 |
|
|
Welded Steel Tubes Facilities |
|
|
190 |
|
Ramallo. Our principal manufacturing facility in Argentina is a fully integrated, strategically
located plant on the banks of the Paraná River near the town of San Nicolás in the district of
Ramallo, which is approximately 280 kilometers north of the city of Buenos Aires. This plant was
acquired in the privatization of the state-owned company Somisa in 1992. The Ramallo facility
produces all of Argentinas operations crude steel and has an effective annual production capacity
of 2.8 million tons per year (tpy). The Ramallo facility includes:
|
|
|
four coke oven batteries; |
|
|
|
|
a continuous feed sinter plant; |
|
|
|
|
two blast furnaces; |
|
|
|
|
a steel making plant; |
|
|
|
|
a hot rolling mill; |
|
|
|
|
a cold rolling mill; |
|
|
|
|
an electrolytic tinning mill; |
|
|
|
|
two service centers: one for tin plated products, with a current capacity of 170
thousand tpy and another for hot rolled product with a capacity of 310 thousand tpy; |
|
|
|
|
a 27 feet deep, two-dock port on the Paraná river used for the reception of raw
materials (mainly iron ore and coal) and for the shipment of finished products; and |
|
|
|
|
auxiliary services such as a thermo-electric plant, an oxygen, nitrogen and argon
gas-separation plant, lime kilns, a maintenance shop and computer and training centers. |
31
Ensenada. The Ensenada plant has a capacity of up to 1.0 million tpy of cold rolled uncoated
sheets and coils. The hot rolled coils it uses come from the Ramallo facility, located at a
distance of 330 kilometers by land and approximately 300 kilometers by river. The plant is located
on the bank of the River Plate at Ensenada, approximately 70 kilometers south of Buenos Aires. The
facility includes:
|
|
|
a cold rolling mill; and |
|
|
|
|
a private port with one freight platform of 150 meters capable of unloading
vessels of up to 35 thousand tons and other auxiliary installations for maintenance and
administrative activities. |
Florencio Varela. This facility is located in Florencio Varela, 30 kilometers south of Buenos
Aires at a distance of 35 kilometers and 295 kilometers from Ensenada and Ramallo, respectively.
This plant receives cold rolled coils from Ensenada and Ramallo as raw material for its own
processes. The facility in this location includes:
|
|
|
an electrolytic galvanizing plant; and |
|
|
|
|
two services centers that produce blanks, skelp and sheets, which are customized
steel shapes cut from flat steel products for use by customers in the manufacture of
finished products. The service centers have a production capacity of 500 thousand tpy of
blanks and customized products. |
Haedo. The Haedo plant is located at a distance of 90 kilometers from the Ensenada facility and
270 kilometers from Ramallo. Crude cold rolled sheets used at the plant are received from the
Ramallo and Ensenada facilities. The Haedo plant includes a continuous hot dipped galvanizing line
and a cut-to-length line and four rollforming machines.
Canning. This facility is located in Canning, approximately 40 kilometers south of the city of
Buenos Aires. This facility includes:
|
|
|
a galvanizing line used for the production of hot dipped galvanized steel and
products under the trademark CINCALUM; |
|
|
|
|
a continuous painting line for coils fully dedicated to the construction and home
appliance markets; and |
|
|
|
|
rollforming machines for the production of a variety of corrugated products. |
Rosario. This facility is located in Rosario, Santa Fe province, approximately 300 kilometers
north of the city of Buenos Aires. This facility provides steel tubes welded by electrical
resistance with a capacity of 130 thousand tpy for structural used.
San Luis. This facility is located in San Luis, San Luis province approximately 800 kilometers
north west of the city of Buenos Aires. This facility provides steel tubes welded by electrical
resistance with a capacity of 60 thousand tpy for structural use.
Mexico
Ternium conducts operations through facilities located in the Mexican cities of Monterrey, Apodaca,
Puebla, Monclova and San Luis Potosí. Furthermore, Ternium sources all of the iron ore used in its
Mexican facilities from its mines located in Colima and Michoacán, and refines that iron ore into
DRI using proprietary technology.
32
The following table presents the annual production capacity of the major operational units of the
complex located in Mexico as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity |
|
|
|
|
|
|
|
(Thousand tpy) |
|
|
3 |
|
|
Direct Reduction Plants |
|
|
2,680 |
|
|
1 |
|
|
Thin Slab Caster / Hot Rolling Mill |
|
|
2,020 |
|
|
2 |
|
|
Billet Steel Plants |
|
|
1,460 |
|
|
2 |
|
|
Flat Hot Rolling Mills |
|
|
3,700 |
|
|
2 |
|
|
Long Hot Rolling Mills |
|
|
1,060 |
|
|
7 |
|
|
Cold Rolling Mills |
|
|
2,150 |
|
|
7 |
|
|
Galvanizing Lines |
|
|
1,460 |
|
|
6 |
|
|
Painting Lines |
|
|
690 |
|
|
22 |
|
|
Tube and beam mills |
|
|
620 |
|
|
4 |
|
|
Panel Lines |
|
|
80 |
|
Monterrey. Terniums facilities in Monterreys metropolitan area include:
|
|
|
two DRI facilities; |
|
|
|
|
a steel making plant with a thin slab caster; |
|
|
|
|
three hot rolling mills; |
|
|
|
|
six reversing cold rolling mills and one tandem cold rolling mill; |
|
|
|
|
six pickling lines, annealing ovens, four temper mills, three skin-pass mills and
tension leveling equipment; |
|
|
|
|
six galvanizing lines; |
|
|
|
|
five painting lines; |
|
|
|
|
twenty two tubing and beam mills; |
|
|
|
|
four panel lines; and |
|
|
|
|
three steel service centers that produce a variety of specialized products, with
a total capacity of 2.3 million tpy. |
The primary raw materials required for the Monterrey facilities production of steel include DRI,
which Ternium produces in its own direct reduction facilities, and/or other iron material in
combination with steel scrap that Ternium buys in the domestic or international markets. Terniums
materials procurement policy is described in greater depth in the section entitled Raw Materials
and Energy.
Close to Terniums Monterrey facilities are the Nogalar and Apodaca service centers, dedicated to
the processing of non-coated and coated steel to produce slitted, cut to length, rollformed
products and shapes in various widths and lengths. The total processing capacity in Monterreys
facilities is 2.3 million tpy.
The Monclova PlantCoahuila. Located in Monclova, Coahuila, the Monclova Plant is dedicated
exclusively to the production of coated steel. This plant purchases cold rolled coils in the
domestic market and also receives cold rolled coils from Monterrey as raw material for its own
processes. The facility in this location includes:
|
|
|
a galvanizing line; and |
|
|
|
|
a painting line. |
33
San Luis Service Center. This service center is located in San Luis Potosí State, south of the city
of Monterrey. This facility processes coated steel to produce slitted and cut to length products in
various widths and lengths. The San Luis service centers total processing capacity is 190 thousand
tpy.
The North PlantApodaca. Located in Apodaca, Nuevo León (near Monterrey, Mexico), the North Plant
is dedicated exclusively to the production of rebar. This plant uses 100% steel scrap as metallic
input for its operations, and includes an electric arc furnace, a continuous caster, a reheating
furnace and a rolling mill.
The Puebla PlantXoxtla. Located in Xoxtla, Puebla (120 km from Mexico City), the Puebla Plant
produces both rebar and wire rod, including high-carbon, low-carbon and micro-alloyed wire rod. The
Puebla Plant has a direct reduction facility to produce DRI, one electric arc furnace, a ladle
furnace, a vacuum degassing station, one continuous caster, a reheating furnace and rolling and
finishing mills.
Las Encinas mines. Las Encinas is composed of three separate iron ore mines: Aquila, which is in
operation, and Cerro Náhuatl and El Encino, which are currently idle. All of them are located near
its pelletizing plant, in the Mexican State of Colima, with a maximum annual capacity of 1.9
million tons.
|
|
|
Aquila is an open-pit mine in Michoacán, Mexico, which began operations in 1998
and is the largest mine at the Las Encinas site. Aquila has the highest percentage of
iron content among the Las Encinas mines. Ore mined at Aquila is transported to the
pelletizing facility by rail and truck. |
|
|
|
|
Cerro Náhuatl is an open-pit mine in Colima, Mexico, which began operations in
1988. During 2008, Cerro Náhuatls cost-effectively minable reserves were exhausted and
the mine ceased operations. Industrial capabilities, including crushing equipment, are
being relocated to the Aquila mine industrial facility. |
|
|
|
|
El Encino is an underground mine in Jalisco, Mexico, which began operations in
1998 and is not currently in use, as the Aquila mine is a less expensive option for
supplying iron ore. An open-pit mine called El Encino was previously operated on the
same site from 1970 to 1998. |
Terniums mining operations at Las Encinas are flexible, giving Ternium the ability to halt
production at one or more of its mines from month to month depending on market conditions. Annual
production capacities for the different production lines of the Las Encinas mines are set forth in
the following table:
|
|
|
|
|
|
|
Facility |
|
Product |
|
Capacity |
|
|
|
|
(Thousands tpy) |
Crushing Plant
|
|
Crushed ore
|
|
|
4,800 |
|
Concentration Plant
|
|
Concentrated
|
|
|
1,920 |
|
Pelletizing Plant
|
|
Pellet
|
|
|
1,900 |
|
For further information please refer to Production ProcessMexico.
Peña Colorada mine. The Peña Colorada mine consists of a single large mining site located in
Minatitlán, Colima, Mexico. The mine is an open-pit mine which began operations in 1975, and has a
production capacity of 8.5 million tons of crushed iron ore per year. There is a two-line
pelletizing plant (located in Manzanillo, Colima) serving the Peña Colorada mine, with a total
installed production capacity of 4.0 million tons of iron ore pellets per year plus and additional
0.4 million tons per year of pellet feed. Peña Colorada has convenient access to seaport and
railroad facilities that enables the distribution of the iron ore pellets to the domestic and
international markets.
34
The Peña Colorada mine is operated by Consorcio Minero Benito Juárez Peña Colorada, S.A. de C.V.,
which has two shareholdersTernium Mexico and Mittal Steel Lazaro Cárdenas (MSLC), a subsidiary
of the ArcelorMittal group. Through Ternium Mexico, Ternium holds 50% of Peña Colorada and MSLC
holds the other half. Under the existing arrangements, Peña Colorada is required to sell half of
the mines production to MSLC. See Raw Materials and EnergyMexicoIron ore. Annual
production capacities for the different production lines of the Peña Colorada mine are set forth in
the following table:
|
|
|
|
|
|
|
Facility |
|
Product |
|
Capacity |
|
|
|
|
(Thousands tpy) |
Crushing Plant
|
|
Crushed ore
|
|
|
8,500 |
|
Concentration Plant
|
|
Concentrated
|
|
|
4,400 |
|
Pelletizing Plant
|
|
Pellet
|
|
|
4,000 |
|
For further information please refer to Production ProcessMexico.
United States of America
Terniums United States production facility is located in Shreveport, Louisiana on the bank of the
Red River, approximately 550 kilometers north of New Orleans. This plant purchases cold rolled
coils in the international markets as raw material for its own processes. The following table
presents the annual production capacity of the major operational units of this facility as of
December 31, 2008:
|
|
|
|
|
|
|
Facility |
|
Product |
|
Capacity |
|
|
|
|
(Thousands tpy) |
1 Galvanizing Line
|
|
Galvanized and coated sheets
|
|
|
240 |
|
1 Painting Line
|
|
Pre-painted sheets
|
|
|
160 |
|
The facility also includes a slitter to produce customized products.
Central America
In connection with the Grupo Imsa transaction in July 2007, we acquired facilities in Central
America. The operations include one coated steel production facility in Guatemala and service
centers in Costa Rica, Nicaragua, Honduras and El Salvador. The production facilities receive cold
rolled coils from the plant in Monterrey and also purchase them from the international market. The
service centers receive galvanized sheets from the Guatemala plant.
35
Guatemala. This facility is located in Villa Nueva, in the metropolitan area of Guatemala City.
The facility includes two galvanizing lines with a capacity of 125 thousand tpy, and processes
coated sheets at its service center with one slitter, four cut-to-length lines and eight
rollforming lines to produce customized products in various widths and lengths.
Costa Rica, Nicaragua, Honduras and El Salvador. The service centers located in these countries
process coated sheets from the Guatemala plant and include cut-to-length and rollforming lines.
Production process
Ternium specializes in manufacturing and processing flat and long steel products. In the case of
flat products, two different technologies are used: conventional slab casting and thin slab
casting. Although in both cases slabs are reheated before entering the hot rolling mill, thin slab
casting requires less energy than conventional slab casting, as it does not require a roughing
section at the hot rolling mill. This treatment removes minor superficial defects and softens the
steel to permit its transformation in the hot rolling mill to defined specifications. Hot rolled
coils and sheets can be processed with or without scaling, according to the clients uses and
needs.
Hot rolled products can also be put under a deformation process at normal temperature (cold
rolling) to reduce their thickness and obtain cold rolled products. These products can be sold in
crude form to the market (full hard) or processed in the reheating ovens, annealing bays and
tempers lines, to modify their metallurgic and geometric characteristics. The tempered products can
be sold as coils or sheets or processed with chromium or tin coverings.
In the production of long products, billets are reheated and taken to rolling temperature. As in
the case of slabs, this treatment removes minor superficial defects and softens the steel to permit
its transformation in the rolling trains to obtain wire rods and bars as final products.
The production processes in Terniums facilities in Argentina and Mexico differ in certain
respects. We include a brief description of the different processes below.
Argentina
Terniums Argentine subsidiary Siderar is the primary integrated manufacturer of flat steel
products in Argentina. Siderar produces crude steel through the use of blast furnaces, which are
large chambers lined with refractory bricks used to make pig iron through the melting of pellets,
sinter (a mixture of iron ore and limestone) and coke. The molten pig iron is then mixed with steel
scrap and limestone in a basic oxygen furnace through a process that removes impurities from the
pig iron by injecting pure oxygen at high pressure into the molten metal, burning-off carbon and
other elements. The molten steel is then cast using the continuous casting method into slabs. The
steel slabs are then sent to a hot rolling mill to be reheated and rolled into hot rolled coils.
Depending on its final use, the hot rolled coil is then scaled, tempered and pickled, before being
sent for sale as coil or cut into steel sheet. Alternatively, the hot rolled coils may be sent to a
cold rolling mill for use as an input in the production of cold rolled coils. In certain cases,
cold rolled coils are processed in an electrolytic cleaning line, an annealing line and a two-stand
temper mill to produce thin steel used to produce tin plate.
Cold rolled coils can be further processed into galvanized or electro galvanized sheets (by adding
a thin layer of zinc to the products through different processes), tin plate (by adding a thin
layer of tin) or pre-painted products. Siderar can also process its production into cut-to-length
and tailor made products according to its customers needs.
Mexico
In Mexico, Terniums subsidiaries manufacture a variety of steel products, including hot rolled
coils and sheets, cold rolled coils and sheets, rebar and wire rod, tubular products, such as
welded pipes, and processed steel products including galvanized steel, pre-painted steel,
mechanical tubular products and insulated panels.
36
The production process begins with the sourcing of iron ore from Terniums own mines in Mexico. The
extraction consists of drilling, loading and transporting the iron ore to a grinding facility in
order to reduce it to a specified size and quality through the grinding process and the separation
of ore with low iron content.
The ore is then shipped to the pelletizing plant, where is gradually fed into a grinding mill to be
reduced to a certain size. After grinding, the ore goes through magnetic drums that separate the
iron from the sterile material. The grinding and concentration processes are repeated two more
times in order to eliminate all the possible sterile material, concentrate the iron to obtain a
pellet with high iron content. These processes are carried out using water as an auxiliary element.
Excess water is afterwards eliminated, leaving only the necessary humidity for the formation of
pellets using pelletizing disks. Pellets are separated according to their size and are then
hardened in ovens. The processed pellets are then shipped to the steel producing facilities for the
DRI process. Next, the electric arc furnaces melt a combination of steel scrap and DRI to produce
liquid steel.
For flat products, molten steel is casted into slabs using state-of-the-art technology that
produces thin slabs, which then are rolled into hot and cold rolled coils. The steel is then
further processed to higher value-added products such as galvanized and prepainted steels, as well
as tubing, insulated panels andarchitectural panels, etc. We also purchase from third parties slabs
for further processing.
Finally, for long products, molten steel is cast into steel billets that are rolled into rebar and
wire rod, such as tire cord and cold heading qualities.
One of Monterreys DRI plants includes the latest DRI HYL® technological advances, such
as Hytemp®, which permits the hot discharge of the DRI to the electric arc furnace
generating significant energy savings and improving
productivity. The use of state-of-the-art proprietary technology allows our subsidiaries
production in Mexico to accommodate higher proportions of steel scrap and other metallic charge
when high natural gas prices make DRI more expensive to produce.
Sales and Marketing
Net Sales
Ternium primarily sells its steel products in the regional markets of North America and Central and
South America, where it can leverage its strategically-located manufacturing facilities to provide
specialized products and delivery services to its clients.
Our total net sales amounted to USD8.5 billion in 2008, USD5.6 billion in 2007 and USD4.5 billion
in 2006. For further information on our net sales see Item 5. Operating and Financial Review and
ProspectsA. Results of Operations.
The following table shows Terniums total consolidated net sales by product and geographical region
in terms of U.S. dollars for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
In thousands of U.S. dollars |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Flat Steel Product Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
2,782,543 |
|
|
|
2,036,967 |
|
|
|
1,648,897 |
|
North America |
|
|
4,294,677 |
|
|
|
2,571,788 |
|
|
|
1,921,774 |
|
Europe and Other |
|
|
47,466 |
|
|
|
122,960 |
|
|
|
22,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Flat Steel Products Sales |
|
|
7,124,687 |
|
|
|
4.731,715 |
|
|
|
3,593,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Steel Product Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
274,215 |
|
|
|
70,023 |
|
|
|
19,396 |
|
North America |
|
|
791,755 |
|
|
|
695,953 |
|
|
|
720,523 |
|
Europe and Other |
|
|
8,921 |
|
|
|
6,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Steel Product Sales |
|
|
1,075,090 |
|
|
|
772,829 |
|
|
|
739,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Sales(1) |
|
|
265,108 |
|
|
|
128,822 |
|
|
|
151,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
8,464,884 |
|
|
|
5,633,365 |
|
|
|
4,484,918 |
|
|
|
|
(1) |
|
The item Other Sales includes mainly sales of pig iron and iron ore. |
37
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands of tons |
|
For the year ended December 31, |
|
(unaudited) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flat Steel Product Sales Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
2,604 |
|
|
|
2,499 |
|
|
|
2,310 |
|
North America |
|
|
3,666 |
|
|
|
3,035 |
|
|
|
2,343 |
|
Europe and Other |
|
|
55 |
|
|
|
185 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Flat Steel Product Sales Volume |
|
|
6,326 |
|
|
|
5,719 |
|
|
|
4,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Steel Product Sales Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
302 |
|
|
|
133 |
|
|
|
39 |
|
North America |
|
|
901 |
|
|
|
1,113 |
|
|
|
1,196 |
|
Europe and Other |
|
|
13 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Steel Product Sales Volume |
|
|
1,217 |
|
|
|
1,261 |
|
|
|
1,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Volume(1) |
|
|
7,543 |
|
|
|
6,980 |
|
|
|
5,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Total Sales Volume does not include the tons of Other sales. |
South and Central America
Sales to customers in South and Central America accounted for 36.7% of Terniums consolidated sales
during 2008, 38.2% during 2007 and 38.5% during 2006. See Item 5. Operating and Financial Review
and ProspectsA. Results of OperationsFiscal year ended December 31, 2008 compared to fiscal
year ended December 31, 2007Net sales and Fiscal year ended December 31, 2007 compared to
fiscal year ended December 31, 2006Net sales.
Terniums sales are oriented toward the construction and agriculture industry, the packaging and
canning sector (especially for food, paints and sprays), the tube and pipe sector (related to
liquids and gas transportation and distribution networks), the automotive industry, the home
appliances sector and service centers that further process Terniums steel products to attend to
particular requirements of steel users.
Ternium serves industrial clients (such as those of the automotive industry) that require
customized products that it can produce through its service centers and finishing facilities, as
well as commercial clients that further process steel. The customer base in South and Central
America consists primarily of independent small- and medium-sized companies and distributors, which
in turn process or retail the products to their customers in different market sectors.
Terniums principal clients in the region are located in Argentina. Its sales in this country are
sensitive to the general economic conditions and government actions and policies, such as the
restrictions on certain foreign currency transfers. For further information on the risks related to
an investment in Argentina please refer to Item 3. Key InformationRisk FactorsRisks Relating
to the Countries in Which We OperateArgentina. We also sell to clients in other South and
Central American countries, including Colombia, Ecuador, Chile, Peru, Guatemala, Costa Rica and
Honduras.
38
North America
Sales to customers in North America accounted for 61.8% of Terniums consolidated sales during
2008, 59.3% during 2007 and 59.9% during 2006. See Item 5. Operating and Financial Review and
ProspectsA. Results of OperationsFiscal year ended December 31, 2008 compared to fiscal year
ended December 31, 2007Net sales and Fiscal year ended December 31, 2007 compared to fiscal
year ended December 31, 2006Net sales.
Terniums largest markets in North America are Mexico and the United States.
Most of Terniums Mexican customers are located near its plants in Monterrey and Puebla. Flat steel
products are mainly sold in Mexico to construction companies, to industrial customers in the
packaging, electric motors and service center industries, and to distributors and auto parts
manufacturers. The principal segments in the Mexican coated steel market are construction,
manufacturing (air conditioning, lamps and furniture), appliances and auto parts. Ternium generally
serves industrial clients that require high quality specifications, as well as commercial clients
through service centers and warehouses. The rebar and wire rod markets in Mexico are generally
characterized by a large number of orders of small volume, and competition is largely based on
price. The customer base for bar and rod products in Mexico consists primarily of independent
dealers and distributors, who in turn retail the products to their customers in the construction
industry. Ternium markets its tubular products mainly through Mexican independent distributors, and
the balance is sold directly to industrial clients.
Clients in the United States of America are served directly through the Louisiana plant and through
Ternium Internacionals Houston office and distribution and service centers, which manage transport
and logistics issues and provide local services and assistance. The Gulf Coast and a large portion
of the West Coast, in particular, are fast
growing regions in which our Mexican facilities are highly competitive. The main markets in the
United States are the construction industry and the energy market and its related steel
consumption.
Europe and Other
Sales to customers in Europe and other markets, which are generally made on a spot basis, accounted
for 1.5% of Terniums consolidated sales during 2008, 2.5% during 2007 and 1.6% during 2006. See
Item 5. Operating and Financial Review and ProspectsA. Results of OperationsFiscal year ended
December 31, 2008 compared to fiscal year ended December 31, 2007Net sales and Fiscal year
ended December 31, 2007 compared to fiscal year ended December 31, 2006Net sales.
Terniums largest markets in Europe are Spain and Italy. Clients in Europe are mainly independent,
small- and medium-sized companies dedicated to steel processing. A large part of their purchases
are of cold rolled coils and coated products, which are mainly produced in Argentina. Their
production is generally directed toward the construction, furniture and appliance industries.
Terniums sales to Europe are carried out through the Ternium commercial network.
Pricing
The prices of our steel products generally reflect international market prices for similar
products. We adjust prices for our products periodically in response to changes in the import
prices of foreign steel, export prices, and supply and demand. See Item 5. Operating and Financial
Review and ProspectsOverview. The actual sales prices that we obtain for our products are also
subject to the specifications, sizes and quantity of the products ordered.
Marketing
Our marketing strategy is to continue to shift Terniums sales mix towards higher margin
value-added products and services. We expect to increase Terniums offerings of value-added
products such as cold rolled sheets and coated and tailor-made products, and services, such as
just-in-time deliveries and inventory management. In order to do so, Ternium will continue to work
with clients to anticipate their needs and develop customized products for particular applications;
and
Ternium maintains a strategic presence in several major steel markets through its network of
commercial offices, which allows it to reach clients outside its regional markets.
39
Ternium adapts its strategy according to the different regions it serves. Its sales force
specializes in different regional requirements ranging from product specifications to transport
logistics.
In order to increase Terniums participation in regional markets and improve services provided to
customers, Ternium consolidated its international sales and marketing activities through Ternium
Internacionals network of commercial offices. Ternium Internacional develops its services through
branches, which are 100% fully owned by Ternium Internacional and are strategically located in the
Terniums key markets. Ternium Internacional has a strong presence in the main steel markets such
as the Americas and Europe and has extensive experience promoting steel products. Its marketing
expertise helps Ternium to expand its position in current markets and in developing new ones.
South and Central America
A principal component of Terniums marketing strategy in South and Central America is establishing
lasting and close relationships with customers. This allows Ternium to provide assistance to its
customers in their use of steel products and to obtain downstream information that can be applied
to future product development.
In 2003, Siderar established a department focused on the development of small- and medium-sized
companies (Propymes), under a program created by the Techint Group for the development of its
clients and the local industry. The objective of the program is to improve the competitiveness of
clients and suppliers, to increase their exports and
allow them to substitute imports for local products. Nearly 340 companies are part of this program,
which provides support for the commercial, financial, industrial and institutional requirements of
these companies.
Terniums sales force in this region is oriented toward serving the specific needs of different
market sectors, such as the construction industry, the packaging and canning sector (especially for
food, paints and sprays), the tube and pipe sector (related to liquids and gas transportation and
distribution), the automotive industry, the home appliances sector and steel processors. Through
its service centers, Ternium can cut, paint or conform its products to specific client
requirements. Customized products include metallic roofing, auto parts, steel for agricultural
machinery, different types of tin used to produce sprays and food containers and cut-to-length
products used in the home appliance and construction industries.
In addition to its offices located in Argentina, Venezuela and Guatemala, Ternium has commercial
and administrative offices in, Colombia, Ecuador, Peru, Uruguay, and service centers in El
Salvador, Honduras, Nicaragua and Costa Rica. These offices generally provide commercial services
such as the development and maintenance of contacts with clients and end users, analysis of
businesses opportunities, assistance to buyers before and after sales, participation in price
negotiations, analysis of the market and competitors and assistance in the design and organization
of the commercial and promotional strategy for sales in the respective countries. In addition in
some of these locations we are able to provide customers with cut-to-length and other customized
products locally.
North America
The North American steel market is highly competitive, since most major international steel
producers direct part of their sales efforts to this region. The Hylsamex acquisition and the
Grupo Imsa transaction significantly increased North Americas importance to Terniums overall
sales.
In Mexico, where our main production facilities are located, we can provide customized services and
deliveries. Terniums main steel customers in Mexico are in the construction and manufacturing
industries (including steel furniture, automotive and electric and home appliances). Propymes was
also implemented in Mexico in 2007, with the objective of promoting local industry and, as of
December 31, 2008, aproximately 150 companies were part of the program
40
Mexicos steel market is strongly oriented toward end users, representing 55% of our subsidiaries
domestic sales in 2008, 51% in 2007, and 54% 2006. In addition, several Mexican steel producers
compete with us in the flat and long steel markets, including AHMSA, Arcelor Mittal, DeAcero S.A.
de C.V., or DeAcero, and Aceros San Luis S.A. de C.V., or Aceros San Luis. Terniums experienced
sales force specializes in the needs of each market sector and focuses on value-added products and
services. In this competitive and end-user oriented market, the extensive use of well-known
commercial brands allows customers to clearly recognize Terniums products. Ternium seeks to
increase its competitive advantage by providing value-added services, including the technical
assistance related to steel use and production, and developing new steel products.
Ternium has a commercial presence in the United States, including a plant in Shreveport and an
office in Houston. From these locations, Ternium provides steel products and related services:
logistics, stock management and customer assistance.
Europe and Other
Sales to Europe and the other markets are carried out through a commercial office located in Spain.
This office is focused on activities such as trading. It is also responsible for the development of
commercial and marketing activities in order to expand Terniums client base, the organization of
provision programs and activities to promote steel products and the assistance in the purchase
process for slabs and semi-finished steel for Ternium. It also provides services related to other
commercial requirements, such as credit risk analysis and credit risk insurance, follow up on
orders and other customer support.
Competition
Global Market
The steel industry operates predominantly on a regional basis, with large industry participants
selling the bulk of their steel production in their home countries or regions, where they have
natural advantages and are able to more effectively market value-added products and provide
additional customized services. Despite the limitations associated with significant transportation
costs, as well as the restrictive effects of protective tariffs and other trade restrictions,
international trade of steel has generally increased in the last decade as production has shifted
towards low-cost production regions. In addition, since 2002, several large steel manufacturers
have merged with each other or acquired steel companies in other parts of the world. This wave of
consolidation has resulted in a number of large, global producers with significant operations in
several regions and/or continents, contributing to the increasing globalization of the steel
industry. Considered as a whole, however, the steel industry still remains considerably fragmented,
compared with market conditions characterizing certain of our key suppliers and customers, e.g.
iron ore suppliers and the automotive industry.
Steel consumption has historically been centered in developed economies such as the United States,
Western Europe and Japan. However, in recent years steel consumption in Asia, and in particular
China, has increased significantly. Moreover, while production in Europe, Japan and the United
States remains significant, steel producers in those regions have increasingly focused on the
rolling and finishing of semi-finished products.
There has been a trend in recent years toward steel industry consolidation among Terniums
competitors. Below is a summary of the most significant transactions:
|
|
|
June 2006: Mittal Steel and Arcelor merge to create ArcelorMittal, the worlds largest
steel company. |
|
|
|
|
March 2007: Votorantim acquires Colombias Aceria Paz del Rio. |
|
|
|
|
April 2007: Tata Steel completes the acquisition of Corus. |
|
|
|
|
July 2007: Gerdau acquires Chaparral Steel. |
41
Despite this trend, the global steel market remains highly fragmented. In 2008, 2007 and 2006, the
four largest steel producers (ArcelorMittal, Nippon Steel, JFE and POSCO) accounted for 18%, 18%
and 19%, respectively, of total worldwide steel production (compared to 15% in 2000). In 2008, the
top five producers of Latin America accounted for aproximately 71% of the production in the region.
Steel prices in general, including for both flat and long products, have undergone significant
volatility in recent years. From 2000 to 2002, the industry, especially in North America,
experienced fluctuating capacity, low demand growth levels and other adverse conditions, which led
to depressed steel prices and also adversely impacted many steel producers profitability. In 2003
and 2004, steel prices increased worldwide, due to higher economic growth in most regions,
particularly China and other developing countries, as well as higher raw material prices (iron ore,
ferroalloys and energy). Although prices in 2005 were below the 2004 peak, they remained well above
the ones from 2000 to 2002. In 2006 prices remained on average above 2005 levels. In 2007, the
construction and automotive industrys activity in the United States of America experienced a
slightly increase, which affected the international steel prices. During the first quarter of 2008,
steel prices went up due to higher raw material and energy costs notwithstanding a decline in
activity in the construction and automotive industries in the United States. However, this trend
reversed beginning in the last quarter of 2008 due to the global economic downturn, with prices
declining steeply, by aproximately 65% for some products. In addition, given the strong competition
that characterizes the flat steel industry, several countries have imposed trade restrictions to
protect their domestic steel industries from imports at below market conditions, commonly referred
to as dumping. For a summary description of some of these regulations, see RegulationTrade
regulations.
South and Central America
Terniums most significant market in South and Central America is Argentina. Other relevant markets
in the region are Guatemala, Colombia, Ecuador and Chile.
Argentina. Siderar is the main producer in Argentina of flat rolled steel products and faces little
competition from domestic steel producers across the majority of its product lines. Its main
competition in the Argentine flat steel market is limited to imports, mainly from Brazil. The main
Brazilian producers of flat steel value-added products are Usiminas, Companhía Siderúrgica Nacional
and Companhia Siderúrgica de Tubarão (part of the ArcelorMittal).
We believe that Siderar has a competitive advantage over potential foreign competitors due to
logistical and other advantages that allow it to offer value-added services and maintain strong
relationships with domestic customers, together with its ability to customize products to customer
specifications, including size and quality. In addition, we believe that the threat of new
competitors entering the Argentine flat steel market is mitigated by:
|
|
|
Terniums substantial domestic market share; |
|
|
|
|
the specialized service provided locally; |
|
|
|
|
the high capital investment required to construct an integrated manufacturing
facility; |
|
|
|
|
the scarcity of good quality scrap in Argentina for use in an electric arc
furnace mini-mill; and |
|
|
|
|
Terniums low production costs and its potential ability to expand capacity at a
relatively low investment cost compared to the cost of building and installing an
electric arc furnace mini-mill. |
Although Siderar has been the principal flat steel provider in Argentina since its foundation, its
market share has been affected by the economic and trade conditions in the country. During the
1990s, Siderar faced increased competitive challenges from outside Argentina as a result of the
Argentine governments trade liberalization policies. See RegulationTrade regulations.
Other South and Central American markets. In these markets, Ternium competes with Brazilian and
U.S. producers and with Terniums former subsidiary Sidor.
42
North America
Mexico. Ternium has strong domestic competitors in the Mexican steel market and faces increasing
competition from imports. Total imports of hot rolled products, cold rolled products and galvanized
products have increased sharply in recent years and according to Canacero, the Mexican chamber of
the iron and steel industry, accounted for approximately 33%, 27% and 33% of the Mexican market in
2008, 2007 and 2006, respectively.
The largest Mexican competitor in the flat products market is AHMSA, an integrated steel producer
located in Monclova, Coahuila that produces a wide variety of steel products. AHMSA focuses on low
value added products such as plate, and commercial quality hot rolled and cold rolled coils.
Another significant domestic competitor is Lámina y Placa Comercial S.A. de C.V. (Grupo Villacero),
a producer of galvanized coils and a distributor of steel products with operations throughout
Mexico.
In the rebar market, Terniums largest competitor is Siderúrgica Lázaro CárdenasLas Truchas S.A.
de C.V. (Sicartsa), that is currently part of Arcelor Mittal. To a lesser extent, Ternium also
faces competition from Aceros San Luis and Deacero. In the low-carbon wire rod market, Terniums
main competitors are Deacero, Sicartsa and, to a lesser extent, Talleres y Aceros and Aceros San
Luis.
The Mexican domestic market for small diameter welded pipe is regional. Orders are usually small
and cover a wide range of product specifications. Terniums leading competitors in this market are
Tubería Laguna, Maquilacero and imports.
The primary customers in the Mexican coated steel market are the construction sector and
manufacturing companies (e.g. of air conditioners, home appliances and lighting fixtures).
Terniums main competitors are imports.
We believe that the threat of new competitors entering the Mexican flat steel market is mitigated
by:
|
|
|
the specialized service provided locally; |
|
|
|
|
the scarcity of good quality scrap and high energy prices in Mexico for use in an
electric arc furnace mini-mill; |
|
|
|
|
Terniums low production costs, including its supply of iron ore from its own
mines; and |
|
|
|
|
Terniums ability to expand capacity at a relatively low investment cost compared
to the cost of building and installing an electric arc furnace mini-mill. |
United States of America. Ternium competes with U.S. manufacturers and distributors.
Capital Expenditure Program
Capital expenditures in Terniums facilities during 2008 amounted to approximately USD544 million.
In light of the global economic downturn, we have delayed or canceled an important part of
previously announced investment plans and projects. We currently expect that our capital
expenditures for 2009 will amount to approximately USD250 million and that such amount will be
financed with cash from operations.
The main objectives of Terniums capital expenditure program are to:
|
|
|
reduce production costs; |
|
|
|
|
improve product quality, equipment reliability and productivity; |
|
|
|
|
comply with applicable environmental standards; and |
|
|
|
|
provide enhanced customer services. |
43
During 2008, we announced new investments in Argentina and Mexico. These investments were aimed at
increasing steel production capacity through the construction of new facilities and the expansion
of existing ones. While Ternium continues to work on the basic engineering design for its Mexican
project, its scope, timetable and target completion dates are being revised due to the global
economic downturn. Certain investments in Argentina were suspended in January 2009 and will resume
if and when market conditions improve.
Argentina
During 2008, Siderar carried out a significant investment plan to increase its production capacity
and improve the product quality of its facilities. The principal investments initiated or carried
out were:
|
|
|
Partial revamping of coke oven plant. The revamping of batteries No. 3 and No. 4
was launched during 2007 with the objective of improving performance and reducing gas
emissions. The projects first stage was completed in March 2008. The second stage (the
relining and repair of 70 headers) began in October 2008; works in battery number 3 were
completed in March 2009, while works in battery number 4 are currently suspended and
will resume if and when market conditions improve. |
|
|
|
|
Relining of blast furnace No. 1. The preparatory works for this project began
in 2007, and the relining work commenced in October 2008. We expect that this project
will be completed during the first half of 2010. |
|
|
|
|
Construction of new continuous caster. This project mill was launched during
October 2008 as part of a plan to increase our Argentine steel production capacity to 4
million tpy. While civil works started and the equipment was commissioned to the vendor,
the project is currently suspended and will resume if and when market conditions
improve. |
|
|
|
|
Modernization of facilities for storage and internal transportation of raw
materials. This project, which was aimed at improving material handling and control, was
launched during the first half of 2008; however, it is currently suspended and will
resume if and when market conditions improve. |
Siderars investment plan contemplates a significant increase in crude steel production capacity
from the current 2.9 million tons to 4.0 million tons to facilitate growth of the manufacturing
sector in Argentina, while allowing Ternium to continue to play an active role in international
markets. Besides completing those investments initiated in 2004, the main objectives of the
investment plan are the installation of a new continuous caster and metallurgy equipment and the
increase of capacity in Siderars sinter plant from 4,000 to 5,000 tons per day. As of March 31,
2009, Siderar had invested USD 202.9 million in connection with its investment plan and had entered
into several commitments to acquire new production equipment for a total consideration of USD 187.2
million. However, given the severe global economic downturn, its impact on the global steel market
and the uncertainty about the evolution of steel demand, Siderar has rescheduled the execution of
its investment plan and entered into a renegotiation process to reduce cash outflows.
Mexico
During 2008, our Mexican subsidiaries invested USD 214.8 million. The most significant investments
and projects carried out or initiated were:
|
|
|
Modernization of thin slabbing plant. This includes the installation of a liquid
core reduction system that provides casting in variable thickness. The modernization was
completed by the end of 2008, increasing the capacity of steel casting and hot rolled
band production in approximately 85 million tpy; and |
|
|
|
|
Revamping of hot rolling mill No.3. This includes the installation of work-roll
change system and the installation of new interstand equipment in the finishing mill.
The project will be completed during 2009 and would provide an additional rolling
capacity of 280 million tpy. |
44
In 2008, Ternium announced a greenfield project to build a flat steel plant in Mexico, which was
aimed at expanding its production capacity. In its initial phase, the project would involve the
design and construction of a mini-mill in the Monterrey area, with an annual production capacity of
two million tons of hot rolled coils, while its second phase would involve the construction of a
cold rolled and galvanizing plant, including a pickling line and a cold rolled tandem mill, with an
annual production capacity of one million tons of cold rolled coils and a hot-dipped galvanizing
line with an annual production capacity of 300,000 tons of hot-dipped galvanized coils, to serve
the industrial and commercial markets. While Ternium continues to work on the basic engineering
design for this project, its scope, timetable and target completion dates are being revised due to
the global economic downturn.
In addition to these investments, management is considering capital expenditures aimed at routine
maintenance or replacement of equipment.
Information technology investments
Our information technology investments in 2008 focused on the following main projects:
|
|
|
completion of the Unified SAP Project, including the integration of the
administration, maintenance and supply processes; |
|
|
|
|
deployment of a new core business system for Siderar in Argentina; and |
|
|
|
|
technological integration of the operations of our Mexican facilities, including
platform integration, datacenter revamping and consolidation and redesign of
telecommunications and security systems and procedures. |
We invested an aggregate of approximately USD30.2 million during 2008. In 2009, we expect to invest
in information technology projects designed to facilitate the integration of and realize synergies
among Terniums
subsidiaries and improve the security measures over their information technology systems, and to
continue developing the projects initiated in 2008.
Raw Materials and Energy
The principal raw materials consumed at Terniums integrated steel facilities in Argentina are iron
ore and coal, while the principal raw materials for Terniums facilities in Mexico are pellets,
scrap, slabs, hot and flat rolled coils, and energy. Below is a more complete description of the
raw material and energy situation at Terniums integrated facilities in these countries. For a
description of some of the risks associated with Terniums access to raw materials, see Item 3.
Key InformationD. Risk FactorsRisk Relating to the Steel IndustryPrice fluctuations or
shortages in the supply of raw materials and energy could adversely affect Terniums profits.
Argentina
In Argentina, our subsidiary Siderar produces crude steel through the use of blast furnace
technology. Siderar is the primary integrated manufacturer of flat steel products in the country,
with an installed capacity of 2.9 million tons of crude steel. The principal raw materials used to
produce steel are iron ore and coal. The manufacturing process also requires significant quantities
of electricity and natural gas. In connection with the global steel industry downturn, Siderar
engaged in several renegotiation processes regarding the pricing of certain iron ore, coal and
other supply contracts, as Siderar considered that the contractual terms did not reflect current
market conditions. As of the date of this annual report, negotiations in respect of a number of
those contracts are still under way.
45
Iron ore. Iron ore is purchased under long-term agreements from suppliers in neighboring Brazil.
Prices under these contracts are determined on an annual basis in accordance with market conditions
and follow the prices agreed upon between the major iron ore exporters and their main steel
industry clients. Our aggregate annual consumption of iron ore in Argentina ranges between 4.0 and
4.5 million tons. Approximately two thirds of Terniums local requirements for iron ore in
different forms, such as pellets, lumps and sinter feed fines (iron ore fines smaller than 6 mm) is
supplied by Brazils Companhia Vale Do Rio Doce, or CVRD. The remaining requirements consist mainly
of lump ore (i.e., iron ore within certain size specifications ranging from 6 to 38 mm) from other
suppliers located in Brazil, the most important of which are Mineração Corumbaense Reunida S.A., or
MCR, a Rio Tinto subsidiary, and MMX Corumba (MMX). The main contracts for these raw materials are
with CVRD, MCR and MMX. Our geographic location provides favorable access to high quality lump
produced in Brazils iron ore mines which are located in the Pantanal Region (Mato Grosso do Sul
state) through the Paraguay and Paraná Rivers. The use of barges to haul this lump ore reduces the
raw material costs associated with the provision of iron ore since those mines are outside of the
international seaborne trade. In 2008, steel-making costs were impacted by rising iron ore prices
(ranging between 65% and 87%), due to an extremely tight supply-demand situation. During the first
half of 2009, due to the effects of the global economic downturn on the demand for iron ore, prices
have fallen approximately 40%.
Coal. Siderar obtains its coke through the processing of coking coal and petroleum coke in its coke
ovens. Siderar requires different types of coal to produce coke. Coking coal is mainly purchased
under annual renewable contracts with several major international suppliers based in Australia and
the United States. Petroleum coke is sourced domestically from producers such as Exxon Mobil and
Repsol YPF. The amount purchased from each supplier mainly depends on technical quality
requirements of the blast furnace operations and to a lesser degree on commercial conditions.
Estimated consumption of coal and petroleum coke is approximately 1.5 million tpy. The price of
metallurgical coal has increased substantially during 2008 due to tightening conditions in the
global market as demand for metallurgical coal in emerging economies has not been matched with
production increases and supply restrictions due to the effects on the supply chain of climatic
events (mainly floods in Western Australia but also harsh winter conditions in Canada and China).
The price for metallurgical coal has gone up approximately 200-230% from USD 100 per ton to around
USD 300-330 per ton during 2008. We expect coking coal prices to fall significantly in 2009,
returning to levels closer to 2007.
Electricity. Siderar consumes large quantities of electricity (approximately 135 Mw) for its
manufacturing activities, particularly in its Ramallo and Ensenada facilities. The electricity
required to cover most of our facilities needs is self-generated by a wholly-owned thermoelectric
plant with an installed capacity of 110 Mw located at the Ramallo facility. Most of the energy
requirements of the thermoelectric plant are obtained from blast furnace and coke oven gases and
from steam that is purchased from a power plant located at the Ramallo facility owned by Siderca
S.A.I.C.
(Siderca), a subsidiary of Tenaris, under a long-term steam sales agreement entered into in June
1995. Another subsidiary of Tenaris manages our subsidiarys thermoelectric plant and the plant
owned by Siderca in exchange for an administration fee. In 2008, we renegotiated the prices to be
paid under the steam supply contract for steam purchased during the period from February 2003 to
October 2008following the forced pesification of the contract to Argentine pesos at a
one-to-one U.S. dollar to Argentine peso exchange rate in 2002and for steam purchased or to be
purchased from October 2008 onwards, which resulted in an aggregate liability to Siderca of USD
10,980,987 for steam purchased during said period, and a price increase of 70% for steam purchased
or to be purchased from October 2008 onwards. The rest of the requirements are covered through the
purchase of natural gas from Repsol YPF and other market vendors, or with alternative sources of
energy such as fuel oil.
Siderar covers electricity shortfalls or sells excesses, as the case may be, at spot prices in the
wholesale market. In order to mitigate these shortfalls, it entered into an electricity supply
contract with Genelba Power Plant, which is owned by Petrobras, to cover the Ramallo facilities
shortfalls. In addition, it has also entered into a supply contract with Central Puerto Plant,
which covers the Ensenada, Florencio Varela and Canning facilities shortfalls.
Natural gas. Siderar also consumes substantial volumes of natural gas in Argentina, particularly to
operate its blast furnace and power generation facilities. The average daily consumption of its
facilities is approximately 1,200 thousand cubic meters of natural gas.
The relative cost of natural gas in Argentina decreased substantially in 2002 following the
Argentine peso devaluation and subsequent freezing of tariffs in local currency terms. However,
since 2003, this cost gradually increased due to governmental and private tariff negotiations.
Currently, the cost of gas and transportation is over 2001 levels, while the cost of distribution
is still below the level of 2001. During the last five years, the continuing increase in natural
gas demand in Argentina together with a substantial lack of investment in natural gas production
and transportation have resulted in shortages of natural gas to industries and private consumers.
See Item 3. Key InformationD. Risk FactorsRisks Relating to the Countries in Which We
OperateArgentinaRestrictions on the supply of energy to Terniums operations in Argentina could
curtail Terniums production and negatively impact Terniums results of operations.
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Siderar had a long-term supply arrangement with Repsol YPF until December 2006. From December 2006
and up to July 2007, Siderar purchased gas from Repsol YPF at spot prices and on spot terms and
conditions. In August 2007, Siderar and Repsol YPF entered into a natural gas supply agreement
covering the period from August 2007 to December 2008. In January 2009, after the agreement had
expired without Siderar and Repsol YPF reaching a new mutually acceptable natural gas supply
agreement, the Secretaría de Energiathe federal governments department in charge of energy
regulationdetermined that, until such time as the parties have reached a new supply agreement,
Repsol YPF should continue supplying natural gas to Siderar on the same terms provided in the
expired agreement. To the date of this annual report, Siderar and Repsol YPF continue to negotiate
a new natural gas supply agreement. Repsol YPF covers an important part of Siderars Ramallo
facilities needs for natural gas while the rest are covered mainly by TOTAL Austral, a subsidiary
of multinational energy company TOTAL, and other significant natural gas traders in Argentina,
including Albanesi, Energy Consulting Services and Energy Traders.
Also, Siderar has a long-term supply agreement with Tecpetrol S.A. (Tecpetrol), a company
controlled by San Faustin. In March 2003, Siderar entered into an agreement with Tecpetrol under
which Siderar paid USD17.3 million for the advance purchase of a total of 725 million cubic meters
(up to 400 thousand daily cubic meters) of natural gas to be delivered over a period of 5 years on
pricing terms that would enable it to share through discounts the impact of any increase in natural
gas prices over that period with Tecpetrol. Under the terms of the agreement, Siderar had a minimum
guaranteed return on this advance payment equal to LIBOR plus 3.5%. In November 2006, the gas
purchased from Tecpetrol covered the total amount paid in March 2003. Since then, no discount was
applied to gas prices. In May 2007, Tecpetrol canceled the contract pursuant to a termination
clause that allowed any party to terminate the contract after the USD17.3 million paid for the
advance purchase of natural gas were exhausted, and continues to supply gas at spot prices and on
spot terms and conditions. Siderars purchases from Tecpetrol in 2008, 2007 and 2006 amounted to
USD1.3 million, USD7.1 million and USD8.9 million, respectively. Siderar covers any variation in
its requirements for natural gas in the spot market.
Siderar also has separate transportation agreements with Transportadora de Gas del Norte S.A.
(TGN), Transportadora de Gas del Sur S.A. (TGS), Camuzzi Gas Pampeana S.A. (Camuzzi), Gas
Natural Ban S.A.
(Gasban) and Metrogas. The main transportation contract is with TGN, a company partially owned by
San Faustin, which expires in April 2013. For the final distribution phase, Siderar has several
distribution contracts with Litoral Gas (a company partially owned by San Faustin), Camuzzi, Gasban
and Metrogas. The principal contract is with Litoral Gas, which expires in December 2011.
Other raw materials. Terniums subsidiary in Argentina Siderar has an on site oxygen, nitrogen and
argon separation plants in order to extract these gases for use in the steelmaking process. In
December 1993, Siderar entered into a contract with Air Liquide Argentina S.A. for the operation
and maintenance of an oxygen separation facility at Ramallo that supplies oxygen, nitrogen and
argon. This contract initially had a term of 15 years and was renewable by mutual agreement. It was
amended in 2000 and 2002, and its term was extended until 2021. Under the terms of the contract,
Siderar is required to take or pay certain minimum daily amounts of oxygen, nitrogen and argon,
which amounts are consistent with its production requirements in Argentina. Due to the Ramallo
facilitys increasing needs, the contract has been renegotiated a number of times during the last
two years to increase the minimum daily take-or-pay amounts of these gases, from 670 tons to 1,880.
In September 2008, Siderar and Air Liquide entered into an amended and restated contract for the
operation and maintenance of the Ramallo oxygen separation facility and the supply of oxygen,
nitrogen and argon for a contracted amount of USD 176.1 million, which is due to terminate in 2025.
Siderar and Air Liquide are currently renegotiating the terms of this agreement in light of current
market conditions.
Mexico
In Mexico, Terniums process for producing steel relies on electric arc furnaces, which melt a
combination of steel scrap and DRI to produce liquid steel, which is then further processed to make
its steel products. Terniums production process requires extensive use of natural gas and
electricity, and energy costs are one of the largest components of production costs.
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Iron ore. As described under Production Process and FacilitiesMexico above, Terniums
subsidiaries own interests in two mining companies in Mexico: 100% of the equity of the Las Encinas
mines, and a 50% equity stake in Consorcio Minero Benito Juárez Peña Colorada, S.A. de C.V., which
operates Peña Colorada, Mexicos largest iron ore mine. In 2008, Terniums Mexican facilities
sourced 100% of their iron ore requirements from those mines. Under our arrangement with
Consorcios other shareholder, MSLC, we are committed to offtake 50% of the annual production of
the mine. From the combined iron ore output retained by us, approximately 81% went to our own
direct reduction plants, while the remaining 19% was sold in the international markets, mainly in
China and Malaysia. Most of the iron ore exports to China were made pursuant to an agreement to
supply 2.9 million tons of pellets to China over a five-year period until March 2009.
DRI. Terniums vertical integration strategy in Mexico is centered on synergies created by mining
its own iron ore and refining it to produce DRI with its proprietary HYL® direct
reduction process. We believe that over the long-term, DRI is the preferable metallic input for the
production of steel because under ordinary circumstances it is a less expensive and a better
quality input than steel scrap. Nonetheless, Ternium seeks to maintain flexibility in the mix of
steel scrap and DRI that it uses in its electric arc furnaces in Mexico, in order to better respond
to fluctuations in raw materials prices. Ternium has the ability to substitute alternative
metallics for DRI in periods where economic conditions make DRI more expensive to produce.
Slabs. Terniums Mexican subsidiaries consume large quantities of slabs. Since Grupo Imsa came
under our control, a portion of Terniums requirements for slabs is covered by third party
suppliers. Currently, Terniums Mexican subsidiaries purchase slabs locally from an ArcelorMittal
subsidiary, from Siderar and from various other sources, principally in Brazil, the CIS, Australia
and Japan.
Scrap. In keeping with its vertical integration strategy, Ternium Mexico sources 100% of its steel
scrap through its own steel scrap collecting and processing companies. In 2008, most of the scrap
used was purchased domestically, with approximately 19% coming from the United States.
Electricity. Electric arc furnaces consume large quantities of electricity. During 2008, 57% of
Ternium Mexicos total consumption was supplied by the Comisión Federal de Electricidad (or CFE,
Mexicos state-owned electricity company). The remainder was purchased under long-term contracts
from two other suppliers with power
plants in the Monterrey area, namely, Iberdrola Energía Monterrey, S.A. de C.V., a subsidiary of a
Spanish utility company, and Tractebel Energia de Monterrey, S. de R.L. de C.V., a subsidiary of a
U.S. utility company. Our long-term contract with Iberdrola was for 143 megawatts of capacity and
our long-term contract with Tractebel is for 64 megawatts of capacity. In December 2007 Iberdrola
invoked the contracts early termination clause to reduce contracted capacity from 143 megawatts to
111 megawatts beginning in April 2008. Since April 2008, we increased electricity purchases from
CFE to cover electricity consumption requirements formerly covered by Iberdrola.
Natural gas. Natural gas is one of the largest cost components of Terniums Mexican production
processes. Natural gas is used as a reducing agent for the production of DRI and for the reheating
of slabs and billets before the hot rolling process. In Mexico, Terniums subsidiaries purchase all
of their natural gas from Pemex, the Mexican state-owned oil and gas company that is Mexicos sole
producer of natural gas, and from three distributors: Gas Industrial de Monterrey S.A. de C.V.
(GIMSA), Compañía Mexicana de Gas (CMG) and Gas Natural Mexico. Natural gas prices are set monthly
based on the spot price in southern Texas, adding only the equivalent surcharge for transportation
and service costs plus a margin that is generally less than 5%. Ternium subsidiaries often enter
into derivatives contracts with the intention of reducing the effects of volatility on a portion of
its natural gas requirements.
Product Quality Standards
Ternium develops its products and services with a philosophy of continuous improvement and seeks to
excel in its internal quality oversight of its products and processes. Terniums products are
manufactured in accordance with the specifications of the International Organization for
Standardization, or ISO, and they also must satisfy proprietary standards and customer
requirements.
Ternium has designed, developed and implemented the Ternium Quality Management System. Based on the
ISO 9001:2000 and, in the case of areas related to the production of automotive supplies, ISO/TS
16949:2002 platforms, the Ternium Quality Management System is aimed at aligning quality management
systems and criteria throughout the Ternium group, replacing the individual quality management
systems formerly in place at each subsidiary. To obtain the ISO Multisite certification, the
Ternium Quality Management System is regularly audited by Lloyds Register Quality Assurance.
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Siderar and Ternium Mexicos metallurgical testing laboratories are accredited for the performance
of various technical tests in accordance with ISO/IEC 17025:2005 General Requirements for the
Competence of Testing and Calibration Laboratories or equivalent standards.
In July 2008, the Amercian Petroleum Industry, or API, performed an audit under API Q1 ISO/TS 29001
at Planta Tuberia Guerrero, Ternium Mexicos thick-walled tubes manufacturing facility, for the
renewal of Ternium Mexicos licence to use the API Monogram® on its line pipe products under the
conditions specified in API Spec 5L. In February 2009, the licence was renewed.
In addition, each Ternium subsidiary has obtained the accreditations required by domestic and
international regulations on certain of its specific products.
Research and Development; Product Development
Product research and development activities at Ternium are conducted through a central product
development department in coordination with local teams that operate in several of the Ternium
facilities. The Company carries out its applied research efforts in house and in conjunction with
universities and research centers, as well as through its participation in international consortia.
Ternium has also developed new products and processes in cooperation with its industrial
customers.
The Grupo Imsa transaction and its consolidation into Terniums operations opened up several
opportunities for synergies and integration of processes. During 2008, new processing routes were
developed for Terniums Mexican facilities, enabling certain products to be manufactured at several
rolling, coating and customizing mills. In turn,
this added ability increased the flexibility to allocate orders, specialize processing lines
according to their technological strengths, and ultimately increase efficiency and reduce costs in
the mid-term.
In addition, Ternium developed new cold rolled and hot rolled semi-finished steel products aimed at
supplying its coating lines in Shreveport, Louisiana and Villanueva, Guatemala. These new products,
which can be manufactured at Terniums Mexican mills, enhance the integration between those mills
and the mentioned downstream lines.
In 2008, Ternium launched a new product portfolio of metal components for the construction
industry, including roll-formed steels for roofing, cladding, decking and floor decking. All these
components have been certified in accordance with international standards. Also in 2008, Ternium
Mexico signed a technology and trademark license agreement with Varco Pruden Buildings, Inc, for
the purpose of consolidating Terniums leadership in the Latin American metal building systems
market. The agreement provides the rights to use Varco Prudens technology and software for the
design, engineering, production and inspection of metal building systems and components.
During the past year, Ternium supported the automotive industrys efforts to reduce automobile
weight through the development of steel products with improved structural resistance that enables
the usage of thinner steel sheets with similar resistance standards.
Additionally, Ternium has been actively participating in research consortia, the purpose of which
has been to evaluate the feasibility of applying new steel coatings, both in galvanized and
electro-galvanized products, in order to either increase corrosion resistance or reduce coating
weight.
In 2008, Ternium developed boron-titanium bearing steels, through conventional and compact hot
rolling mills, to serve its customers needs for quenched and tempered welded tubes for oil and gas
industry applications. In addition, Ternium widened the dimensional range of high resistance API
X65, for as-rolled line pipe applications, to meet the market demand.
Ternium has also completed joint developments with several first-tier home-appliance manufacturers.
New products include structured surface coated steel for laundry; chrome-free coated galvanized
steel for refrigeration, in compliance with ROHS (Restriction of Hazardous Substances) standards;
and high-stability metallic finishing for various applications.
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During 2008, developments for the electrical industry included a new ultra low-carbon
silicon-alloyed cold rolled grade to further reduce magnetic losses for electric motor cores with
improved energy efficiency.
New wire rods for forging and automatic welding have been developed. Also new manganese-chrome
bearing steel billets for hot forging processes have been produced with excellent performance among
our customers.
Terniums development of new steel products has been based on a deep metallurgical knowledge, which
is the result of its basic and applied research activities. Several basic research efforts were
conducted during 2008, with projects aimed mainly at improving processes, creating new steel
products with superior performances and generating the basic knowledge for the design of certain
steel products. These mid- to long-term efforts are being carried out in conjunction with several
institutions, including the University of Pittsburg, the Steel Research Center McMaster
University, the French Corrosion Institute, the Tenaris Research Center and the Argentine Steel
Institute.
Ternium signed long-term cooperation agreements with leading local universities. Under these
agreements, signed in 2008, engineers, post-graduate students and teachers at these institutions
are sponsored to conduct, along with Terniums steel product engineers, steel metallurgy and
product research and development projects of academic and industrial interest.
In 2009, Ternium intends to further its industrial integration through the complementation of
Argentinas steel shop and Mexican hot rolling mills, with the design of slab chemistries that
optimize processes in both facilities. We expect that these developments will enable higher
flexibility and integration in this complex steel market situation.
In addition, Ternium intends to continue its flat, long and coated steel product development plans
to enter new niches in its key industrial markets and to support new export opportunities.
We spent an aggregate of USD0.8 million for R&D in 2008, compared to USD1.1 million in 2007 and
USD1.3 million in 2006.
Environmental Regulation
Terniums operations (including mining activities in Mexico) are subject to a broad range of
environmental laws and regulations relating to land use, air emissions; wastewater treatment and
discharges; the use, handling and disposal of hazardous or toxic materials and the handling and
disposal of solid wastes and other aspects of the protection of human health and environment at its
locations and operating subsidiaries.
As the environmental laws and regulations in Argentina, the United States, Mexico and Guatemala
continue to become more stringent, Ternium expects to expend the necessary amounts to achieve and
maintain ongoing compliance.
Ternium has established corporate environmental guidelines requiring each of its business units to
comply with all applicable environmental laws and regulations. Compliance with environmental laws
and regulations, and monitoring regulatory changes, is addressed primarily at the regional level.
Ternium has recently decided to report to the World Steel Association its CO2 emissions data on an
annual basis as part of the associations initiative to collect emissions data from member
companies. We support the steel industrys ongoing effort to develop innovative solutions to reduce
greenhouse gas (GHG) emissions over the lifecycle of steel products. According to the
Intergovernmental Panel on Climate Change (IPCC), the steel industry accounts for approximately 3%
to 4% of total world GHG emissions.
Our steel production facilities in Mexico have achieved GHG-specific emission levels that are close
to the theoretical minimum. In Argentina, Siderars GHG-specific emission levels are close to the
industry average for blast furnace technology.
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Ternium has not been subject to any material penalty for any environmental violations in 2008, and
we are not aware of any current material legal or administrative proceedings pending against
Ternium with respect to environmental matters which could have an adverse material impact on
Terniums financial condition or results of operations.
Mining regulations in Mexico
Because our operations in Mexico include mining, we are also subject to Mexican regulations
relating to mining and mining concessions. Under Mexican law, mineral resources belong to the
Mexican nation and a concession from the Mexican federal government is required to explore for or
exploit mineral reserves. Pursuant to the Ley Minera (Mining Law), mining concessions may only be
granted to Mexican individuals and to legal entities incorporated under Mexican law. Foreign
investors may hold up to 100% of the shares representing the capital stock of such entities.
A mining concession allows its holder to perform both exploration works (including indentifying
mineral deposits and quantifying and evaluating economically minable reserves), and exploitation
works (including detaching and extracting mineral products from such deposits). Mining concessions
have a 50-year duration from the date of their recording in the Public Mining Registry and may be
extended for an equal term, provided certain requirements are met.
Mining concessions grant several specified rights to the concessionaire, including:
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the right to dispose freely of mineral products obtained as a result of the
exploitation of the concession; |
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the right to obtain the expropriation of, or an easement with respect to, the
land where the exploration or exploitation will be conducted; and |
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the use of water in the mine to facilitate extraction. |
In addition, a concessionaire of a mining concession is obligated, among other things, to explore
or exploit the relevant concession, to pay for any relevant mining rights, to comply with all
environmental and safety standards, and to provide information to and permit inspections by the
Secretaría de Economía. Mining concessions may be terminated if the obligations of the
concessionaire are not satisfied.
A company that holds a concession must be registered with the Public Mining Registry. In addition,
mining concessions and permits, assignments, transfers and encumbrances must be recorded with the
Public Mining Registry to be enforceable. We believe that our material mining concessions are duly
registered in the Public Mining Registry.
Trade regulations
Intense global competition in the flat steel products industry can lead many countries to impose
higher duties or other restrictions on steel product imports to protect their domestic industries
from trades that are not made under market conditions or that are otherwise unfair. Such measures
protect domestic producers from increased imports sold at dumped or subsidized prices.
During a period of intense competition in 2001, some of the main regions to which Ternium sells its
products, such as the United States and Europe, implemented these measures as well as other,
general measures known as safeguards. While safeguards were lifted in December 2003, antidumping
and countervailing duties remained in place. At the same time, bilateral or regional free trade
agreements have liberalized trade among some countries, providing for reduced or zero tariffs for
many goods, including flat steel products.
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Countries imposition of trade remedy measures and the entry into force of various free trade
agreements can and have both benefited and adversely affected Terniums home market and export
sales of flat steel products, as described below. See also Item 3. Key InformationRisk
FactorsCertain Regulatory Risks and Litigation RisksInternational trade actions or regulations
and trade-related legal proceedings could adversely affect Terniums sales, revenues and overall
business.
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Argentina: The Argentine government has imposed various antidumping measures on certain
steel imports that compete directly with Terniums sales in Argentina. Although, Terniums
operations have not been materially affected by the anti-dumping duties imposed by the
Argentine government, the following measures are currently in effect: |
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Hot rolled products. Since December 1999, the Argentine government has imposed
anti-dumping measures requiring a minimum import price for hot rolled steel imports from
Brazil, the Russian Federation and Ukraine. Argentina accepted a price undertaking
agreement from Brazilian exporters. In 2006 Argentine authorities conducted a sunset
review of these measures and decided to continue them for five more years. In its
decision, the Argentine government determined antidumping duties for Russian, Ukranian and
Brazilian hot rolled steel exports to Argentina. A price undertaking for Brazilian exports
was also accepted by Argentine authorities. |
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Argentina has also imposed antidumping measures on hot rolled steel imports from
Kazakhstan (39.91%), Romania (40.48%), Slovak Republic (62.09%) and South Africa (55.26%),
effective since April 2002. In October 2008, following completion of a sunset review
initiated in May 2007, Argentine authorities decided to continue these measures for five
more years. |
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Cold rolled products. Since January 2003, Argentina has also imposed antidumping
measures on cold rolled steel imports from Korea (60.46%), South Africa (83.07%),
Kazakhstan (80.61%) and Ukraine (71.22%). In January 2008, Argentine authorities initiated
a sunset review for these measures, whichalthough originally expected to conclude in
January 2009is expected to be completed in June 2009. |
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Galvanized products. Since May 2003, Argentina has imposed antidumping duties on
galvanized steel sheets from South Korea (49.67%), South Africa (27.90%), Australia
(70.37%) and Taiwan (33.09%). The petitioners requested the initiation of a sunset review
in May 2008 to determine whether the antidumping duties will be maintained for five more
years. A decision is expected by May 2009. |
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Argentina has signed free trade agreements with several countries or trade blocs aimed at
liberalizing trade between them: |
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In early 1991, the Argentine government reduced import tariffs and eliminated most
non-tariff restrictions on trade as part of an effort to open the Argentine economy to
foreign competition. In March 1991, Argentina, Brazil, Uruguay and Paraguay entered into
the Treaty of Asuncion, creating the Mercado Común del Sur (Common Market of the South),
or Mercosur, a common market organization that aimed to bring about the free movement of
goods, capital, services and people among its member states. The Treaty of Ouro Preto,
signed in 2004, formalized a customs union among Mercosurs member states. Over time, the
Mercosur has eliminated or significantly reduced import duties, tariffs and other trade
barriers among member states. In particular, zero tariffs have applied to steel products
imported from other member states since January 1, 2000. The current tariff applicable to
flat and long steel products imported from outside Mercosur ranges from 2% to 14%, while
the tariff for tubular steel products imported from outside Mercosur generally ranges from
14% to 16%. |
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In 2005, Mercosur entered into a trade agreement with Chile, pursuant to which all tariffs
on steel products have been eliminated. In 1996, Mercosur signed a free trade agreement
with Bolivia, pursuant to which all steel products began receiving a 100% tariff
preference on January 1, 2006. |
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Mercosur and the Andean Community (Bolivia, Colombia, Ecuador, Peru and, formerly,
Venezuela), signed a free trade agreement aimed at reducing and eventually eliminating
tariffs on steel products traded among member countries over a period of 8 to 12 years.
Mercosur is also negotiating free-trade agreements with the EU, Mexico, India and South
Africa. |
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In May 2006, Venezuela became a junior member of Mercosur and is currently seeking full
membership in the group. Argentina and Uruguay have already approved Venezuelas
membership. The matter is still pending before the Congresses in Brazil and Paraguay. |
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Mexico: The Mexican government has imposed certain anti-dumping measures on steel import
products that are similar to the ones produced by Ternium Mexico. The following anti-dumping
measures are currently in effect: |
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Hot rolled products. On March 28, 2000, the Mexican government imposed anti-dumping
duties on the Russian Federation and Ukraine of 30.31% and 46.66%, respectively. On March
25, 2005 the first sunset review was initiated by the Mexican authorities, and on March
17, 2006 a final resolution was issued, extending the anti-dumping duties for an
additional five-year period. |
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Furthermore, since September 2005, Mexico has imposed antidumping duties against Ukraine
(60.1%), Romania (67.60%) and Russia (36.80%) on cut-to length plate in coils. Mexican
authorities are expected to conduct a sunset review of these measures in 2010. |
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In March 2008, the Mexican government imposed a provisional antidumping duty on
cut-to-length plate imports from China. The measure was lifted in October 6, 2008, as the
Mexican authorities concluded that their domestic industry was not suffering injury as a
result of such imports and thus decided not to conduct any further investigations thereon. |
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Cold rolled products. Since June 1999, Mexico has imposed antidumping duties on cold
rolled steel sheets from Bulgaria (44%45%), the Russian Federation (83%88%) and
Kazakhstan (33%34%). On December 12, 2005, and as a result of the first sunset review,
the Mexican authorities extended the anti-dumping duties for an additional five-year period until June 2009. As a result of the
sunset review that will be initiated in June 2009, some or all those duties could be
eliminated. |
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Plate in coil. Since June 1996, an anti-dumping duty of 29.3% on imports from Russia has
been imposed. In June 2003, the first sunset review resolution concluded the application
of the antidumping duty. In June 2007, the Ministry of Economy issued the final resolution
of the second sunset review, determining the continuation of the anti-dumping duties for
an additional five-year period. |
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Long products. Brazilian imports of reinforcing bars are currently subject to an
antidumping duty of 57.69%. In June 2006, the first sunset review resolution determined
the continuation of antidumping duties for an additional five-year period. Wire rod
imports from Ukraine are subject to a duty of 30.52% since September 2000. In June 2006,
the first sunset review resolution determined the continuation of antidumping duties for
an additional five-year period |
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Mexico has signed trade agreements with several countries or trade blocs aimed at
liberalizing trade between them: |
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NAFTA was signed among Canada, Mexico and the United States and came into effect on
January 1, 1994. NAFTA provided for the progressive elimination over a ten-year period of
duties on, among other things, steel products traded between or among Mexico, the United
States and Canada. As a result, zero tariffs currently apply to steel products traded
within NAFTA countries. As a result, Ternium has greater access to the U.S. and Canadian
markets through Ternium Mexico, but also faces increased competition in Mexico from U.S.
and Canadian steel imports. NAFTA provides that NAFTA member companies (including Mexican
steel producers such as Ternium Mexico) can challenge trade restrictions imposed by other
NAFTA countries before a bi-national dispute resolution panel. |
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The Mexican-European Free Trade Agreement, or MEFTA, became effective on July 1, 2000.
MEFTA provides for the phase-out and eventual elimination of Mexican and European duties
on all industrial goods, including finished steel products. The European Union, or EU,
eliminated all import duties on Mexican industrial goods, including finished steel
products, as of January 1, 2003, while Mexico eliminated all import duties on European
industrial goods, including finished steel products, as of January 1, 2007. Accordingly,
Ternium has increased access to EU markets under MEFTA through Ternium Mexico, but also
could face increased competition in Mexico from EU steel imports. |
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|
|
In addition, the Mexican government has signed trade agreements with Venezuela, Colombia,
the European Free Trade Associationan intergovernmental organisation set up by
Liechtenstein, Norway, Iceland and Switzerland, Japan, Chile, Bolivia, Nicaragua, Costa
Rica and Uruguay, among others. However, the Mexico-Venezuela free trade agreement was
terminated in November 2006. |
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|
United States: U.S. authorities have imposed a number of measures on flat and long steel
import products from Argentina and Mexico, thereby restricting Terniums exports to that
country. Below is a description of measures currently in effect: |
Argentina. In August 2001, following an affirmative injury determination by the
U.S. International Trade Commission (the ITC), the U.S. Department of Commerce (the
DoC) imposed an antidumping duty of 44.59% and a countervailing duty of 41.69% on
hot rolled steel products from Argentina. During 2007, the ITC conducted a sunset
review concerning such measures and concluded that Argentine exports were not likely
to continue to injure the U.S. domestic producers and, accordingly, revoked the
measures effective as of October 2007.
In July 2005, sunset reviews concerning previously imposed duties on certain pipe and
tube from various countries, including Argentina, were instituted. In June 2006, the
ITC found that revoking the existing antidumping duty order on light-walled
rectangular pipe and tube from Argentina would not be likely to lead to continuation
or recurrence of material injury within a reasonably foreseeable time and,
accordingly, revoked such measure.
Mexico. Since 1992, pursuant to an antidumping duty order on circular welded
non-alloy steel pipe, or standard pipe, from various countries, including Mexico,
standard pipes manufactured by Hylsa, S.A. de C.V. (Hylsa)a wholly-owend
subsidiary of Ternium Mexico, are subject to an antidumping duty of 10.38%, and
standard pipes manufactured by Ternium Mexicoformerly known as Grupo Imsaare
subject to an antidumping duty of 36.62%. In 2007, such measures were extended for
five more years. In October 2008, at Ternium Mexicos request, the DoC initiated a
changed circumstances review of the antidumping duty order described above in order
to determine whether Ternium Mexico is the successor-in-interest to Hylsa for
purposes of determining antidumping duty liability. Although the review is not yet
complete , the DoC has preliminarily found that Ternium Mexico is the
successor-in-interest to Hylsa and, thus, should receive the same antidumping duty
treatment with respect to steel wire rod from Mexico as Hylsa.
Hylsas wire rod exports are also subject to an antidumping duty of 17.94% pursuant
to an antidumping duty order on carbon and certain alloy steel wire rod from Mexico.
Following the most recent sunset review, such duty was extended for five more years
from June 2008. In November 2008, at Ternium Mexicos request, the DoC initiated a
changed circumstances review of the antidumping duty order described above in order
to determine whether Ternium Mexico is the successor-in-interest to Hylsa for
purposes of determining antidumping duty liability. On May 13, 2009, the DoC
determined that Ternium Mexico is the successor-in-interest to Hylsa and, thus,
should receive the same antidumping duty treatment with respect to steel wire rod
from Mexico as Hylsa.
Tubular products from Mexico have been subject to antidumping duties since August
1995. In particular, our subsidiaries Oil Country Tubular Goods, or OCTG, products
were subject to a 1.48% antidumping duty until such duty was revoked following ITCs
May 31, 2007 determination that existing antidumping duty orders on imports of OCTG
from, among other countries, Mexico would not be likely to lead to continuation or
recurrence of material injury within a reasonably foreseeable time.
54
In 2007, the DoC initiated an antidumping investigation of light-walled rectangular
pipe and tube (LWRPT) from, among other countries, Mexico. On June 13, 2008, the
Department made a final determination of sales at less than fair value in the
investigation of LWRPT from Mexico and, as a result, LWRPT from Mexico, including
LWRPT manufactured by Hylsa, are now subject to antidumping duties. In particular,
Hylsas exports of LWRPT are subject to either a 3.76% or an 11.5% duty, depending on
the plant at which the relevant product was manufactured. In October 2008, at Ternium
Mexicos request, the DoC initiated a changed circumstances review of the antidumping
duty order on LWRPT from Mexico in order to determine whether Ternium Mexico is the
successor-in-interest to Hylsa for purposes of determining antidumping duty
liability. Although the review is not yet concluded, the DoC has preliminarily found
that Ternium Mexico is the successor-in-interest to Hylsa and, thus, should receive
the same antidumping duty treatment with respect to steel wire rod from Mexico as
Hylsa.
Insurance
Our subsidiaries carry insurance policies covering property damage (including machinery breakdown
and business interruption), general liability and other insurance such as, among others,
automobile, marine cargo and life and workers compensation insurance. These insurance policies
include coverage and contract amounts which are customary in the steel products industry and in
line with legal and domestic market requirements. General liability coverage typically includes
third party, employers, sudden and accidental seepage and pollution and product liabilities within
limits up to USD100 million.
|
C. |
|
Organizational Structure |
Below is a simplified diagram of Terniums corporate structure as of December 31, 2008.
|
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(1) |
|
Ternium Procurement was formerly named Alvory. |
|
(2) |
|
On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG. For
more information, see note 29 to our audited consolidated financial statements included
elsewhere in this annual report and Item 4. Information on the CompanyA. History and
Development of the CompanySidor Nationalization Process.. |
Subsidiaries
Ternium operates entirely through subsidiaries. For a complete list of its subsidiaries and a
description of its investments in other companies, see notes 1 and 2 to our audited consolidated
financial statements included elsewhere in this annual report.
55
Siderar. Siderar is the main integrated manufacturer of flat steel products in Argentina with a
current total annual production capacity of 2.9 million tons of crude steel. The shareholders of
Siderar as of March 31, 2009 are set out in the following table, together with the share percentage
owned by each such shareholder as of that date:
|
|
|
|
|
Siderar Shareholders |
|
% Shares |
|
Ternium |
|
|
60.94 |
% |
ANSeS |
|
|
25.97 |
% |
Inversora Siderúrgica Argentina (employees) |
|
|
4.31 |
% |
Public |
|
|
8.78 |
% |
|
|
|
|
Total |
|
|
100.00 |
% |
|
|
|
|
Siderars shares are listed on the Buenos Aires Stock Exchange (Bolsa de Comercio de Buenos Aires),
or BASE, under the symbol ERAR. The Buenos Aires Stock Market (Mercado de Valores de Buenos
Aires), which is affiliated with the BASE, is the largest stock market in Argentina. On June 23,
2009, the closing price of the Siderar shares on the BASE was ARP9.25 per share (approximately
USD2.44 per share.)
Sidor. Sidor is the main flat steel producer and the main exporting private company in Venezuela.
The shareholders of record of Sidor as of December 31, 2008 are set out in the following table,
together with the share percentage owned by each such shareholder as of that date:
|
|
|
|
|
Sidor Shareholders |
|
% Shares |
|
Ternium (through Amazonia) |
|
|
51.14 |
% |
Siderar (through Amazonia) |
|
|
8.59 |
% |
CVG |
|
|
20.27 |
% |
Banco de Desarrollo Económico y Social de Venezuela |
|
|
0.05 |
% |
Employees |
|
|
19.95 |
% |
|
|
|
|
Total |
|
|
100.00 |
% |
|
|
|
|
On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG as part of
the nationalization of Sidor by the Venezuelan government. For more information on the Sidor
nationalization process, please see Item 4. Information on the CompanyA. History and Development
of the CompanySidor Nationalization Process.
Ternium Mexico. Ternium Mexico was formed as result of the merger of Grupo Imsa, Hylsamex and
Hylsamexs major shareholder in March 2008. Ternium Mexico and its subsidiaries operate all of
Terniums mining and steel production activities in Mexico. Ternium Mexico and its subsidiaries
produce flat and long steel products, including value-added finished steel products for use mainly
in the construction, auto parts and appliance industries. Ternium Mexico has an annual crude steel
production capacity of 3.5 million tons. Ternium Mexico is a wholly-owned subsidiary of the
Company.
Ternium Internacional. Ternium Internacional comprises a network of companies in various
jurisdictions around the worldincluding Colombia, Ecuador, Panama, Spain, Uruguay, the
Netherlands and the United Statesthat market and provide services in relation to the sales of
Terniums products worldwide. The headquarters of the network are located in Uruguay. Ternium
Internacionals services include sales and trading, communication systems, offices and human
resources dedicated to export trading, technical assistance, commercial back office and credit
analysis.
Other Investments
Exiros. Exiros, with presence in Argentina, Brazil, Canada, Italy, Mexico, Romania and the United
States, provides our subsidiaries with purchase agency services in connection with Terniums
purchases of raw materials and other products or services. Until September 2006, Exiros was a
wholly-owned subsidiary of Tenaris. In October 2006, we acquiredthrough our wholly-owned
subsidiary Ternium Procurementa 50% interest in Exiros, while Tenaris retained the remaining 50%.
Exiros objectives are to procure better purchase conditions and prices by exercising the improved
bargaining power that results from combining the demand of products and services of both Ternium
and Tenaris.
56
|
D. |
|
Property, Plants and Equipment |
See Business OverviewProduction Process and Facilities.
Item 4A. Unresolved Staff Comments
None
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis of our financial condition and results of operations is based
on, and should be read in conjunction with, our audited consolidated financial statements and the
related notes included elsewhere in this annual report. This discussion and analysis presents our
financial condition and results of operations on a consolidated basis. We prepare our consolidated
financial statements in conformity with IFRS, as issued by IASB, which differ in certain
significant respects from U.S. GAAP.
Certain information contained in this discussion and analysis is presented elsewhere in this annual
report, including information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. See Cautionary Statement
Concerning Forward-Looking Statements. In evaluating this discussion and analysis, you should
specifically consider the various risk factors identified in this annual report and others that
could cause results to differ materially from those expressed in such forward-looking statements.
We note that the audited consolidated financial statements of the Company as of December 31, 2007,
and for the years ended December 31, 2007 and 2006, included in this annual report vary
significantly from the results and
other financial data shown in the financial statements and financial data included in prior annual
reports as a result of the deconsolidation of Sidor as from April 1, 2008. As from that date, the
Company ceased consolidating Sidors results and other financial data and classified its investment
in Sidor as an available-for-sale financial asset, with Sidors results and cash flows during each
period prior to April 1, 2008 being presented as discontinued operations. For more information on
the Sidor nationalization process and its accounting treatment, see note 29 to our audited
consolidated financial statements included elsewhere in this annual report and Item 4. Information
on the CompanyA. History and Development of the CompanySidor Nationalization Process.
Overview
Ternium is a leading steel company in Latin America, manufacturing and processing a wide range of
flat and long steel products for customers active in the construction, home appliances, capital
goods, container, food, energy and automotive industries. Ternium has operating facilities in
México, Argentina, the United States and Guatemala, as well as a network of service centers which
provide it with a strong position from which to serve its core markets. As of December 31, 2008, we
were shareholders of record of approximately 59.7% of Sidor, the main flat steel producer and the
main exporting private company in Venezuela. On May 7, 2009, we completed the transfer of our
entire interest in Sidor to CVG. In addition, Ternium reaches customers outside its regional
markets through its own network of distribution, sales and marketing offices.
Ternium primarily sells its steel products in the regional markets of North, Central and South
America, where its manufacturing facilities are located, allowing it to provide specialized
products and delivery services to its clients. We believe that Ternium is the leading supplier of
flat steel products in Argentina, a leading supplier of flat steel products in Mexico and a
significant competitor in the Mexican market for long steel products, and a competitive player in
the international steel market for flat and long steel products. Ternium maintains a presence in
Europe through its network of commercial offices, which allows it to reach clients outside its
regional markets and place products in case of slower demand in domestic economies, achieve
improved effectiveness in the supply of its products and in the procurement of steel for its
manufacturig facilities, and maintain a fluid commercial relationship with its clients by providing
continuous services and assistance.
57
Terniums revenues are affected by general global trends in the steel industry and more
specifically by the economic conditions in the countries in which it has manufacturing operations
and where its clients are located. Terniums revenues are also impacted by events that affect the
price and availability of raw materials, energy and other inputs needed for its operations.
Furthermore, due to the highly cyclical nature of the steel industry, recent results may not be
indicative of future performance, and historical results may not be comparable to future results.
Investors should not rely on the results of a single period, particularly a period of peak prices,
as an indication of Terniums annual results or future performance. The variables and trends
mentioned below could also affect the results of its investments in steel related companies. See
Item 4. Information on the CompanyB. Business OverviewOur Business Strategy.
Terniums primary source of revenue is the sale of flat and long steel products. Management
expects sales of flat and long steel products to continue to be Terniums primary source of
revenue. The global market for such steel products is highly competitive, with the primary
competitive factors being price, cost, product quality and customer service. The majority of
Terniums sales are concentrated in the Americas. Specifically, Terniums largest markets are
concentrated in Argentina and Mexico, where its main manufacturing facilities are located.
Terniums results are sensitive to economic activity, steel consumption, prices in the
international steel markets and trends in the steel industry. Terniums results of operations
primarily depend on economic conditions in Argentina and Mexico and, to a lesser extent, on
economic conditions in international and regional markets such as Mercosur, the Andean Community
and NAFTA. Historically, annual steel consumption in the countries where Ternium operates has
varied at a rate that is linked to the annual change in each countrys gross domestic product and
per capita disposable income. Recently, worldwide economic growth and favorable economic
developments throughout the Americas resulted in increases in investments and in per capita
disposable income, which in turn contributed to increased overall demand for Terniums products.
For example, apparent consumption of finished steel products in Argentina increased by 20.5%, 14%
and 5% during 2006, 2007 and 2008, respectively, due to the sustained recovery in the Argentine
economy, mainly in the industrial activity, agriculture, construction
and automotive sectors. However, starting in September 2008, a steep downturn in the global
economy, sparked by uncertainty in credit markets and deteriorating consumer confidence, has
sharply reduced demand for steel products. This economic downturn has had, and continues to have, a
pronounced negative effect on Terniums business and results of operation, and a protracted global
recession or a depression would have a material adverse effect on the steel industry and Ternium.
Moreover, steel prices are volatile and the global steel industry has historically been
cyclical. After rising during 2007 and through the boreal summer of 2008, steel prices in global
markets fell sharply beginning in the late boreal summer of 2008 as a result of collapsing demand
and the resulting excess supply in the industry. The fall in prices during this period adversely
affected the results of steel producers generally, including Ternium, as a result of lower revenues
and writedowns of finished steel products and raw material inventories. For example, in the second
half of 2008, Ternium wrote down inventories in an amount of USD200 million, and in the first
quarter of 2009, it recorded an additional USD123.1 million writedown. Steel prices are sensitive
to trends in cyclical industries, such as the automotive, construction, appliance and machinery
industries, which are the significant markets for Terniums products. In the past, substantial
price decreases during periods of economic weakness have not always been offset by commensurate
price increases during periods of economic strength. Although prices are expected to stabilize at
some point, the timing and extent of price recovery or return to prior levels cannot be predicted.
An eventual rebound in steel prices will likely depend on a broad recovery from the current global
economic downturn, although the length and nature of business cycles affecting the steel industry
have historically been unpredictable. If the downturn in steel prices were to be protracted, this
would materially and adversely affect Terniums revenues and profitability.
In addition to economic conditions and prices, the steel industry is affected by other factors
such as worldwide production capacity and fluctuations in steel imports/exports and tariffs.
Historically, the steel industry has suffered from substantial over-capacity. Currently, as the
economic crisis widens, there are signs of excess capacity in all steel markets, which is impacting
steel prices across all of our markets. It is thus possible in the context of the current downturn
that the industrys excess capacity will result in an extended period of depressed prices and
industry weakness. Ternium has already made significant production cuts in response to the current
economic crisis, as have other steel producers. Ternium also expects that consolidation in the
steel sector in recent years should, as a general matter, help producers maintain a more consistent
performance through the down cycle by preventing investment overlaps and increasing producers
efficiency, economies of scale and bargaining power with customers and suppliers. These actions and
trends, however, may not suffice to address the adverse consequences of an extended over-capacity
scenario.
58
Furthermore, there has been a trend in recent years toward steel industry consolidation among
Terniums competitors, and smaller competitors in the steel market today could become larger
competitors in the future. For example, in June 2006, Mittal Steel and Arcelor merged to create the
worlds largest steel company, Arcelor Mittal; in April 2007, Tata Steel completed the acquisition
of Corus; and in July 2007, Gerdau acquired Chaparral Steel. Regional players in Terniums markets
have also experienced consolidation through acquisitions; for example, Siderperu was acquired by
Gerdau in 2006, Sicartsa of Mexico was acquired by Arcelor Mittal in December 2006 and Aceria Paz
del Rio of Colombia was acquired by Votorantim in March 2007. Competition from global and regional
steel manufacturers with expanded production capacity such as Arcelor Mittal and new market
entrants, especially from China and the CIS, could result in significant price competition,
declining margins and reductions in revenue.
Terniums production costs are generally sensitive to the international prices of raw
materials, semi-finished products and energy, which reflect supply and demand factors in the global
steel industry. Ternium purchases substantial quantities of raw materials and semi-finished
products, including iron ore, slabs, coal, ferroalloys and scrap for use in the production of its
steel products. The availability and price of these and other inputs vary according to general
market and economic conditions and thus are influenced by industry cycles. In addition to raw
materials, natural gas and electricity are both important components of Terniums cost structure.
Since 2003, the recovery of the U.S. economy, an unprecedented demand for steel in China and
shortage of shipping capacity resulted in a tight market for raw materials globally, which
contributed to a strong boost in the prices of raw materials worldwide. Similarly, international
energy prices rose substantially from the levels that had prevailed in the previous years,
reflecting higher demand for energy. Beginning in September 2008, worsening global economic
conditions have triggered a reduction in market prices of many of Terniums production costs
components.
However, due to the existence of prior supply contracts and existing inventories, reduction in
market prices of some of our production inputs may not translate into an immediate and commensurate
reduction in production costs.
Terniums revenues could be affected by competition from imports and dumping conditions.
Terniums ability to profitably access the export markets varies with the value of the local
currencies of the countries where it operates, the strength of the economies of the countries to
which it exports and overall steel prices. Terniums ability to sell its products is influenced to
varying degrees by trends in global trade for steel products, particularly trends in imports of
steel products into its principal markets. During 2001, a period of strong over-supply, several
anti-dumping measures were imposed in several countries in which Ternium operates (including
Argentina and Mexico) to prevent foreign steel producers from dumping certain steel products in
local markets. The recovery in global economic conditions since 2003 and strong Chinese demand
reduced the previously strong competition in the international exports markets and, consequently,
several countries reduced or eliminated protective measures established in prior years. However, a
number of trade restrictions, both in Terniums local and export markets, remain in place.
Beginning in September 2008, a steep downturn in the global economy, sparked by uncertainty in
credit markets and deteriorating consumer confidence, has sharply reduced global demand for steel
products. In the face of a protacted period of over-supply, countries may re-establish anti-dumping
duties and/or other safeguards to protect their domestic markets.
Prevailing exchange rates have had an impact on Terniums results in the past and could impact
results again in the future. In accordance with IFRS, Terniums subsidiaries in Mexico and
Argentina prepare financial statements in their local currencies and record foreign exchange
results on their net non-local currency positions when their local currencies revaluate or
devaluate to other currencies. In 2008, net foreign exchange result was a loss of USD632.7 million,
which was primarily due to the impact of the Mexican pesos 25% devaluation on Ternium Mexicos
U.S. dollar denominated debt. This non-cash result when measured in U.S. dollars was offset by
changes in Terniums net equity position in the currency translation adjustment, or CTA, line, as
the value of Ternium Mexicos U.S. dollar denominated debt was not affected by the Mexican Peso
fluctuation when stated in U.S. dollar terms in Terniums consolidated financial statements.
59
In addition, Ternium has Mexican peso-denominated receivables from domestic sales in Mexico,
which represent a considerable portion of Terniums overall receivables. If the Mexican peso
depreciates, as occurred in Mexico during the fourth quarter of 2008 and the beginning of 2009, the
results from our Mexican operations, when measured in U.S. dollar terms, will be adversely
affected.
Terniums cash flows for 2009 and 2010 will be strongly affected by the amounts to be
collected in connection with the transfer of our interest in Sidor to Venezuela. On May 7, 2009, we
completed the transfer of our entire 59.7% interest in Sidor to CVG. The transfer was effected as a
result of Venezuelas Decree Law 6058, which ordered that Sidor and its subsidiaries and associated
companies be transformed into state-owned enterprises and declared the activities of such companies
of public and social interest. While CVG had assumed operational control of Sidor on July 12, 2008,
Ternium had retained formal title over the shares until May 7, 2009. Ternium agreed to receive an
aggregate amount of US$1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid
US$400 million in cash on May 7, 2009. The balance was divided in two tranches: the first tranche,
of US$945 million, will be paid in six equal quarterly installments (the first such installment
being due on August 7, 2009), while the second tranche will be paid at maturity in November 2010,
subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price
over its May 6, 2009 level.
Critical Accounting Estimates
This discussion of our operating and financial review and prospects is based on our audited
consolidated financial statements, which have been prepared in accordance with IFRS, as issued by
IASB. The use of IFRS has an impact on our critical accounting policies and estimates.
The preparation of financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its
accounting estimates and assumptions, including those related to doubtful accounts, obsolescence of
inventory, impairment of long-term investments, goodwill, and other
assets and contingencies, and revises them when appropriate. Management bases its estimates on
historical experience and on various other assumptions that it believes to be reasonable under the
circumstances. These estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Although management
believes that its estimates and assumptions are reasonable, they are based upon information
available when the estimates and assumptions are made. Actual results may differ significantly from
these estimates under different assumptions or conditions.
Our most critical accounting estimates are those that are most important to the portrayal of our
financial condition and results of operations, and which require us to make our most difficult and
subjective judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Changes in these assumptions and estimates could have a material impact on
our consolidated financial statements. Our most critical accounting estimates and judgments are set
forth below.
Useful Lives and Impairment of Property, Plant and Equipment and Other Long-lived Assets
As permitted under IFRS 1First Time Adoption of IFRS, management has elected to use the fair
value of its property, plant and equipment as at January 1, 2003, as its deemed cost. In
determining useful lives and impairment estimates, 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 expectancy, all of which were
used in determining useful lives and impairment estimates. 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. Impairments may result from, among other factors, changes in
usage level and maintenance capital expenditure policies, obsolescence and external factors
(including increases in input prices that would affect the profitability of the selected fixed
assets). Any such impairment charges could have a material adverse effect on Terniums results of
operations, financial condition and net worth. Under IFRS, assets that have an indefinite useful
life are not subject to amortization and are tested annually for impairment. An impairment loss is
recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an assets fair value less cost to sell and the present value
of estimated future cash flows. For purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows (cash-generating units).
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.
60
No impairment charge resulted from the impairment tests performed.
Impairment and recoverability of goodwill and other assets
Assessment of the recoverability of the carrying value of goodwill and other assets require
significant judgment. We evaluate goodwill allocated to the operating units for impairment on an
annual basis.
Goodwill is tested at the level of the cash generating units, or CGU. Impairment testing of the CGU
is carried out and the value in use determined in accordance with the discounted cash flow method.
In order to perform the test, we use projections for the next five years based on past performance
and expectations of market development. After the fifth year a perpetuity rate with no grow up
increase was utilized. The discount rates used for these tests are based on our weighted average
cost of capital adjusted for specific country and currency risks associated with the cash flow
projections. Discount rates used range from 12.4% to 18.3%.
No impairment charge resulted from the impairment tests performed.
Although we believe our estimates and projections are appropriate based on currently available
information, the actual operating performance of an asset or group of assets which has been tested
for impairment may be significantly different from current expectations. In such an event, the
carrying value of goodwill, investments in
associated companies and deferred taxes may be required to be reduced from the amounts currently
recorded. Any such reductions may materially affect asset values and results of operations.
Allowances for Doubtful Accounts
Management makes estimates of the uncollectibility of our accounts receivable. Management analyzes
our trade accounts receivable on a regular basis and, when aware of a third partys inability to
meet its financial commitments to us, management impairs the amounts due by means of a charge to
the allowance for doubtful accounts. Management specifically analyzes accounts receivable and
historical bad debts, customer concentrations, customer creditworthiness, current economic trends
and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful
accounts.
In addition, a charge to the allowance for doubtful accounts is recognized when a customer makes a
claim in connection with an order that has been invoiced and management estimates that, despite its
efforts, we are unlikely to collect the full amount of the invoice.
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.
Historically, losses due to credit failures, aging of overdue accounts and customer claims have
been within expectations and in line with the provisions established. If, however, circumstances
were to materially change (e.g., higher than expected defaults), managements estimates of the
recoverability of amounts due to us could be materially reduced and our results of operations,
financial condition and net worth could be materially and adversely affected.
61
Allowance for Obsolescence of Supplies and Spare Parts, Inventorys Net Realizable Value and
Slow-Moving Inventory
Management makes estimates of the recoverability of our inventories of supplies and spare parts
based on the following criteria:
|
|
|
analysis of the aging of the supplies and spare parts; and |
|
|
|
|
analysis of the capacity of materials to be used according to their level of
preservation and of their potential obsolescence due to technological changes in the
mills. |
In addition, in our manufacturing facilities an allowance for slow-moving inventory is made in
relation to finished goods based on managements analysis of their aging and market conditions. For
this purpose, stocks of finished goods held in inventory for more than six months before the
applicable reporting date are valued as scrap.
As explained in note 4 to our audited consolidated financial statements included elsewhere in this
annual report, Ternium states inventories at the lower of costcalculated using the
first-in-first-out, or FIFO, methodor net realizable valueestimated sales price in the
ordinary course of business, less the estimated costs of completion and selling expenses. In
estimating sales prices, costs of completion and selling expenses, management made assumptions as
to, among others, product mix, destination markets and product route. As of December 31, 2008,
Ternium established a valuation allowance for net realizable value of USD160.9 million.
Historically, losses due to obsolescence and scrapping of inventory have been within expectations
and the provisions established. As of December 31, 2008, Ternium maintained an allowance for
obsolescence of USD124.9 million. If, however, circumstances were to materially change (e.g.,
significant changes in market conditions or in the technology used in the mills), managements
estimates of the recoverability of these inventories could be materially reduced and our results of
operations, financial condition and net worth could be materially and adversely affected.
Loss Contingencies
We are subject to various claims, lawsuits and other legal proceedings that arise in the ordinary
course of our business, including customer claims in which a third party is seeking reimbursement
or indemnity. Our 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 the applicable financial statement. As additional information becomes
available, management will reassess its evaluation of the pending claims, lawsuits and other
proceedings and revise its estimates.
With respect to the loss contingencies described in our financial statements, we do not expect to
incur any losses exceeding the amounts accrued as of December 31, 2008, that would be material
relative to our consolidated financial position, results of operations or liquidity as of such
date. However, if reserves prove to be inadequate and we incur a charge to earnings, such charge
could have a material adverse effect on our results of operations, financial condition and net
worth.
Impairment of Deferred Tax Assets
Management calculates current and deferred income taxes according to the tax laws applicable to our
subsidiaries 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. When assessing the recoverability of deferred tax assets,
management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies. Based on those estimates, management did not record a valuation
allowance at December 31, 2008.
62
Although we believe our estimates are appropriate, significant differences in actual performance of
the asset or group of assets may materially affect our asset values and results of operation.
Critical Accounting Estimates and Assumptions Relating to the Sidor Financial Asset
As discussed elsewhere in this annual report, on April 8, 2008, the Venezuelan government announced
its intention to nationalize Sidor. On July 12, 2008, CVG assumed operational control and complete
responsibility for Sidors operations. As from April 1, 2008, the Company ceased consolidating
Sidors results of operations and cash flows and classified its investment in Sidor as an
available-for-sale financial asset. For more information, see note 29 to our audited consolidated
financial statements included elsewhere in this annual report and Item 4. Information on the
CompanyA. History and Development of the CompanySidor Nationalization Process.
We believe that the most significant estimates and assumptions relevant to the valuation of the
Sidor available-for-sale financial asset in our our audited consolidated financial statements
included elsewhere in this annual report are the Companys assessment of:
|
|
|
the determination of the rate used to discount future cash flows, |
|
|
|
|
the assumptions used to estimate Sidors future cash flows at the time of the
announcement of the nationalization, and |
|
|
|
|
the list of companies deemed comparable to Sidor for purposes of calculating the
FV/EBITDA and capacity multiples valuation techniques. In the absence of other steel
manufacturers of comparable size with operations expropriated by the Venezuelan
government, the public steel companies used to
calculate FV/EBITDA multiples were companies of comparable or larger size with strong
presence in the Americas and/or emerging markets, as follows: AK Steel; ArcelorMittal;
CSN Companhia Siderúrgica Nacional; Evraz; Gerdau; Nucor Corporation; Posco; Steel
Dynamics; Usiminas, Usinas Siderúrgicas do Minas Gerais S.A.; and U.S. Steel. |
Subsequently to the end of the year covered by our audited consolidated financial statements
included elsewhere in this annual report, on May 7, 2009, we completed the transfer of our entire
59.7% interest in Sidor to CVG. The Company agreed to receive an aggregate amount of US$1.97
billion as compensation for its Sidor shares. Of that amount, CVG paid US$400 million in cash on
that date. The balance was divided in two tranches: the first tranche, of US$945 million, will be
paid in six equal quarterly installments (the first such installment being due on August 7, 2009),
while the second tranche will be paid at maturity in November 2010, subject to quarterly mandatory
prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level.
A. Results of Operations
The following discussion and analysis of our financial condition and results of operations are
based on our audited consolidated financial statements included elsewhere in this annual report.
Accordingly, this discussion and analysis present our financial condition and results of operations
on a consolidated basis. See Presentation of Certain Financial and Other InformationAccounting
Principles and notes 2 and 4 to our audited consolidated financial statements included elsewhere
in this annual report. The following discussion should be read in conjunction with our audited
consolidated financial statements and the related notes included elsewhere in this annual report.
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars |
|
For the year ended December 31, |
|
(except number of shares and per share data) |
|
2008 |
|
|
2007 |
|
|
2006(2) |
|
|
2005(1) (2) |
|
|
2004(1)(2) |
|
Selected consolidated income statement
data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
8,464,885 |
|
|
|
5,633,366 |
|
|
|
4,484,918 |
|
|
|
2,690,450 |
|
|
|
1,615,181 |
|
Cost of sales |
|
|
(6,128,027 |
) |
|
|
(4,287,671 |
) |
|
|
(3,107,629 |
) |
|
|
(1,787,848 |
) |
|
|
(965,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,336,858 |
|
|
|
1,345,695 |
|
|
|
1,377,289 |
|
|
|
902,602 |
|
|
|
650,177 |
|
Selling, general and administrative
expenses |
|
|
(669,473 |
) |
|
|
(517,433 |
) |
|
|
(370,727 |
) |
|
|
(243,993 |
) |
|
|
(132,882 |
) |
Other operating income (expenses), net |
|
|
8,662 |
|
|
|
8,514 |
|
|
|
(4,739 |
) |
|
|
(57,338 |
) |
|
|
(3,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,676,047 |
|
|
|
836,776 |
|
|
|
1,001,823 |
|
|
|
601,271 |
|
|
|
514,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(136,111 |
) |
|
|
(133,109 |
) |
|
|
(96,814 |
) |
|
|
(60,686 |
) |
|
|
(18,257 |
) |
Interest income |
|
|
32,178 |
|
|
|
41,613 |
|
|
|
33,903 |
|
|
|
17,786 |
|
|
|
8,911 |
|
Other financial income (expenses), net |
|
|
(693,192 |
) |
|
|
(38,498 |
) |
|
|
(40,432 |
) |
|
|
33,514 |
|
|
|
211,635 |
|
Equity in earnings (losses) of associated
companies |
|
|
1,851 |
|
|
|
434 |
|
|
|
671 |
|
|
|
153 |
|
|
|
209,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
880,773 |
|
|
|
707,216 |
|
|
|
899,151 |
|
|
|
592,038 |
|
|
|
925,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and deferred income tax expense |
|
|
(258,969 |
) |
|
|
(291,345 |
) |
|
|
(353,044 |
) |
|
|
(233,113 |
) |
|
|
(177,486 |
) |
Reversal of deferred statutory profit
sharing |
|
|
96,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
718,069 |
|
|
|
415,871 |
|
|
|
546,107 |
|
|
|
358,925 |
|
|
|
748,175 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
157,095 |
|
|
|
579,925 |
|
|
|
444,468 |
|
|
|
715,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year(3) |
|
|
875,164 |
|
|
|
995,796 |
|
|
|
990,575 |
|
|
|
1,074,825 |
|
|
|
748,175 |
|
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company |
|
|
715,418 |
|
|
|
784,490 |
|
|
|
795,424 |
|
|
|
706,418 |
|
|
|
457,339 |
|
Minority interest |
|
|
159,746 |
|
|
|
211,306 |
|
|
|
195,151 |
|
|
|
368,407 |
|
|
|
290,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875,164 |
|
|
|
995,796 |
|
|
|
990,575 |
|
|
|
1,074,825 |
|
|
|
748,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
413,541 |
|
|
|
355,271 |
|
|
|
251,371 |
|
|
|
160,145 |
|
|
|
99,192 |
|
Weighted average number of shares
outstanding(4) |
|
|
2,004,743,442 |
|
|
|
2,004,743,442 |
|
|
|
1,936,833,060 |
|
|
|
1,209,476,609 |
|
|
|
1,168,943,632 |
|
Basic earnings per share for profit
attributable to the equity holders of the
Company (4) |
|
|
0.36 |
|
|
|
0.39 |
|
|
|
0.41 |
|
|
|
0.58 |
|
|
|
0.39 |
|
Diluted earnings per share for profit
attributable to the equity holders of the
Company |
|
|
0.36 |
|
|
|
0.39 |
|
|
|
0.41 |
|
|
|
0.54 |
|
|
|
0.39 |
|
Dividends per share declared(6) |
|
|
|
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Combined consolidated financial information on the basis of common control. See note 2 to our
audited consolidated financial statements. |
|
(2) |
|
Certain comparative amounts for 2007, 2006, 2005 and 2004 have been reclassified to conform
to changes in presentation in the current period. |
|
(3) |
|
International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as
shown in the income statement not exclude minority interest. Earnings per share and Income
from continuing operations per share, however, continue to be calculated on the basis of
income attributable solely to the equity holders of the Company. |
|
(4) |
|
In October 2005, Usiminas exchanged its 5.3% equity interest in Siderar, its 16.6% equity
interest in Amazonia and its 19.1% equity interest in Ylopa and other items for 227,608,254
new shares of the Company. Upon the consummation of this exchange, capital increased to
USD1,396.6 million, represented by 1,396,551,886 shares of USD1.00 nominal value each.
Pursuant to certain provisions contained in subordinated convertible loan agreements, on
February 6, 2006, the Company exchanged such subordinated convertible loans (including
interest accrued thereon through January 31, 2006) for Company shares at a conversion price of
USD2 per share, resulting in the issuance of 302,962,261 new shares to a wholly-owned
subsidiary of San Faustin on February 9, 2006. As provided in a certain corporate
reorganization agreement, on February 9, 2006, after the settlement of the Companys initial
public offering, a wholly-owned subsidiary of San Faustín contributed all of its assets and
liabilities to the Company in exchange for 959,482,775 newly-issued shares of the Company,
which
contribution included, among other items, the San Faustin subsidiarys right to receive
302,962,261 new shares of the Company in connection with the conversion of the subordinated
convertible loans described above, and 374,272,579 existing shares of the Company then held by
such San Faustin subsidiary that were cancelled upon receipt by the Company. In connection with
the over-allotment described in note 1 to our audited consolidated financial statements, on
March 1, 2006, the Company issued 22,981,360 new shares. Upon consummation of the transactions
discussed above, as of December 31, 2006, the capital of the Company was increased to USD2,004.7
million, represented by 2,004,743,442 shares, each having a nominal value of USD1.00. Terniums
combined earnings per share for the year ended December 31, 2004 have been calculated based on
the assumption that 1,168,943,632 shares were issued and outstanding in such year. For fiscal
years 2008, 2007, 2006 and 2005, the weighted average of shares outstanding totaled
2,004,743,442, 2,004,743,442, 1,936,833,060 and 1,209,476,609 shares, respectively. |
|
(5) |
|
Diluted earnings per share have been calculated giving effect to the conversion of the
Subordinated Convertible Loans. See note 1 to our audited consolidated financial statements. |
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars |
|
At December 31, |
|
(except number of shares and per share data) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005(1) (2) |
|
|
2004(1) (2) |
|
Selected consolidated balance sheet data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
5,491,408 |
|
|
|
8,553,123 |
|
|
|
6,029,383 |
|
|
|
6,029,823 |
|
|
|
1,728,410 |
|
Property, plant and equipment, net |
|
|
4,212,313 |
|
|
|
6,776,630 |
|
|
|
5,335,030 |
|
|
|
5,377,831 |
|
|
|
1,244,691 |
|
Other non-current assets(3) |
|
|
1,279,095 |
|
|
|
1,776,493 |
|
|
|
694,353 |
|
|
|
651,992 |
|
|
|
483,719 |
|
Current assets |
|
|
5,179,839 |
|
|
|
5,095,959 |
|
|
|
2,628,870 |
|
|
|
2,518,958 |
|
|
|
918,220 |
|
Cash and cash equivalents |
|
|
1,065,552 |
|
|
|
1,125,830 |
|
|
|
643,291 |
|
|
|
765,506 |
|
|
|
194,875 |
|
Other current assets |
|
|
4,108,954 |
|
|
|
3,200,987 |
|
|
|
1,978,537 |
|
|
|
1,750,292 |
|
|
|
723,345 |
|
Non-current assets classified as held for sale |
|
|
5,333 |
|
|
|
769,142 |
|
|
|
7,042 |
|
|
|
3,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
10,671,247 |
|
|
|
13,649,082 |
|
|
|
8,658,253 |
|
|
|
8,548,781 |
|
|
|
2,646,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital and reserve attributable to equity holders(4) |
|
|
4,597,370 |
|
|
|
4,452,680 |
|
|
|
3,757,558 |
|
|
|
1,842,454 |
|
|
|
1,026,725 |
|
Minority interest |
|
|
964,094 |
|
|
|
1,805,243 |
|
|
|
1,626,119 |
|
|
|
1,633,881 |
|
|
|
745,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
3,374,964 |
|
|
|
5,401,549 |
|
|
|
1,867,892 |
|
|
|
3,683,755 |
|
|
|
359,510 |
|
Borrowings |
|
|
2,325,867 |
|
|
|
3,676,072 |
|
|
|
546,601 |
|
|
|
2,396,807 |
|
|
|
1,008 |
|
Deferred income tax |
|
|
810,160 |
|
|
|
1,327,768 |
|
|
|
982,091 |
|
|
|
1,047,038 |
|
|
|
337,473 |
|
Other non-current liabilities |
|
|
238,937 |
|
|
|
397,709 |
|
|
|
339,200 |
|
|
|
239,910 |
|
|
|
21,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
1,734,819 |
|
|
|
1,989,610 |
|
|
|
1,406,684 |
|
|
|
1,388,691 |
|
|
|
515,269 |
|
Borrowings |
|
|
941,460 |
|
|
|
406,239 |
|
|
|
507,241 |
|
|
|
510,820 |
|
|
|
121,998 |
|
Other current liabilities |
|
|
793,359 |
|
|
|
1,369,608 |
|
|
|
899,443 |
|
|
|
877,871 |
|
|
|
393,271 |
|
Liabilities directly associated with non-current assets held
for sale |
|
|
|
|
|
|
213,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,109,783 |
|
|
|
7,391,159 |
|
|
|
3,274,576 |
|
|
|
5,072,446 |
|
|
|
874,779 |
|
Total equity and liabilities |
|
|
10,671,247 |
|
|
|
13,649,082 |
|
|
|
8,658,253 |
|
|
|
8,548,781 |
|
|
|
2,646,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares outstanding(5) |
|
|
2,004,743,442 |
|
|
|
2,004,743,442 |
|
|
|
2,004,743,442 |
|
|
|
1,396,551,886 |
|
|
|
1,168,943,632 |
|
|
|
|
(1) |
|
Combined consolidated financial information on the basis of common control. See note 2 to our
audited consolidated financial statements. |
|
(2) |
|
Certain comparative amounts for 2007, 2006, 2005 and 2004 have been reclassified to conform
to changes in presentation in the current period. |
|
(3) |
|
As of December 31, 2008, 2007, 2006 and 2005, includes goodwill related to the acquisition of
our Mexican subsidiaries for a total amount of USD683.7, USD850.7, USD397.9 million and
USD399.7 million, respectively. See note 3 to our audited consolidated financial statements. |
|
(4) |
|
The Companys common stock as of December 31, 2008, 2007, 2006, 2005, and 2004 was
represented by 2,004,743,442, 2,004,743,442, 2,004,743,442, 1,396,551,886 and 1,168,943,632,
par value USD1.00 per share, for a total amount of USD2,004.7 million, USD2,004.7 million,
USD2,004.7 million, USD1,396.6 million and USD1,168.9 million. |
|
(5) |
|
As described in note 28 to our audited consolidated financial statements, after the
completion of the Companys initial public offering, the conversion of certain subordinated
convertible loans, the exercise of the over-allotment option granted to the underwriters of
the initial public offering and the consummation of the transactions contemplated in a certain
corporate reorganization agreement, 2,004,734,442 shares were outstanding. In October 2005,
Usiminas exchanged its 5.3% equity interest in Siderar, its 16.6% equity interest in Amazonia
and its 19.1% equity interest in Ylopa and other items for 227,608,254 new shares of the
Company. Upon the consummation of this exchange, capital increased to USD1,396.6 million,
represented by 1,396,551,886 shares of USD1.00 nominal value per share. Pursuant to provisions
contained in the subordinated convertible loan agreements, on February 6, 2006, the Company
exchanged certain subordinated convertible loans (including interest accrued thereon through
January 31, 2006) for Company shares at a conversion price of USD2 per share, resulting in the
issuance of 302,962,261 new shares to a wholly-owned subsidiary of San Faustin on February 9,
2006. As provided in a corporate reorganization agreement, on February 9, 2006, after the
settlement of the Companys initial public offering, a wholly-owned subsidiary of San Faustín
contributed all of its assets and liabilities to the Company in exchange for 959,482,775
newly-issued shares of the Company, which contribution included, among other items, the San
Faustin subsidiarys right to receive 302,962,261 new shares of the
Company in connection with the conversion of the subordinated convertible loans described above,
and 374,272,579 existing shares of the Company then held by such San Faustin subsidiary that
were cancelled upon receipt by the Company. In connection with the over-allotment described in
note 1 to our audited consolidated financial statements, on March 1, 2006, the Company issued
22,981,360 new shares. Upon consummation of the transactions discussed above, as of December 31,
2006, the capital was increased to USD2,004.7 million, represented by 2,004,743,442 shares, each
having a nominal value of USD1.00. |
65
The following table sets forth our operating and other costs and expenses as a percentage of net
sales for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
Percentage of net sales |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(72.4 |
)% |
|
|
(76.1 |
)% |
|
|
(69.3 |
)% |
|
|
(66.5 |
)% |
|
|
(59.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
27.6 |
% |
|
|
23.9 |
% |
|
|
30.7 |
% |
|
|
33.5 |
% |
|
|
40.3 |
% |
Selling, general and administrative expenses |
|
|
(7.9 |
)% |
|
|
(9.2 |
)% |
|
|
(8.3 |
)% |
|
|
(9.1 |
)% |
|
|
(8.2 |
)% |
Other operating expenses, net |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
(0.1 |
)% |
|
|
(2.1 |
)% |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19.8 |
% |
|
|
14.9 |
% |
|
|
22.3 |
% |
|
|
22.3 |
% |
|
|
31.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1.6 |
)% |
|
|
(2.4 |
)% |
|
|
(2.2 |
)% |
|
|
(2.3 |
)% |
|
|
(1.1 |
)% |
Interest income |
|
|
0.4 |
% |
|
|
0.7 |
% |
|
|
0.8 |
% |
|
|
0.7 |
% |
|
|
0.6 |
% |
Other financial income (expense), net |
|
|
(8.2 |
)% |
|
|
(0.7 |
)% |
|
|
(0.9 |
)% |
|
|
1.2 |
% |
|
|
13.1 |
% |
Equity in earnings (losses) of associated companies |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
10.4 |
% |
|
|
12.6 |
% |
|
|
20.0 |
% |
|
|
22.0 |
% |
|
|
57.3 |
% |
Income tax expense |
|
|
(1.9 |
)% |
|
|
(5.3 |
)% |
|
|
(7.8 |
)% |
|
|
(8.7 |
)% |
|
|
(11.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
8,5 |
% |
|
|
7,4 |
% |
|
|
12,2 |
% |
|
|
13.3 |
% |
|
|
46.3 |
% |
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
1.9 |
% |
|
|
10.3 |
% |
|
|
9.9 |
% |
|
|
26.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year |
|
|
10.3 |
% |
|
|
17.7 |
% |
|
|
22.1 |
% |
|
|
39.9 |
% |
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company |
|
|
8.5 |
% |
|
|
13.9 |
% |
|
|
17.7 |
% |
|
|
26.3 |
% |
|
|
28.3 |
% |
Minority interest |
|
|
1.9 |
% |
|
|
3.8 |
% |
|
|
4.4 |
% |
|
|
13.7 |
% |
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2008 compared to Fiscal Year Ended December 31, 2007
Our results for the year ended December 31, 2008 varied significantly from the results for the year
ended December 31, 2007, primarily as a result of (i) Grupo Imsas results being consolidated for
the entire 2008 (as opposed to the period from July 26, 2007 through the end of that year) and (ii)
Sidors results no longer being recognized as from April 1, 2008.
Overview
Terniums net income attributable to equity holders for the year ended December 31, 2008, decreased
to USD715.4 million from USD784.5 million in the previous year. This lower income was mainly
attributable to net foreign exchange losses arising from the impact of the Mexican peso devaluation
on our Mexican subsidiarys U.S. dollar-denominated debt and lower income from discontinued
operations as a result of Sidors results no longer being recognized as from April 1, 2008, which
more than offset the impact of strong steel prices for most of the year and the consolidation of
Grupo Imsas results for the entire year.
Cash and cash equivalents as of December 31, 2008, were USD1,065.6 million, a USD60.3 million
decrease from to USD1,125.8 million at the end of the previous year. This decrease is attributable
to the de-consolidation of Sidors cash and cash equivalents as of March 31, 2008 (USD157.9
million), which was partially offset by net cash generation of USD115.1 million. Net cash
generation was the result of USD517.5 million provided by operating activities and USD350.5 million
provided by investing activities, less USD752.9 million used in financing activities.
66
Net Sales
Net sales increased 50.3% in 2008 to USD 8,464.9 millionfrom USD5,633.4 in 2007primarily as a
result of the consolidation of Grupo Imsa for the entire year. Excluding the effect of the
consolidation of Grupo Imsa, net sales increased in 2008 due to higher revenue per ton. Shipments
of flat and long products were 7.5 million tons during 2008, an increase of 8% compared to shipment
levels in 2007, mainly due to the consolidation of Grupo Imsa and higher shipment levels in the
South and Central America region. Revenue per ton shipped was USD 1,087 in 2008, an increase of 38%
when compared to 2007, mainly as a result of higher prices and the consolidation of Grupo Imsas
higher value added product mix.
The following table shows Terniums total consolidated net sales by product and geographical region
for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
In thousands of U.S. dollars |
|
2008 |
|
|
2007 |
|
Flat Steel Product Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
2,782,543 |
|
|
|
2,036,967 |
|
North America |
|
|
4,294,677 |
|
|
|
2,571,788 |
|
Europe and Other |
|
|
47,466 |
|
|
|
122,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Flat Steel Products Sales |
|
|
7,124,687 |
|
|
|
4,731,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Steel Product Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
274,415 |
|
|
|
70,023 |
|
North America |
|
|
791,755 |
|
|
|
695,953 |
|
Europe and Other |
|
|
8,921 |
|
|
|
6,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Steel Product Sales |
|
|
1,075,090 |
|
|
|
772,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Sales(1) |
|
|
265,107 |
|
|
|
128,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
8,464,884 |
|
|
|
5,633,365 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The item Total Other Sales includes mainly sales of pig iron and iron ore. |
In 2008, Ternium derived the majority of its revenues (approximately 84%) from sales of flat steel
products. Total sales of flat steel products increased significantly, from USD4,731.7 million in
2007 to USD7,124.7 million in 2008, primarily as a result of a USD1,722.9 million increase in sales
in the North America region, an increase of USD745,6 million in sales in the South and Central
America region and a decrease of USD75.5 million in sales in Europe and other regions. The
significant increase in sales in the North America region is due mainly to the consolidation of
Grupo Imsa for the entire year.
Sales of long products were USD1,075.1 million during 2008, an increase of 39.1% when compared to
USD772.8 million in 2007, due to higher shipment levels in the South and Central America region,
partially offset by lower shipment activity in the North America region and higher prices in both
regions.
Other sales increased to USD265.1 million in 2008 from USD128.8 million in 2007, mainly as a
consequence of higher shipments and prices in our sales of iron ore pellets and fines and higher
pre-engineered metal building sales resulting from the consolidation of Grupo Imsa.
67
Sales Volume
The following table shows our sales volume by product and market for the years ended December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
In thousands of tons |
|
For the year ended December 31, |
|
(unaudited) |
|
2008 |
|
|
2007 |
|
Flat Steel Product Sales Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
2,604.2 |
|
|
|
2,499.1 |
|
North America |
|
|
3,666.1 |
|
|
|
3,034.9 |
|
Europe and Other |
|
|
55.2 |
|
|
|
184.9 |
|
|
|
|
|
|
|
|
Total Flat Steel Product Sales Volume |
|
|
6,325.5 |
|
|
|
5,718.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Steel Product Sales Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
302.5 |
|
|
|
132.8 |
|
North America |
|
|
901.3 |
|
|
|
1,113.4 |
|
Europe and Other |
|
|
13.3 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
Total Long Steel Product Sales Volume |
|
|
1,217.2 |
|
|
|
1,261.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Volume(1) |
|
|
7,542.7 |
|
|
|
6,980.1 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Total Sales Volume does not include the tons related to Other sales. |
Total sales volume increased by 8.1%, from 6,980.1 thousand tons in 2007 to 7,542.7 thousand tons
in 2008. Net sales went up in 2008 due to an increase of 10% in sales in the South and Central
America region driven by good economic performance in our main markets; and an increase of 10% in
sales in the North America region due to the effect of the consolidation of Grupo Imsa for the
entire year, partially offset by declining activity in our main markets in the region. Steel
consumption in the North America region decreased 7% during 2008, mainly due to softening activity
in Mexico and the United States, and a de-stocking process that took place towards the end of the
year.
In 2008, flat steel product sales volume increased by 10.6% to 6,325.5 thousand tons, from 5,718.9
thousand tons in 2007. Sales in the South and Central America region increased by 105.1 thousand
tons, or 4.2%, from 2,499.1 thousand tons in 2007 to 2,604.2 thousand tons in 2008, due to
favorable economic conditions in our principal markets in the region. Sales in the North America
region increased by 20.8% to 3,666.1 thousand tons in 2008, from 3,034.9 thousand tons in 2007, due
to the consolidation of Grupo Imsas sales for the entire year, partially offset by a slowdown in
the North American market. Sales to Europe and other markets decreased by 129.7 thousand tons, or
70.1%, from 184.9 thousand tons in 2007 to 55.2 thousand tons in 2008.
In 2008, long steel product sales volume decreased by 3.5% to 1,217.2 thousand tons, from 1,261.2
thousand tons in 2007. Sales in the South and Central America region increased by 169.7 thousand
tons, or 127.8%, from 132.8 thousand tons in 2007 to 302.5 thousand tons in 2008, as a consequence
of good economic performance in our main markets in the region. Sales in the North America region
decreased by 212.1 thousand tons, or 19.0%, from 1,113.4 thousand tons in 2007 to 901.3 thousand
tons in 2008, mainly as a result of weakening activity and a de-stocking process in the United
States towards the end of the year, coupled with softening activity in Mexico.
The following table shows the percentage of market distribution of Terniums total sales by region
for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
Percentage of total sales |
|
2008 |
|
|
2007 |
|
South and Central America |
|
|
38.5 |
% |
|
|
37.7 |
% |
North America |
|
|
60.6 |
% |
|
|
59.4 |
% |
Europe and Other |
|
|
0.9 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
68
Sales prices
Revenue per ton of flat steel products increased by 36.1% to USD1,126.3 in 2008, from USD827.4 in
2007. Revenue per ton of long steel products increased by 44.1% to USD883.3 in 2008, from USD612.8
in 2007. During the first nine months of 2008, Ternium benefited from a strong steel market pricing
environment in the North
America region, followed by rapidly weakening conditions during the fourth quarter of the year.
Steel prices in the South and Central America region grew during 2008, due to good economic
performance across our main markets.
Cost of sales
Total cost of sales increased by 42.9%, from USD4,287.7 million in 2007 to USD6,128.0 million in
2008. Cost of sales increased partly as a result of the consolidation of Grupo Imsa for the entire
year, which increased Terniums overall production volume and cost per ton due to Grupo Imsas
higher production cost structure and higher value added product sales mix. The year-over-year cost
of sales increase was also due to higher costs of third party steel, raw materials, energy,
freight, labor and services and a USD200.0 million write-down of Terniums inventory (primarily
related to purchased slabs), partially offset by a reduction in the U.S. dollar value of
inventories at the beginning of the year and purchased during 2008 (due mainly to the Mexican
Pesos 25% devaluation with respect to the U.S. dollar).
Prices of natural gas and electricity for our South American operations were relatively stable. Our
operations in Argentina have self-generation capability and are largely self-sufficient in terms of
electricity. Energy input for our Argentine operations is obtained mostly from metallurgical coal
and petroleum coke, and supplemented with fuel oil and natural gas. Natural gas prices in
Argentina showed only slight fluctuations during 2008. The price of natural gas for our operations
in Mexico was partly fixed through hedging mechanisms, which prevented major cost fluctuations.
Average cost of sales per ton of flat steel products increased by 30.8%, from USD635.3 per ton in
2007 to USD831.0 per ton in 2008, largely due to additional processing cost associated with Grupo
Imsas richer product mix and also to higher overall costs for third party steel, raw materials,
energy, freight, labor and services and a USD200.0 million write-down of Terniums inventory
primarily related to purchased slabs. The average cost of sales per ton of long steel products
increased by 30.6%, from USD460.8 in 2007 to USD 601.7 in 2008, due mainly to the same reasons.
Cost of sales, expressed as a percentage of net sales, decreased to 72.4% during 2008, compared to
76.1% in 2007. The decrease was due to the fact that cost increases during the first three
quarters of the year were more than offset by higher sales price increases.
Selling, general and administrative expenses
Selling general and administrative (SG&A) expenses in 2008 were USD669.5 million, or 7.9% of net
sales, compared to USD517.4 million, or 9.2% of net sales in 2007. The increase in SG&A expenses
reflects mainly the consolidation of Grupo Imsas results for the entire year and increased taxes
in Argentina of USD18.2 million.
Other operating income, net
Other operating income, net, increased by USD0.1 million, from a net income of USD8.5 million for
the fiscal year ended December 31, 2007, to a net income of USD8.7 million for the fiscal year
ended December 31, 2008.
Operating income
Operating income totaled USD1,676.0 million in 2008, up 100.3% from 2007s operating income of
USD836.8 million. Such major variation was mainly due to higher sales prices and a slight increase
in volume, partially offset by higher costs of sales. Operating income as a percentage of sales was
19.8 % in 2008, compared to 14.9% in 2007.
69
Financial expenses, net
Financial expenses, net, resulted in a net financial loss of USD797.1 million in 2008, compared to
a net financial loss of USD130.0 million in 2007. The increase was due to:
|
|
|
an increase of USD614.3 million in net foreign exchange losses, mainly related to the
impact of the Mexican Peso 25% devaluation on Ternium Mexicos U.S. dollar-denominated
debt incurred in connection with the Grupo Imsa transaction; |
|
|
|
|
a USD32.5 million loss in the fair value of derivatives in 2008, compared to a gain
of USD2.5 million in 2007, mainly related to derivative instruments entered into in order
to mitigate the effect of fluctuations in interest rates, foreign exchange rates and
commodities prices; |
|
|
|
|
an increase of USD3.0 million in interest expense, from USD133.1 million in 2007 to
USD136.1 million in 2008, due to higher interest costs resulting from the indebtedness
under the facilities entered into in connection with the Grupo Imsa transaction; and |
|
|
|
|
a decrease of USD9.4 million in interest income, mainly due to lower interest rates. |
Equity in earnings (losses) of associated companies
Terniums share in the results of associated companies (mainly Exiros) during 2008 was a gain of
USD1.9 million, compared to a gain of USD0.4 million in 2007.
Income tax expense
For 2008, Ternium recorded an income tax expense of USD259.0 millionpartially offset by a USD96.3
million reversal of a deferred statutory profit sharing liability relating to Hylsas employees,
compared to an income tax expense of USD291.3 million for the fiscal year ended December 31, 2007.
The decrease in income tax expense for the year is due mainly to lower taxes at our Mexican
subsidiary, partially offset by higher income taxes at our Argentine subsidiary.
Terniums effective tax rate for 2008 was 29%, compared to 41% in 2007. The effective tax rate is
calculated as income tax on Terniums income before income tax, discontinued operations and
minority interest. The year-to-year variation in effective tax rates is primarily attributable to
the accounting treatment of statutory profit sharing. Under Mexican law, Terniums subsidiaries are
required to pay their employees an annual benefit calculated as a percentage of taxable profit for
the year. Because Mexican employee statutory profit sharing is determined on a basis similar to
that used for determining local income taxes, Ternium accounts for temporary differences arising
between the statutory calculation and the reported expense determined under IFRS in a manner
similar to calculation of deferred income tax. On March 31, 2008, Hylsa engaged in a corporate
reorganization, as part of which all of Hylsas employees were transferred to the payroll of a
company expected to generate non-significant taxable income and non-significant temporary
differences, with Hylsa agreeing to pay its employees a bonus salary to be calculated on the basis
of agreed-upon criteria. Accordingly, during the year ended December 31, 2008, Ternium reversed the
outstanding balance of the deferred tax liability recorded in connection with the statutory profit
sharing as of December 31, 2007 (amounting to USD96 million) and disclosed the related gain as an
income tax gain.
Net income attributable to minority interest
Net income attributable to minority interest for the fiscal year ended December 31, 2008 was
USD159.7 million, compared to USD211.3 million in 2007. The decrease was mainly due to lower income
attributable to minority interest in discontinued operations in Venezuela.
Fiscal Year Ended December 31, 2007 compared to Fiscal Year Ended December 31, 2006
The Companys results and other financial data for the year ended December 31, 2007 varied
significantly from the results and other financial data for the year ended December 31, 2006 due to
the consolidation of Grupo Imsa beginning July 26, 2007. As from April 1, 2008, the Company ceased
consolidating Sidors results and other financial data and classified its investment in Sidor as an
available-for-sale financial asset, with Sidors results and cash flows during each period prior to
April 1, 2008 being presented as discontinued operations.
70
Overview
Terniums net income attributable to equity holders decreased to USD784.5 million for the year
ended December 31, 2007, from USD795.4 million for the year ended December 31, 2006.
The results in 2007 were attributable to a positive environment for improved volumes and strong
steel prices, and to the impact of the Grupo Imsa transaction, which closed on July 26, 2007. These
factors were partially offset by increases in cost of sales, SG&A expenses, and financial expense.
The increase in cost of sales was principally due to higher cost per ton due to Grupo Imsas higher
production cost structure and higher value added product sales mix, and overall increases in raw
materials, such as iron ore and related freight expenses, and higher labor costs and maintenance
expenses. The increase in SG&A expenses was mainly due to the consolidation of Grupo Imsas results
beginning July 26, 2007, and to higher freight and transportation expenses, attributable to an
increase in sales, and higher taxes in Argentina. Finally, the increase in financial expenses was
principally attributable to higher interest expense resulting from the indebtedness under the
facilities entered into in connection with the Grupo Imsa transaction, an increase in net foreign
exchange losseswhich is a non-cash loss when measured in U.S. dollars and is offset by changes in
the Companys net equity position in the currency translation adjustments linethat resulted in a
financial loss of USD18.4 million, partially offset by a net increase of US$2.5 million in the fair
value of certain derivative instruments.
Cash and cash equivalents as of December 31, 2007 were USD1,125.8 million, a 77.9% increase when
compared to USD633.0 million (not including USD10.4 million of restricted cash) in the previous
year. This increase was mainly due to the performance of operating activities which provided
USD936.4 million, the net cash provided by financing activities of USD1.359,0 million and cash
acquired of USD190.1 million, offset mainly by capital expenditures of USD344.3 million,
acquisition of business of USD1,728.9 million, an income tax credit paid on business acquisition of
USD297.7 million and net cash used in other investing activities of USD40.8 million. Cash flows
related to investing activities also include net cash generated by discontinued operations of USD
419.3 million during 2008.
Net Sales
Net sales in 2007 totaled USD5,633.4 million, a 25.6% increase from USD4,484.9 million in 2006,
primarily as a result of the consolidation of Grupo Imsa beginning in July 26, 2007. Excluding the
effect of the consolidation of Grupo Imsa (USD976.3 million), net sales increased in 2007 due to
higher shipments and revenue per ton, while shipments increased mainly as a result of strong demand
for steel products in South America which more than offset a slowdown in North American steel
markets.
The following table shows Terniums total consolidated net sales by product and geographical region
for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
In thousands of U.S. dollars |
|
2007 |
|
|
2006 |
|
Flat Steel Product Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
2,036,967 |
|
|
|
1,648,897 |
|
North America |
|
|
2,571,788 |
|
|
|
1,921,774 |
|
Europe and Other |
|
|
122,960 |
|
|
|
22,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Flat Steel Products Sales |
|
|
4,731,715 |
|
|
|
3,593,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Steel Product Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
70,023 |
|
|
|
19,396 |
|
North America |
|
|
695,953 |
|
|
|
720,523 |
|
Europe and Other |
|
|
6,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Steel Product Sales |
|
|
772,829 |
|
|
|
739,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Sales(1) |
|
|
128,822 |
|
|
|
151,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
5,633,365 |
|
|
|
4,484,918 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The item Total Other Sales includes mainly sales of pig iron and iron ore. |
71
In 2007, Ternium derived the majority of its revenues (approximately 84.0%) from sales of flat
steel products. Total sales of flat steel products increased significantly, from USD3,593.0 million
in 2006 to USD4,731.7 million in 2007, primarily as a result of a USD650.0 million increase in
sales in the North America region, an increase of USD388.1 million in sales in the South and
Central America region and an increase of USD100.6 million in sales in Europe and Other region. The
Grupo Imsa consolidation, beginning in July 26, 2007, contributed USD909.2 million.
Sales of long products were USD772.8 million during 2007, an increase of 4.4% compared to USD739.9
million in 2006 due to higher shipment levels in the South and Central America region, partially
offset by lower shipment activity in the North America region and higher prices in both regions.
Other sales decreased from USD151.9 million in 2006 to USD128.8 million in 2007, mainly as a
consequence of lower exports of iron ore pellets and fines to China, due to higher internal
consumption.
Sales Volume
The following table shows our sales volume by product and market for the years ended December 31,
2007 and 2006:
In thousands of tons
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Flat Steel Product Sales Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
2,499.1 |
|
|
|
2,310.2 |
|
North America |
|
|
3,034.9 |
|
|
|
2,343.5 |
|
Europe and Other |
|
|
184.9 |
|
|
|
39.5 |
|
|
|
|
|
|
|
|
Total Flat Steel Product Sales Volume |
|
|
5,718.9 |
|
|
|
4,693.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Steel Product Sales Volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South and Central America |
|
|
132.8 |
|
|
|
38.9 |
|
North America |
|
|
1,113.4 |
|
|
|
1,195.7 |
|
Europe and Other |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long Steel Product Sales Volume |
|
|
1,261.2 |
|
|
|
1,234.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Volume(1) |
|
|
6,980.1 |
|
|
|
5,927.8 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Total Sales Volume does not include the tons related to Other sales. |
Total sales volume increased by 17.8% to 6,980.1 thousand tons in 2007 from 5,927.8 thousand tons
in 2006. Excluding the effect of the consolidation of Grupo Imsa beginning in July 26, 2007 (935
thousand tons), net sales increased in 2007 due to higher shipments, mainly as a result of strong
demand for steel products in South and Central America, which more than offset a slowdown in the
North American steel markets.
72
In 2007, flat steel product sales volume increased by 21.9% to 5,718.9 thousand tons, from 4,693.3
thousand tons in 2006. Sales in the South and Central America region increased by 188.9 thousand
tons, or 8.2%, from 2,310.2 thousand tons in 2006 to 2,499.1 thousand tons in 2007, due to
favorable economic conditions in our principal markets in the region. Sales in the North America
region increased by 29.5% to 3,034.9 thousand tons in 2007, from 2,343.5 thousand tons in 2006.
Such substantial difference was due to the consolidation of Grupo Imsas sales volume beginning
July 26, 2007, which was partially offset by a slowdown in the North American market. Sales in
Europe and other markets increased by 145.4 thousand tons, or 368.1%, from 39.5 thousand tons in
2006 to 184.9 thousand tons in 2007, due to spot sales to the European market.
In 2007, long steel product sales volume increased by 2.1% to 1,261.2 thousand tons, from 1,234.6
thousand tons in 2006. Sales in the South and Central America region increased by 93.9 thousand
tons, or 241.4%, from 38.9 thousand tons in 2006 to 132.8 thousand tons in 2007, as a consequence
of good economic performance in our main markets in the region. Sales in the North America region
decreased by 82.3 thousand tons, or 6.9%, from 1,195.7 thousand tons in 2006 to 1,113.4 thousand
tons in 2007, mainly as a result of a de-stocking process in the United States.
The following table shows the percentage of market distribution of Terniums total sales by region
for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
Percentage of total sales |
|
2007 |
|
|
2006 |
|
South and Central America |
|
|
37.7 |
% |
|
|
39.6 |
% |
North America |
|
|
59.4 |
% |
|
|
59.7 |
% |
Europe and Other |
|
|
2.9 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Sales prices
Revenue per ton of flat steel products increased by 8.1% to USD827.4 in 2007, from USD765.6 in
2006. Revenue per ton of long steel products increased by 2.2% to USD612.8 in 2007, from USD599.3
in 2006. While prices remained relatively stable throughout 2007 in the North America region, steel
prices in the South and Central America region grew during 2007, mainly due to Argentinas good
economic performance.
Cost of sales
Total cost of sales increased by 38.0%, from USD3,107.6 million in 2006 to USD4,287.7 million in
2007. The variation was mainly due to the consolidation of Grupo Imsas cost of sales of USD864.9,
together with an increase in Siderars cost of sales of USD320.5 million. Ternium experienced
higher iron ore and related freight expenses in 2007 due to the annual increases in the
international prices for iron ore and higher level of shipments. Furthermore, 2007 results included
higher amortizations, partially offset by the non-recurrence of costs associated with the relining
of Siderars blast furnace No.1 carried out during 2006, which resumed operations on January 31,
2007.
Prices of natural gas and electricity for our South American operations were relatively stable. Our
operations in Argentina have self-generation capability and are largely self-sufficient in terms of
electricity. Energy input for our Argentine operations is obtained mostly from metallurgical coal
and petroleum coke, and supplemented with fuel oil and natural gas. Natural gas prices in
Argentina showed only slight fluctuations during 2007.
The price of natural gas for our operations in Mexico was partly fixed through hedging mechanisms,
which prevented major cost fluctuations associated therewith.
Average cost of sales per ton of flat steel products increased by 18.3%, from USD536.9 per ton in
2006 to USD635.3 per ton in 2007, largely due to additional processing costs associated with Grupo
Imsas richer product mix and also to overall increases in prices of raw materials such as iron ore
and slabs and related freight expenses, and higher labor costs and maintenance expenses. The
average cost of sales per ton of long steel products increased
by 5.9%, from USD435.0 in 2006 to USD460.8 in 2007, mainly due to an increase in prices of scrap
and other raw materials.
73
Cost of sales, expressed as a percentage of net sales, increased to 76.1% during 2007, compared to
69.3% in 2006. The increase was due to higher costs of supplies, raw materials and labor costs,
together with a shift in product mix towards products with a lower gross margin, and also the
result of the consolidation of Grupo Imsas higher cost products beginning July 26, 2007.
Selling, general and administrative expenses
SG&A expenses in 2007 were USD 517.4 million, or 9.2% of net sales, compared to USD370.7 million,
or 8.3% of net sales in 2006.
The increase in SG&A expenses reflects the consolidation of Grupo Imsas results beginning July 26,
2007, and the effect of higher freight costs in Argentina, partially offset by a decrease in
freight costs in Mexico and higher taxes in Argentina.
Other operating income (expenses), net
Other operating income (expenses), net, increased by USD13.3 million in 2007, from a net loss of
USD4.7 million for the fiscal year ended December 31, 2006, to a net income of USD8.5 million for
the fiscal year ended December 31, 2007. Other operating expenses, net, in 2006 included a
non-recurring loss of USD13.1 million resulting from the de-recognition of certain items of
property, plant and equipment.
Operating income
Operating income totaled USD836.8 million in 2007, down 16.5% from 2006s operating income of
USD1,001.8 million. Operating income as a percentage of sales was 14.9% in 2007, compared to 22.3%
in 2006. This variation was mainly due to lower sales in our North American markets and higher
input costs for slabs and freight, partially offset by the consolidation of Grupo Imsas operations
beginning July 26, 2007.
Financial expenses, net
Financial expenses, net, resulted in a net financial loss of USD130.0 million in 2007, compared to
a net financial loss of USD103.3 million in 2006. The increase was due to:
|
|
|
an increase of USD36.3 million in interest expense, from USD96.8 million in 2006 to
USD133.1 million in 2007, due to higher interest costs resulting from the indebtedness
under the facilities entered into in connection with the Grupo Imsa transaction, partially
compensated by an interest rate reduction; |
|
|
|
|
an increase of USD14.3 million in net foreign exchange transactions, mainly related
to the indebtedness under the facilities entered into in connection with the Grupo Imsa
transaction; |
|
|
|
|
an increase of USD5.7 million in other charges due to the issuance of letters of
credit, payment of commissions and other financial costs arising from the higher level of
activity; |
|
|
|
|
all of which was partially offset by an increase of USD7.7 million in interest
income, a gain of USD13.0 million related to changes in the fair value of derivatives and
a decrease in debt issue costs of USD4.7 million. |
Equity in earnings (losses) of associated companies
Terniums share in the results of associated companies (mainly Exiros) during 2007 was a gain of
USD0.4 million, compared to a gain of USD0.7 million for 2006.
74
Income tax expense
During 2007, Ternium recorded an income tax expense of USD291.3 million, compared to an income tax
expense of USD353.0 million for the fiscal year ended December 31, 2006. The decrease in income tax
expense for the year 2007 is mainly due to the effect of lower taxes on our Mexican subsidiaries,
compensated by higher taxes on our Argentine subsidiary.
Terniums effective tax rate for 2007 was 41%, compared to 39% in 2006. The effective tax rate is
calculated as income tax on Terniums income before equity in earnings of associated companies,
income tax and excess of fair value of net assets acquired over cost and minority interest.
Net income attributable to minority interest
Net income attributable to minority interest for the fiscal year ended December 31, 2007 was
USD211.3 million, compared to USD195.2 million in 2006. The increase was mainly due to an increase
of USD41.3 million related to Sidor, partially offset by a decrease in results attributable to
Siderars minority interest of USD25.2 million.
Foreign Currency Fluctuations
See Item 11. Quantitative and Qualitative Disclosure About Market RiskForeign Exchange Exposure
Risk.
Governmental Economic, Fiscal, Monetary or Political Policies or Factors
See Item 3. Key InformationD. Risk Factors Risks Relating to the Countries in Which We
Operate.
B. Liquidity and Capital Resources
We obtained funds from our operations and from short-term as well as long-term borrowings from
financial institutions. These funds were primarily used to finance our working capital and capital
expenditures requirements and acquisitions. We hold money market investments and variable-rate or
fixed-rate securities from investment grade issuers. During 2008, we significantly decreased our
financial indebtedness, from USD4,082.3 million at the end of 2007 to USD 3,267.3 million at the
end of 2008, by using the proceeds from the sale of certain non-core U.S. assets to prepay
indebtedness incurred in connection with the Grupo Imsa transaction.
Management believes that funds from operations will be sufficient to satisfy our current working
capital needs, finance our capital expenditures and service our debt in the foreseeable future.
While Ternium currently does not have credit facilities available for borrowing, management
believes that Ternium could have access to external borrowing in case of any shortfalls. Management
also believes that our liquidity and capital resources give us adequate flexibility to manage our
planned capital spending programs and to address short-term changes in business conditions.
75
The following table shows the changes in our cash and cash equivalents, excluding funds placed in
trust, for each of the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
In thousands of U.S. dollars |
|
2008 |
|
|
2007 |
|
|
2006(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
517,513 |
|
|
|
936,418 |
|
|
|
754,008 |
|
Net cash provided by (used in) investing
activities |
|
|
350,530 |
|
|
|
(1,802,317 |
) |
|
|
(193,133 |
) |
Net cash provided by (used in) financing
activities |
|
|
(752,909 |
) |
|
|
1,359,046 |
|
|
|
(682,475 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents |
|
|
115,134 |
|
|
|
493,147 |
|
|
|
(121,600 |
) |
Effect of exchange rate changes |
|
|
(17,518 |
) |
|
|
(258 |
) |
|
|
(315 |
) |
Cash and cash equivalents at the
beginning of the year |
|
|
1,125,830 |
|
|
|
632,941 |
|
|
|
754,856 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of
the year |
|
|
1,065,552 |
|
|
|
1,125,830 |
|
|
|
632,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2006, cash and cash equivalents do not include
USD10.4 million of restricted cash. |
Fiscal Year Ended December 31, 2008 compared to Fiscal Year Ended December 31, 2007
Overview
During 2008, Terniums primary source of funding was cash flows from its operating activities.
Cash and cash equivalents as of December 31, 2008, were USD1,065.6 million, a USD60.3 million
(5.4%) decrease from to USD1,125.8 million at the end of the previous year. This decrease is
attributable to the de-consolidation of Sidors cash and cash equivalents as of March 31, 2008
(USD157.9 million), which was partially offset by net cash generation of USD115.1 million. Net cash
generation was the result of USD517.5 million provided by operating activities and USD350.5 million
provided by investing activities, less USD752.9 million used in financing activities.
In addition to cash and cash equivalents, as of December 31, 2008, we held other current
investments totaling USD90.0 million.
Operating activities
Net cash provided by operations was USD517.5 million in 2008, compared to USD936.4 million in 2007,
which represented a 44.7% decrease. The main reasons for the variation in operating cash flow were:
|
|
|
a strong increase in working capital of USD1,071.5 million in 2008, compared to a
decrease in working capital of USD97.7 million in 2007 (see below); |
|
|
|
|
a decrease in taxes paid of USD91.6 million; and |
|
|
|
|
an increase in interest paid of USD175.0 million, reflecting the accounting of interest
payments for an entire year on the debt incurred in connection with the Grupo Imsa
transaction; |
partially offset by
|
|
|
an increase in our operating income of USD839.3 million; and |
|
|
|
|
an increase in other liabilities of USD20.4 million in 2008, mainly due to an increase
in payroll and social security liabilities at our Mexican subsidiary. |
The significant variation in our working capital during 2008, as indicated above, was attributable
to:
|
|
|
an increase of USD 821.7 million in inventory, mainly as a result of higher inventory
costs and higher volumes (as shown in the table below); |
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
(in millions of USD) |
|
|
|
Price |
|
|
Volume |
|
|
Total |
|
Finished Goods |
|
|
106.0 |
|
|
|
(16.3 |
) |
|
|
89.7 |
(1) |
Goods in process |
|
|
435.0 |
|
|
|
143.3 |
|
|
|
578.2 |
(1) |
Raw materials and supplies |
|
|
172.6 |
|
|
|
181.2 |
|
|
|
353.8 |
(1) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
713.5 |
|
|
|
308.1 |
|
|
|
1,021.7 |
(1) |
|
|
|
(1) |
|
This amount was partially offset by a USD200.0 million write-down for net
realizable value of inventory |
and
|
|
|
a decrease in account payables of USD212.6 in 2008 million, mainly due to lower
purchases of semi-finished steel products in the last quarter of 2008 in a context of
weakening economic activity. |
Higher inventory costs and higher volumes of raw materials and goods in process in 2008 were
primarily attributable to higher input prices and increased demand. In particular, during the nine
months of 2008, Ternium managed its inventory levels in Mexico with a view towards satisfying
anticipated increased customer demand and preventing Ternium from missing out on sales
opportunities. This upward trend reversed in the last quarter of 2008, generally as a result of the
global crisis. In that context, Ternium began to implement a de-stocking process, with inventory
levels decreasing as finished goods were sold and raw materials and supplies were replaced at a
slower rate than before.
Investing activities
Net cash provided by investing activities in 2008 was USD350.5 million, compared to net cash used
in investing activities of USD1,802.3 million in 2007. This significant variation was primarily
attributable to the following events and factors:
|
|
|
the completion of the Grupo Imsa transaction in 2007, which resulted in a net cash
outflow of USD1,538.8 million (a USD1,728.9 million payment, partially offset by acquired
cash and cash equivalents of USD190.1 million); |
|
|
|
|
a non-recurring income tax credit of USD297.7 million on taxes paid in connection with
the Grupo Imsa transaction in 2007; |
|
|
|
|
the proceeds from the sale of of certain non-core U.S. assets in 2008, amounting to
USD718.6 million; |
|
|
|
|
lower cash generated by discontinued operations, mainly Sidor (USD242.4 million in 2008,
compared to USD419.3 million in 2007); and |
|
|
|
|
an increase of USD243.6 million in capital expenditures (from USD344.3 million in 2007
to USD587.9 million in 2008). |
Financing activities
Net cash used in financing activities was USD752.9 million in 2008, compared to net cash provided
by financing activities of USD1,359.0 million in 2007. The variation was mainly due to a net
repayment of borrowings of USD633.1 million in 2008, compared to net proceeds from borrowings of
USD1,478.1 million in 2007 (in each case, such borrowings were mostly related to the Grupo Imsa
transaction).
77
Fiscal Year Ended December 31, 2007 compared to Fiscal Year Ended December 31, 2006
Overview
During 2007, Terniums primary source of funding was cash flows from its operating activities. In
the third quarter of 2007, we significantly changed the mix of financial resources as a result of
the indebtedness incurred in connection with the Grupo Imsa transaction.
Cash and cash equivalents increased by 77.9%, or USD492.9 million, from USD632.9 million as of
December 31, 2006 (not including USD10.4 million of restricted cash) to USD1,125.8 million as of
December 31, 2007. This amount includes cash acquired in connection with the Grupo Imsa
transaction, amounting to USD190.1 million. In addition to cash and cash equivalents, as of
December 31, 2007, we held other current investments totaling USD65.3 million.
Operating activities
Net cash provided by operations was USD936.4 million in 2007, compared to USD754.0 million in 2006.
The main reasons for the variation in operating cash flow were:
|
|
|
a decrease in working capital of USD97.8 million in 2007, compared to an increase in
working capital of USD 156.7 in 2007; and |
|
|
|
|
a decrease in income from continuing operations of USD 130.2 million |
Investing activities
Net cash used in investing activities was USD1,802.3 million in 2007, compared to USD193.1 million
in 2006. The variation was mainly due to the Grupo Imsa transaction, which resulted in:
|
|
|
acquisitions of businesses in 2007 in an amount of USD1,518.3 million, equal to a total
purchase consideration of USD1,728.9 million, net of acquired cash amounting to USD 190.1
million (in 2006, Ternium completed acquisition transactions for an aggregate amount of
USD210.5 million, consisting principally of the purchase of a 50% equity interest in
Acerex, S.A. de C.V. for USD44.6 million, the acquisition of tube manufacturing assets in
Argentina from Acindar Industria Argentina de Aceros S.A. for USD55.2 million, and the
purchase of a 4.85% equity stake in Siderar for USD107.5 million); and |
|
|
|
|
an income tax credit of USD297.7 million in 2007 for income taxes paid in connection
with the Grupo Imsa transaction. |
Financing activities
Net cash provided by financing activities was USD1,359.0 million in 2007, compared to USD682.5
million of net cash used for financing activities in 2006. The variation was mainly due to the
following events and factors:
|
|
|
net proceeds from borrowings of USD1,478.1 million during 2007, compared to net
repayments of USD1,183.4 million during 2006 (this variation is mainly due to the
borrowings made under the facilities entered into in connection with the Grupo Imsa
transaction, to refinance existing indebtness of Grupo Imsa and Hylsa and to pay taxes,
fees and expenses related to the transaction); |
|
|
|
|
the Companys initial public offering in 2006, which resulted in net proceeds from the
sale of equity securities in an amount of USD525.0 million; and |
|
|
|
|
dividend distributions to the Companys shareholders of USD100.2 million in 2007. |
78
Principal Sources of Funding
Funding Policies
Managements policy is to maintain a high degree of flexibility in operating and investment
activities by maintaining adequate liquidity levels and ensuring access to readily available
sources of financing. While Ternium currently does not have credit facilities available for
borrowing, management believes that Ternium could have access to external borrowing in case of any
shortfalls. We obtain financing primarily in U.S. dollars. Whenever feasible, management bases its
financing decisions, including the election of term and type of the facility, on the intended use
of proceeds for the proposed financing.
Financial Liabilities
Our financial liabilities currently consist of loans with financial institutions, debt securities
in a non-material amount and minor overdrafts transactions. These facilities are mainly denominated
in U.S. dollars. As of December 31, 2008, U.S. dollar-denominated financial liabilities represented
97.6% of total financial liabilities. Total financial debt decreased from USD4,082.3 million as of
December 31, 2007, to USD3,267.3 million as of December 31, 2008. During 2008, Terniums bank
borrowings (inclusive of principal and interest accrued thereon) decreased by USD815.0 million,
principally due the repayment of a significant portion of principal and interest on borrowings
related to prior acquisitions. As of December 2008, current borrowings were 29% of total
borrowings, none of which corresponded to borrowings with related parties.
The following table shows Terniums financial liabilities as of December 31 of each of the last
three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands of U.S. dollars |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Borrowings with related parties |
|
|
|
|
|
|
|
|
|
|
2,161 |
|
Bank borrowings |
|
|
3,267,327 |
|
|
|
4,082,311 |
(1) |
|
|
1,054,934 |
(1) |
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
3,267,327 |
|
|
|
4,082,311 |
|
|
|
1,057,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of debt issuance costs |
The weighted average interest rates at December 31, 2008, 2007 and 2006 shown below were calculated
using the rates set for each instrument in its corresponding currency and weighted using the U.S.
dollar-equivalent outstanding principal amount of those instruments at December 31, 2008, 2007 and
2006, respectively, after giving effect to any derivative financial instruments used to mitigate
interest rate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings |
|
|
2.79 |
% |
|
|
6.15 |
% |
|
|
6.82 |
% |
The maturity of our financial liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
1 - 2 |
|
|
2 - 3 |
|
|
3 - 4 |
|
|
4 - 5 |
|
|
Over 5 |
|
|
|
|
At December 31, 2008 |
|
or less |
|
|
years |
|
|
years |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
Borrowings(1)(2) |
|
|
941,460 |
|
|
|
542,882 |
|
|
|
493,427 |
|
|
|
1,289,558 |
|
|
|
|
|
|
|
|
|
|
|
3,267,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
941,460 |
|
|
|
542,882 |
|
|
|
493,427 |
|
|
|
1,289,558 |
|
|
|
|
|
|
|
|
|
|
|
3,267,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Borrowings are primarily bank borrowings with third parties. See Liquidity and Capital
ResourcesPrincipal Sources of FundingFinancial Liabilities. |
|
(2) |
|
Net of debt issuance costs. |
For information on our derivative financial instruments, please see Item 11. Quantitative and
Qualitative Disclosures About Market Risk and note 25 to our audited consolidated financial
statements included in this annual report.
79
Most Relevant Borrowings
Our most relevant borrowings as of December 31, 2008, were incurred in relation to the Grupo Imsa
transaction in July 2007.
Millions of U.S. dollars or Mexican pesos (as applicable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding principal |
|
|
|
|
|
|
|
|
Original principal |
|
amount as of |
|
|
Date |
|
Borrower |
|
Type |
|
amount |
|
December 31, 2008 |
|
Maturity |
July 2007 |
|
Ternium Mexico |
|
Syndicated loan |
|
USD3,485.0 |
|
USD2,785.0 |
(1) |
|
July 2012 |
May 2003 |
|
Ternium Mexico |
|
Debt securities |
|
MXN547.0 |
|
MXN547.0 |
(2) |
|
May 2009 |
August 2007 |
|
Siderar |
|
Term loan |
|
USD60.0 |
|
USD60.0 |
|
|
August 2009 |
October 2008 |
|
Ternium Mexico |
|
Term Loan |
|
USD 100.0 |
|
USD 100.0 |
(3) |
|
June 2009 |
October 2008 |
|
Ternium Mexico |
|
Term Loan |
|
USD 50.0 |
|
USD 50.0 |
(4) |
|
April 2009 |
November 2008 |
|
Ternium Mexico |
|
Term Loan |
|
USD 43.0 |
|
USD 43.0 |
|
|
August 2009 |
|
|
|
(1) |
|
On February 1, 2008, we completed the sale of our interests in Steelscape, Inc., ASC
Profiles Inc., Varco Pruden Buildings Inc. and Metl-Span LLC to BlueScope Steel North America
Corporation, a subsidiary of BlueScope Steel Limited, for a total consideration of US$727
million. On February 28, 2008, we applied USD700.0 million of the proceeds of such sale to
partially prepay loans under the syndicated loan agreement. |
|
(2) |
|
Ternium Mexico (formerly, Grupo Imsa) issued two series of debt securities (certificados
bursátiles, or CEBURES) on the Mexican Stock Exchange. The series issued on September 6, 2002
matured in August 2008, while the series issued on May 29, 2003 matured in May 2009. Both
series were repaid in full at maturity and are no longer outstanding. |
|
(3) |
|
As of the date of this annual report, this term loan is no longer outstanding. Principal
payments on this term loan were made in February, March and June 2009, in the amount of USD20
million, USD55 million and USD25 million, respectively. |
|
(4) |
|
This term loan was repaid in full at maturity. |
The main covenants in our syndicated loan agreement are limitations on liens and encumbrances,
limitations on the sale or other dispositions of certain material assets, and compliance with
financial ratios (e.g., leverage ratio and interest coverage ratio).
As of December 31, 2008, we were in compliance with all covenants under our loan agreements. The
current global recession and the resulting decline in the demand for steel and steel products,
coupled with fluctuations in foreign currency exchange rates and other regulatory, business,
economic and other factors (some of which are at least partially outside of our control), may
affect our ability to comply with some covenants in the future, mainly due to their impact on our
earnings. Such circumstances could trigger a need to modify or replace those loan agreements on
less favorable terms, which could adversely affect our flexibility, cash flow and results. There
can be no assurance that we would be able to modify or replace those loan agreements on
satisfactory terms or at all. If we were unable to accomplish those actions, our loan agreements
(which had outstanding balances totaling $2,937.6 million as of March 31, 2009) could become
immediately due and payable.
For further information on our financial liabilities, borrowings and commitments please see notes
26 and 27(ii) to our audited consolidated financial statements included in this annual report.
C. Research and Development, Patents and Licenses, Etc.
See Item 4. Information on the CompanyB. Business OverviewResearch and Development.
D. Trend Information
See Overview.
E. Off-Balance Sheet Arrangements
Ternium does not use off-balance sheet arrangements as such term is defined by applicable SEC
rules. However, as described above, Ternium has various off-balance sheet commitments to purchase
energy (gas, gas transportation
and steam for the production of electricity, entered into by Siderar). Off-balance sheet
commitments are discussed in note 27(ii) to our audited consolidated financial statements included
in this annual report.
80
F. Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2008, and the effect
such obligations are expected to have on our liquidity and cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
In millions of U.S. dollars |
|
as of December 31,2008 |
|
|
|
|
|
|
|
Less than 1 |
|
|
1-3 |
|
|
4-5 |
|
|
After 5 |
|
Contractual Obligations |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Borrowings(1) |
|
|
3,267.4 |
|
|
|
941.5 |
|
|
|
1,036.3 |
|
|
|
1,289.6 |
|
|
|
|
|
Estimated interest payments(2) |
|
|
116.9 |
|
|
|
53.3 |
|
|
|
48.5 |
|
|
|
15.1 |
|
|
|
|
|
Purchase Obligations(3) (4) |
|
|
2,496.2 |
|
|
|
420.9 |
|
|
|
749.2 |
|
|
|
641.0 |
|
|
|
685.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
|
5,880.5 |
|
|
|
1,415.7 |
|
|
|
1,834.0 |
|
|
|
1,945.7 |
|
|
|
685.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Borrowings are primarily bank borrowings with third parties. See Liquidity and Capital
ResourcesPrincipal Sources of FundingFinancial Liabilities. |
|
(2) |
|
Variable rates used in the projection are the ones settled in the current interest period and
are considered to be fixed over the years. |
|
(3) |
|
Includes contracts with TGN (gas transportation), Iberdrola (electricity), Tractebel
(electricity) and Corus (slabs). |
|
(4) |
|
Purchase obligations includes Ternium Procurements obligations under the off-take agreement
agreement with Corus to purchase approximately 0.5 million tons of slabs per year. This
agreement was terminated after December 31, 2008. For further
information, see Item 5. Operating and Financial Review
and ProspectsG. Recent DevelopmentsArbitration with
Corus. |
G. Recent Developments
On May 7, 2009, we completed the transfer of our entire 59.7% interest in Sidor to CVG. The
transfer was effected as a result of Venezuelas Decree Law 6058, which ordered that Sidor and its
subsidiaries and associated companies be transformed into state-owned enterprises and declared the
activities of such companies of public and social interest. While CVG had assumed operational
control of Sidor on July 12, 2008, Ternium had retained formal title over the shares until May 7,
2009. Ternium agreed to receive an aggregate amount of US$1.97 billion as compensation for its
Sidor shares. Of that amount, CVG paid US$400 million in cash on May 7, 2009. The balance was
divided in two tranches: the first tranche, of US$945 million, will be paid in six equal quarterly
installments (the first such installment being due on August 7, 2009), while the second tranche
will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based
on the increase of the WTI crude oil price over its May 6, 2009 level.
(b) |
|
Annual General Shareholders Meeting. |
On June 3, 2009, the Annual General Meeting of shareholders of the Company approved all resolutions
on its agenda. Among other resolutions adopted at the meeting, the shareholders approved the
consolidated financial statements and annual accounts for the year ended December 31, 2008;
re-elected Ubaldo Aguirre, Roberto Bonatti, Wilson Nélio Brumer, Marco Antônio Soares da Cunha
Castello Branco, Carlos Condorelli, Pedro Pablo Kuczynski, Adrian Lajous, Bruno Marchettini,
Gianfelice Mario Rocca, Paolo Rocca and Daniel Agustin Novegil as members of the board of directors
to serve until the next annual shareholders meeting (to be held in June 2010); and re-appointed
PricewaterhouseCoopers as Terniums independent auditors for the 2009 fiscal year.
In addition, the Annual General Meeting of shareholders resolved to authorize the Company and the
Companys subsidiaries to acquire shares of the Company, including shares represented by ADRs, at
such times and on such other terms and conditions as may be determined by the board of directors of
the Company or the board of directors or other governing body of the relevant Company subsidiary.
See Item 16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers for further
information.
81
The board of directors subsequently re-appointed Paolo Rocca as its chairman and Daniel Novegil as
Terniums chief executive officer, and confirmed Ubaldo Aguirre, Pedro Pablo Kuczynski and Adrián
Lajous as members of the boards audit committee, with Mr. Aguirre to continue chairing that
committee. All three members of the audit committee are independent directors, as defined under our
articles of association.
(c) Arbitration with Corus.
Grupo Imsa, together with Grupo Marcegaglia, Duferco International and Donkuk Steel were parties to a ten-year steel
slab off-take framework agreement with Corus UK Limited dated as of December 16, 2004, which was supplemented by
bilateral off-take agreements. Under the agreements, the off-takers were required, in the aggregate, to purchase
approximately 78% of the steel slab production of Corus Teeside facility in the North East of England, of which Grupo
Imsas share was 15.38%, or approximately 0.5 million tons per year. In addition, the offtakers were required to make,
in the aggregate and according to their respective pro rata shares, significant payments to Corus to finance capital
expenditures. In December 2007, all of Grupo Imsas rights and obligations under this contract were assigned to our
wholly-owned subsidiary Ternium Procurement S.A. On April 7, 2009, Ternium Procurement, together with the other
offtakers, declared the early termination of their respective off-take agreements with Corus pursuant to a provision
allowing the offtakers to terminate the agreements upon the occurrence of certain events specified in the off-take
framework agreement. Corus initially denied the occurrence of the alleged termination event and initiated an
arbitration proceeding against the offtakers and Ternium Mexico seeking damages arising out of the alleged wrongful
termination of the off-take agreements, which damages Corus has not quantified but has stated would exceed the USD150
million maximum aggregate cap on liability of the offtakers under the off-take framework agreement. In addition, Corus
threatened to submit to arbitration further claims in tort against the offtakers, and also threatened to submit such
claims against certain third-parties to such agreements, including the Company. The offtakers and Ternium Mexico, in
turn, denied Corus claims and brought counterclaims against Corus which, in the aggregate, would also be greater than
USD150 million. On May 12, 2009, Corus, by a letter from its lawyers, alleged that the offtakerss termination notice
amounted to a repudiatory breach of the agreements and stated that it accepted that the agreements had come to an
end and that it would no longer pursue a claim for specific performance in the arbitration; the claim for damages,
however, would be maintained. As of the date of this annual report, the arbitration proceeding has not yet concluded.
Item 6. Directors, Senior Management and Employees
|
A. |
|
Directors and Senior Management |
Board of Directors
The Companys articles of association provide for a board of directors consisting of a minimum of
five members (when the shares of the Company are listed on a regulated market, as they currently
are) and a maximum of fifteen. The board of directors is vested with the broadest powers to act on
behalf of the Company and accomplish or authorize all acts and transactions of management and
disposal that are within its corporate purpose and which are not specifically reserved in the
articles of association or by applicable law to the general shareholders meeting.
The board of directors is required to meet as often as required by the interests of the Company and
at least four times per year. A majority of the members of the board of directors in office
present or represented at each board of directors meeting constitutes a quorum, and resolutions
may be adopted by the vote of a majority of the directors present or represented. In case of a
tie, the chairman is entitled to cast the deciding vote.
Directors are elected at the annual ordinary general shareholders meeting to serve one-year
renewable terms, as determined by the general shareholders meeting. The general shareholders
meeting may dismiss all or any one member of the board of directors at any time, with or without
cause, by resolution passed by a simple majority vote.
The Companys current board of directors is composed of eleven directors, three of whom are
independent directors. Pursuant to the terms of a shareholders agreement, dated July 20, 2005,
between Usiminas and I.I.I.-Industrial Investments Inc., a wholly-owned subsidiary of San Faustín
organized in the Cayman Islands and the Companys direct controlling shareholder (I.I.I. CI),
Usiminas is entitled to designate two directors and I.I.I. CI is entitled to designate the chief
executive officer of the Company and seven directors (and, in the case of an increase in the total
number of directors, a majority of such directors), one of whom shall be the chairperson of the
board of directors. The shareholders agreement will remain in full force and effect so long as
Usiminas and I.I.I. CI each hold at least 5% of the shares of the Company or until it is terminated
by either of Usiminas or I.I.I. CI pursuant to its terms. Wilson Nélio Brumer and Marco Antônio
Soares da Cunha Castello Branco were nominated by Usiminas and appointed as directors pursuant to
this agreement.
In addition, on January 9, 2006, Tenaris and a wholly-owned subsidiary of San Faustín entered into
a shareholders agreement, pursuant to which such San Faustín subsidiary is required to take all
actions in its power to cause one of the members of the Companys board of directors to be one
nominated by Tenaris and any directors nominated by Tenaris only be removed pursuant to written
instructions by Tenaris. Tenaris and San Faustíns subsidiary also agreed to cause any vacancies on
the board of directors to be filled with new directors nominated by either Tenaris or the San
Faustín subsidiary, as applicable. On April 27, 2007, the San Faustín subsidiary assigned all of
its rights and obligations under the shareholers agreement to I.I.I. CI. The shareholders
agreement will remain in effect so long as each of the parties holds at least 5% of the shares of
the Company or until it is terminated by either Tenaris or I.I.I. CI pursuant to its terms. Carlos
A. Condorelli was nominated by Tenaris and appointed as a director pursuant to this agreement.
Under the Companys articles of association, an independent director is a director who:
|
(i) |
|
is not employed, and has not been employed in an executive capacity by the Company or
any of its subsidiaries within the five years preceding the ordinary general shareholders
meeting at which the candidate for the board of directors was voted upon; |
82
|
(ii) |
|
does not receive consulting, advisory or other compensatory fees from the Company or
any of its subsidiaries (other than fees received as a member of the board of directors of
any committee thereof and fees received as a member of the board of directors or other
governing body, or any committee thereof, of any of the Companys subsidiaries); |
|
|
(iii) |
|
is not a person who directly or indirectly controls the Company; |
|
|
(iv) |
|
does not have, and does not control a business entity that has, a material business
relationship with the Company, any of its subsidiaries or a person who directly or
indirectly controls the Company, if such material business relationship would reasonably
be expected to adversely affect the directors ability to properly discharge his or her
duties; |
|
|
(v) |
|
does not control, and is not and has not been, within the five years preceding the
ordinary general shareholders meeting at which the candidate for the board of directors
was voted upon, employed by a present or former internal or external auditor of the
Company, any of its subsidiaries or a person who directly or indirectly controls the
Company; and |
|
|
(vi) |
|
is not a spouse, parent, sibling or relative up to the third degree of, and does not
share a home with, any of the persons above described. |
Within the limits of applicable law, the board of directors of the Company may delegate to one or
more persons, whether or not members of the board of directors, the Companys day-to-day management
and the authority to represent the Company, provided that such delegation shall be subject to prior
authorization by the general shareholders meeting. On September 14, 2005, following the requisite
authorization at the general shareholders meeting, the board of directors delegated such
day-to-day management and authority to Daniel A. Novegil. On June 3, 2009, the Companys annual
general shareholders meeting re-elected Ubaldo Aguirre, Roberto Bonatti, Wilson Nélio Brumer, Marco
Antônio Soares da Cunha Castello Branco, Carlos Condorelli, Pedro Pablo Kuczynski, Adrian Lajous,
Bruno Marchettini, Gianfelice Mario Rocca, Paolo Rocca and Daniel Agustin Novegil as members of the
board of directors to serve until the next annual shareholders meeting, which will be held in June
2010. The board of directors subsequently re-appointed Paolo Rocca as its chairman and Daniel
Novegil as chief executive officer of the Company.
The following table sets forth the current members of the board of directors of the Company, their
respective offices on the board, their principal occupation, their years of service as board
members and their age.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years as |
|
Age at |
Name |
|
Position |
|
Principal Occupation |
|
Director |
|
December 31, 2008 |
Paolo Rocca(1)
|
|
Chairman
|
|
Chairman and CEO of Tenaris and
Chairman of Ternium
|
|
|
4 |
|
|
|
56 |
|
Marco Antônio Soares da
Cunha Castello Branco
|
|
Director
|
|
President-CEO of Usiminas
|
|
|
1 |
|
|
|
48 |
|
Ubaldo Jose Aguirre
|
|
Director
|
|
Managing Director of Aguirre,
Gonzalez, Marx & Asociados S.A.
|
|
|
3 |
|
|
|
60 |
|
Roberto Bonatti(1)
|
|
Director
|
|
President of San Faustín
|
|
|
4 |
|
|
|
59 |
|
Carlos Condorelli
|
|
Director
|
|
Member of the Board of Tenaris
|
|
|
4 |
|
|
|
57 |
|
Adrián Lajous
|
|
Director
|
|
Energy advisor at McKinsey &
Company
|
|
|
3 |
|
|
|
65 |
|
Wilson Nelio Brumer
|
|
Director
|
|
Chairman of the board of Usiminas
|
|
|
1 |
|
|
|
60 |
|
Bruno Marchettini
|
|
Director
|
|
Member of the board of San
Faustín and Siderar
|
|
|
3 |
|
|
|
67 |
|
Daniel Novegil
|
|
Director
|
|
CEO of the Company
|
|
|
4 |
|
|
|
56 |
|
Gianfelice Mario
Rocca(1)
|
|
Director
|
|
Chairman of the board of
directors of San Faustín
|
|
|
3 |
|
|
|
60 |
|
Pedro Pablo Kuczynski
|
|
Director
|
|
Partner of The Rohatyn Group
|
|
|
2 |
|
|
|
70 |
|
|
|
|
(1) |
|
Paolo Rocca and Gianfelice Rocca are brothers, and Roberto Bonatti is Paolo and Gianfelice
Roccas first cousin. |
83
Paolo Rocca. Mr. Rocca has served as the chairman of the Companys board of directors since
2005. He is a grandson of Agostino Rocca, founder of the Techint group, a group of companies
controlled by San Faustin. He is also chairman and chief executive officer of Tenaris and chairman
of the board of directors of Tubos de Acero de México, S.A. (Tamsa). In addition, he is a member
of the board of directors and vice president of San Faustín and a director of Techint Financial
Corporation N.V. Mr. Rocca is vice chairman of the World Steel Association and member of the
International Advisory Committee of NYSE Euronext (New York Stock Exchange). Mr. Rocca is an
Italian citizen.
Marco Antônio Soares da Cunha Castello Branco. Mr. Castello Branco has served as a director of
the Company since 2008. He currently serves as President-CEO of Usiminas, a position to which he
was appointed on April 29, 2008. He has held several positions within Mannesman (now Vallourec &
Mannesmann Tubes) including Commercial Director and Chairman of the Board of Directors. Mr.
Castello Branco is a Brazilian citizen.
Ubaldo Aguirre. Mr. Aguirre has served on the Companys board of directors since 2006. He
is a managing director of Aguirre, Gonzalez and Marx S.A., an Argentine investment banking firm,
and also serves as a member of the board of directors of Juan Minetti S.A., a subsidiary of Holcim,
the Swiss cement producer. Since 2005, he also serves as chairman of the board of directors of
Permasur S.A. and since 2000 as member of the board of directors of URS Argentina S.A. Mr. Aguirre
formerly served as director and chairman of the audit committee of Siderar. Mr. Aguirre began his
career at the World Bank in Washington, D.C. In addition, Mr. Aguirre has been a member of the
boards of each of Argentinas Central Bankwhere he was responsible for that countrys external
borrowing program and financial negotiationsBanco de la Nación Argentina and Banco Nacional de
Desarrollo. He also served as the Republic of Argentinas financial representative for Europe in
Geneva and negotiator on behalf of the Republic of Argentina with the Paris Club. Mr. Aguirre is an
Argentine citizen.
Roberto Bonatti. Mr. Bonatti has served as a director of the Company since 2005. He is a
grandson of Agostino Rocca. Throughout his career in the Techint group he has been involved
specifically in the engineering and construction and corporate sectors. He was first employed by
the Techint group in 1976, as deputy resident engineer in Venezuela. In 1984, he became a director
of San Faustín, and since 2001 he has served as its president. In addition, Mr. Bonatti currently
serves as president of Techint Compañía Técnica Internacional S.A.C.I. and Tecpetrol. He is also a
member of the board of directors of Tenaris, Siderca and Siderar. Mr. Bonatti is an Italian
citizen.
Carlos Condorelli. Mr. Condorelli has served as a director of the Company since 2005. He is
currently a member of the board of directors of Tenaris. He began his career within the Techint
group in 1975 as an analyst in the accounting and administration department of Siderar. He has held
several positions within Tenaris and other Techint group companies, including chief financial
officer of Tenaris, finance and administration director of Tamsa, and president of the board of
directors of Empresa Distribuidora La Plata S.A., an Argentine utilities company. Mr. Condorelli is
an Argentine citizen.
Adrián Lajous. Mr. Lajous has served as a director of the Company since 2006. Mr. Lajous
currently serves as the senior energy advisor to McKinsey & Company, chairman of the Oxford
Institute for Energy Studies, president of Petrométrica, S.C. and non-executive director of
Schlumberger, Ltd. and Trinity Industries Inc. Mr. Lajous began his career teaching economics at El
Colegio de México and in 1977 was appointed director general for energy at Mexicos Ministry of
Energy. Mr. Lajous joined Pemex in 1983, where he held a succession of key executive positions
including executive coordinator for international trade, corporate director of planning, corporate
director of operations and director of refining and marketing. From 1994 until 1999, he served as
chief executive officer of Pemex and chairman of the boards of the Pemex Group of operating
companies. Mr. Lajous is a Mexican citizen.
Wilson Nélio Brumer. Mr. Brumer has served as a director of the Company since 2008. He is
chairman of the board of directors of Usiminas, a position to which he was appointed on April 29,
2008. He was Secretary of State of Economic Development in the State of Minas Gerais, Brazil. He
also served as Chairman and Vice-Chairman of the Board of Directors of Companhia Vale Do Rio Doce,
Chairman of the Board of Directors of BHP Billiton in Brazil, and President of Acesita S.A.
Throughout his career, Mr. Brumer served as member of the Board of Directors of several Brazilian
companies and entities related to the steel industry. Mr. Brumer is a Brazilian citizen.
84
Bruno Marchettini. Mr. Marchettini has served on the Companys Board of Directors since
2006. Mr. Marchettini is senior advisor in technological matters for the Techint group. Mr.
Marchettini has retired from executive positions and is presently engaged as a consultant by
Siderar. Mr. Marchettini is a director of San Faustin and Techint Financial Corporation N.V. Mr.
Marchettini is an Italian citizen.
Daniel A. Novegil. Mr. Novegil has served as a director and chief executive officer of the
Company since 2005. Mr. Novegil joined Propulsora Siderurgica in 1978 and was appointed as its
general director in 1991. In 1993, following the merger of the privatized company Somisa with
Propulsora, he was appointed managing director of Siderar. In 1998, after the acquisition of Sidor,
Mr. Novegil was appointed chairman and chief executive officer of Sidor. In March 2003, Mr. Novegil
was designated executive vice-president of the Techint Flat and Long Steel Division, with executive
responsibilities over Siderar and Sidor. He became president of Siderar in May 2005. Mr. Novegil
is an Argentine citizen.
Gianfelice Mario Rocca. Mr. Rocca has served as a director of the Company since 2006. He is
a grandson of Agostino Rocca. He is chairman of the board of directors of San Faustín, a member of
the board of directors of Tenaris, president of the Humanitas Group, and president of the board of
directors of Techint Compagnia Tecnica Internazionale S.p.A. and of Tenova S.p.A. In addition, he
sits on the board of directors or executive committees of several companies, including Allianz
S.p.A, RCS Quotidiani and Buzzi Unicem. He is vice president of Confindustria, the leading
association of Italian industrialists. He is a member of the Advisory Board of Allianz Group, of
the Trilateral Commission and of the European Advisory Board of the Harvard Business School. Mr.
Rocca is an Italian citizen.
Pedro Pablo Kuczynski. Mr. Kuczynski has served as a member of the Companys Board of
Directors since 2007. He was Prime Minister of Peru in 2005-2006 and prior to that he was the
Minister of Economy and Finance from 2001. He was the Republic of Perus Minister of Energy and
Mines in 1980-82. He was president until 2001 of a private equity firm he founded in 1992 after
spending ten years as Chairman of First Boston International (today Credit Suisse) in New York.
Since 2007, he is Senior Advisor to the Rohatyn Group, a firm specializing in emerging markets. He
ran a bauxite mining company affiliated with Alcoa between 1977 and 1980. He began his career at
the World Bank in 1961 and was in the 1970s head of its Policy Planning Division, Chief Economist
for Latin America and Chief Economist of IFC. He was born in Peru in 1938 and educated in Peru and
at Oxford and Princeton. Mr. Kuczynski is a United States and Peruvian national.
Director Liability
Under Luxembourg law, a director may be liable to the Company for any damage caused by management
errors, such as wrongful acts committed during the execution of the mandate granted to them by the
Company, and to the Company, its shareholders and third parties in the event that the Company, its
shareholders, or third parties suffer a loss due to an infringement of either the Luxembourg
Company Law or the Companys articles of association. A shareholder may in certain circumstances
have rights to damages if a duty owed by the directors is breached.
Under Luxembourg law, any director having a conflict of interest in respect of a transaction
submitted for approval to the board of directors may not take part in the deliberations concerning
such transaction and must inform the board of such conflict. Subject to certain exceptions,
transactions in which any directors may have had an interest conflicting with that of the Company
must be reported at the next shareholders meeting follwing any such transaction.
The general shareholders meeting may dismiss all or any one member of the board of directors at any
time, with or without cause, by resolution passed by a simple majority vote, irrespective of the
number of shares present or represented at the meeting.
A director will not be liable for acts committed in accordance with a resolution if,
notwithstanding his presence at the meeting at which such a resolution was adopted, such director
advised the board of directors that he opposed the resolution and caused a record of his statement
of opposition to be included in the minutes of the meeting.
85
Causes of action against directors for damages may be initiated by the Company upon a resolution of
the shareholders passed by a simple majority vote, irrespective of the number of shares present or
represented at the meeting. Causes of action against directors who misappropriate corporate assets
(for example, by using corporate assets for their own benefit) or commit a breach of trust (for
example, by breaching their fiduciary duties to the Company) may be brought by any shareholder for
personal losses different from those of the Company. In general, claims must be brought within five
years from the occurrence of an action for which liability may apply, or in the case of fraud, from
the date the fraud is discovered.
It is customary in Luxembourg that the shareholders expressly discharge the members of the board of
directors from any liability arising out of or in connection with the exercise of their mandate
when approving the annual accounts of the Company at the annual shareholders meeting. However,
such discharge will not release the directors from liability for any damage caused by wrongful acts
committed during the execution of their mandate or due to an infringement of either the Luxembourg
Company Law or the Companys articles of association.
Auditors
The Companys articles of association require the appointment of at least one independent auditor
chosen from among the members of the Luxembourg Institute of Independent Auditors. Auditors are
appointed by the general shareholders meeting, on the audit committees recommendation, through a
resolution passed by a simple majority vote. Shareholders may determine the number and the term of
the office of the auditors at the ordinary general shareholders meeting, provided however that an
auditors term shall not exceed one year and that any auditor may be reappointed or dismissed by
the general shareholders meeting at any time, with or without cause. Luxembourg law does not allow
directors to serve concurrently as independent auditors.
PricewaterhouseCoopers (acting, in connection with the Companys annual accounts and annual
consolidated financial statements required under Luxembourg law, through PricewaterhouseCoopers
S.àr.l., Réviseur dentreprises, and, in connection with the Companys annual and interim
consolidated financial statements required under the laws of any other relevant jurisdiction,
through Price Waterhouse & Co. S.R.L.) are the Companys independent auditors for the year ending
December 31, 2008.
Senior Management
The following table sets forth certain information concerning our senior management:
|
|
|
|
|
|
|
|
|
Age at |
|
|
Name |
|
December 31, 2008 |
|
Position |
Daniel Novegil
|
|
|
56 |
|
|
Chief Executive Officer; Director |
Roberto Philipps
|
|
|
62 |
|
|
Chief Financial Officer |
Ricardo Prósperi
|
|
|
46 |
|
|
International Area Managing Director |
Julían Eguren
|
|
|
45 |
|
|
North Region Area Manager |
Martín Berardi
|
|
|
51 |
|
|
South Region Area Manager |
Oscar Montero Martínez
|
|
|
48 |
|
|
Planning and Operations General Director |
Luis Andreozzi
|
|
|
58 |
|
|
Engineering and Environment Director |
Miguel Punte
|
|
|
61 |
|
|
Human Resources Director |
Rubén Bocanera
|
|
|
52 |
|
|
Chief Information Officer |
Rubén Herrera
|
|
|
57 |
|
|
Quality and Product Director |
Daniel A. Novegil. Mr. Novegil has served as a director and chief executive officer of the
Company since 2005. Mr. Novegil joined Propulsora Siderurgica in 1978 and was appointed as its
general director in 1991. In 1993, following the merger of the privatized company Somisa with
Propulsora, he was appointed managing director of Siderar. In 1998, after the acquisition of Sidor,
Mr. Novegil was appointed chairman and chief executive officer of Sidor. In March 2003, Mr. Novegil
was designated executive vice-president of the Techint Flat and Long Steel Division, with executive
responsibilities over Siderar and Sidor. He became president of Siderar in May 2005. Mr. Novegil
is an Argentine citizen.
86
Roberto Philipps. Mr. Philipps has served as the Companys Chief Financial Officer since
2005. He joined Siderar in 1988 and was chief financial officer of Siderar and chief financial
officer of Amazonia. He oversaw the restructurings of Sidors debt in 2000 and 2003 and the
restructuring of Siderars debt in 2002. From 2003 to August 2005, he was the chief executive
officer of TGN. He is also past president of the Argentine Financial Executives Institute (IAEF).
Mr. Philipps is an Argentine citizen.
Ricardo Prósperi. Mr. Prósperi is our International Area Managing Director. From February 2007
to July 2008, he was chief executive officer of Sidor. He has held several other executive
positions since joining the Techint group in 1985, such as Commercial Director of Siderar, Exports
Manager of Sidor and Sales Manager of Siderar. He is also a director of Centro de Industriales
Siderurgicos de Argentina (CIS), the Instituto Venezolano de Siderurgia (Venezuelan Steel
Institute) (IVES), and the Latin-American Institute of Iron and Steel (ILAFA). Mr. Prósperi is
an Argentine citizen.
Martín Berardi. Mr. Berardi is our South Region Area Manager. He began his career with the
Techint group in 1980 as a trainee in Propulsora Siderúrgica. He has held several positions within
the Techint group including in Propulsora Siderúrgica, Siat S.A.I.C. and Siderca. He served as
managing director of Siat (1992-1995), managing director of Tamsa (1995-2000), president and chief
executive officer of Sidor (2000-2004) and became managing director of Siderar in October 2004, a
position which he held until he assumed his present position at the Company. He was president of
the IVES between 2002 and 2004, and, since 2004, he is vice-president of CIS. Mr. Berardi is an
Argentine citizen.
Julián Eguren. Mr. Eguren is our North Region Area Manager. Since January 2008, he is chief
executive officer of Ternium Mexico. Prior to that, he served as chief executive officer of Sidor.
He has held several other executive positions since joining the Techint group in 1987, such as
commercial director of Sidor, chief executive officer of Tavsa, Tubos de Acero de Venezuela S.A.,
general manager of Socominter (Venezuela), economic planning manager and treasurer of Tamsa and
commercial planning manager of Siderca. He is also a director of IVES, ILAFA and Matesi, Materiales
Siderúrgicos S.A. (Matesi), and president of CAVEARG (Venezuelan Argentinean Chamber). Mr. Eguren
is an Argentine citizen.
Oscar Montero Martínez. Mr. Montero is our Planning and Operations General Director. He
began his career with the Techint group in 1984 as a commercial analyst in Siderar. Since then, he
has held several positions within Siderar in the planning, commercial and procurement areas. In
1998, he assumed the position of strategic planning director of Sidor. Since 2005, he serves as
planning and operations general director of the Company. Mr. Montero is an Argentine citizen.
Luis Andreozzi. Mr. Andreozzi is our Engineering and Environment Director. He began his
career with the Techint group in 1968 as a trainee in Siderca. He has held several positions within
other Techint group companies, including Techint Engineering Company, or TEING, Siderar and Sidor.
Most recently, he served as construction manager of TEING (1986-1992), construction manager of
Siderar (1992-1998), engineering and environment general manager of Sidor (1998-2004) and
technology manager of the Techint Flat and Long Steel Division, a position he held until he assumed
his present position at the Company. Mr. Andreozzi is an Italian citizen.
Miguel Punte. Mr. Punte is our Human Resources Director. In 1970, Mr. Punte joined Siderar,
where he held several positions within the human resources department. In 1984, he joined Finma
S.A., or Finma, an affiliate of the Techint group that provides human resources services to Techint
group companies. At Finma, Mr. Punte served first as human resources manager and later as human
resources director until 2005, when he was appointed human resources director of Siderar, a
position that he held until he assumed his present position at the Company. Mr. Punte is an
Argentine citizen.
Rubén Bocanera. Mr. Bocanera is our Chief Information Officer. He joined the Techint group
in 1983 as a junior analyst with Siderca. Since then, he has held several positions in different
Techint group companies, including project manager and automation and control manager of Siderca
and Sidor, and chief information officer of Siderar. Since 2002, he is responsible for the
information technology unit of the Techint Flat Steel Division. Mr. Bocanera is an Argentine
citizen.
87
Rubén Herrera. Mr. Herrera is our Quality and Product Director since July 1, 2008. He is also
Quality and Product Director of Ternium Mexico since 2007. Since joining the Techint group in 1990,
he has held several other executive positions, including Mechanical Metallurgical Department Chief
in Sidercas Industrial Research Center, Product Manager of Siderar, and Quality and Product
Director of Sidor. Mr. Herrera is an Argentine citizen.
The compensation of the Companys directors is approved annually at the ordinary general
shareholders meeting. For the year ended December 31, 2008, each member of the board of directors
received an amount of USD70 thousand as compensation for such postion, and the chairman of the
board received, further, an additional fee of USD180 thousand. In addition, the directors who were
members of the audit committee each received an additional fee of USD50 thousand, and the chairman
of such committee received, further, an additional fee of USD10 thousand.
The aggregate compensation earned by directors and executive officers during 2008 amounted to
approximately USD10,955 thousand.
On January 1, 2007, Ternium adopted an employee retention and long term incentive program. Pursuant
to this program, certain senior executives may be granted a number of units, with the value of such
units being determined based on the Companys equity value (excluding minority interest.) Each unit
entitles the holder thereof to receive cash amounts equal to the amount of dividends paid from time
to time to the Companys shareholders. Units vest over a four-year period and we will redeem vested
units on the tenth anniversary of the grant date or when the employee ceases to be employed by us,
whichever happens first; provided, however, that we are required to repurchase the units at full
value (regardless of vesting) within ten business days of the death or permanent disability of the
relevant beneficiary. Compensation under this program is not expected to exceed 35% of the total
annual compensation of the beneficiaries. As of December 31, 2008, the outstanding liability
corresponding to the program amounts to USD5.8 million, and the total value of the units granted to
date under the program is USD 4.8 million.
See Directors and Senior Management.
There are no service contracts between any director and Ternium that provide for benefits upon
termination of employment.
Audit Committee
On June 3, 2009, the Companys board of directors re-appointed Ubaldo Aguirre, Adrián Lajous and
Pedro Pablo Kuczynski as members of its audit committee, with Mr. Aguirre to continue chairing that
committee. All three members of the audit committee are independent directors as defined under the
Companys articles of association. The members of the audit committee are not eligible to
participate in any incentive compensation plan for employees of the Company or any of its
subsidiaries.
Under our articles of association and the audit committee charter, the audit committee is required,
among other things, to report to the board of directors on its activity and the adequacy of the
Companys systems of internal control over financial reporting. In addition, the charter of the
audit committee sets forth, among other things, the audit committees purpose and responsibilities.
The audit committee assists the board of directors in its oversight responsibilities with respect
to the integrity of the Companys financial statements and is responsible for making
recommendations regarding the appointment, dismissal, compensation, retention and oversight of, and
assess the independence of the Companys independent auditors (see Item 16.C for additional
information about the audit committees procedures with respect to our independent auditors). The
audit committee also performs other duties imposed upon it by applicable laws and regulations of
the regulated market or markets on which the shares of the Company are listed, as well as any other
duty entrusted to it by the Companys board of directors.
88
In addition, the audit committee is required by the Companys articles of association to review
Material Transactions, as such term is defined by the Companys articles of association, to be
entered into by the Company or its subsidiaries with Related Parties, as such term is defined by
the Companys articles of association (other than transactions reviewed and approved by the
independent members of the board of directors of the Company or through any other procedures that
the board of directors may deem substantially equivalent to the foregoing) , in order to determine
whether their terms are consistent with market conditions or are otherwise fair to the Company
and/or its subsidiaries. In the case of Material Transactions entered into by the Companys
subsidiaries with Related Parties, the Companys audit committee will review those transactions
entered into by those subsidiaries whose boards of directors do not have independent members, or
that have not been reviewed and approved by such independent directors or through any other
procedures that the board of directors of the Company may deem substantially equivalent to the
foregoing.
Under the Companys articles of association, as supplemented by the audit committees charter:
|
|
|
a Material Transaction is (i) any transaction with or involving a Related Party
(x) with an individual value equal to or greater than ten million U.S. dollars or (y)
with an individual value lower than ten million U.S. dollars, when the aggregate sum of
any series of transactions reflected in the financial statements of the four fiscal
quarters of the Company preceding the date of determination (excluding any transactions
that were reviewed and approved by any of the audit committee of the Company, or any of
its subsidiaries, the board of directors of the Company, the independent members of the
board of directors or other governing body of any subsidiary of the Company, or a
majority of the members of the board of directors or similar governing body of any
subsidiary of the Company that were not nominated by or at the request of the Company or
any entity that directly or indirectly controls or is under common control with the
Company) exceeds 1.5% of the Companys consolidated net sales made in the fiscal year
preceding the year on which the determination is made; or (ii) any corporate
reorganization transaction (including a merger, spin-off or bulk transfer of a business)
involving the Company or any of its direct or indirect subsidiaries for the benefit of
or involving a Related Party; and |
|
|
|
|
a Related Party is, in relation to the Company or its direct or indirect
subsidiaries, any of the following persons: (i) a member of the board of directors of
the Company or of the board of directors or other governing body of any of the Companys
subsidiaries; (ii) any member of the board of directors or other governing body of an
entity that directly or indirectly controls the Company; (iii) any entity that directly
or indirectly controls or is under common control with the Company (other than the
Companys subsidiaries); (iv) any entity controlled directly or indirectly by any member
of the board of directors of the Company, or of the board of directors or other
governing body of any subsidiary of the Company; and (v) any spouses, parents, siblings
or relatives up to the third degree of, and any person that shares a home with, any
person referred to in (i) or (ii). |
The audit committee has the power (to the maximum extent permitted by applicable laws) to request
that the Company or relevant Subsidiary provide any information necessary for it to review any
Material Transaction. A Related Party transaction shall not be entered into unless (i) the
circumstances underlying the proposed transaction justify that it be entered into before it can be
reviewed by the Companys audit committee or approved by the board of directors and (ii) the
Related Party agrees to unwind the transaction if the Companys audit committee or board of
directors does not approve it.
The audit committee has the authority to conduct any investigation appropriate to fulfilling its
responsibilities, and has direct access to the Companys internal and external auditors as well as
Terniums management and employees and, subject to applicable laws, its subsidiaries.
89
The following table shows the number of persons employed by Ternium and its consolidated
subsidiaries as at the end of each of the past three financial years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Argentina |
|
|
5,609 |
|
|
|
5,243 |
|
|
|
5,072 |
|
Mexico |
|
|
9,456 |
|
|
|
9,570 |
|
|
|
7,469 |
|
Venezuela |
|
|
|
|
|
|
5,537 |
|
|
|
5,660 |
|
Other |
|
|
586 |
|
|
|
3,295 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
Total employees(1) |
|
|
15,651 |
|
|
|
23,645 |
|
|
|
18,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
It does not include 1,255 outsourced employees in 2008, 3,894 outsourced employees in 2007,
and 3,983 outsourced employees in 2006. |
At December 31, 2008, the number of persons employed by Ternium was 15,651. During 2008, the
aggregate number of employees decreased compared to 2007, mainly due to the de-consolidation of
Sidor as from April 1, 2008, and the sale of certain non-core U.S. assets in February of that year.
Total employees increased in 2007 compared to 2006 mainly due to Grupo Imsa transaction.
Argentina
Most of Siderars employees are members of the Argentine steelworkers union (the Unión Obrera
Metalúrgica de la República Argentina, or UOM) and are are covered by a collective agreement that
includes all workers in the Argentine steel industry. The employees are also covered by certain
complementary collective agreements between Siderar and the UOM that define specific issues related
to any plant in particular (or Siderar as a whole), such as working structures, salary levels
related to performance, productivity, production quantity and quality and the results of Siderar.
These agreements are subject to periodic modification according to changing circumstances and are
updated in relation to competitiveness, quality, security and efficiency goals.
As part of the privatization process in 1992, 20% of Siderars shares were sold to former employees
of state-owned Somisa under the Programa de Propiedad Participada (the Employee Stock Ownership
Plan). For further information see Item 4. Information on the CompanyC. Organizational
StructureSubsidiariesSiderar.
Many foremen of Siderar are affiliated with the Asociación de Supervisores de Industria
Metalmecánica de la República Argentina (ASIMRA), the union of supervisors of different
activities in the metal manufacturing industry. ASIMRA-affiliated employees are subject to an
agreement signed with Siderar that establishes regulations relating to salaries, working
organization, absences, vacations, benefits and labor relations.
In the last five years, salaries in nominal terms have been increasing mainly due to a revaluation
of the Argentine peso against the U.S. dollar and increases in salaries resulting from private
agreements and government regulation. On March 31, 2009, agreement on salaries signed on June 5,
2008, between the employers entity representing steel companies in the collective bargaining
including Siderar and the steelworkers unions expired. Negotiations between the parties are
still underway.
We believe that Siderar maintains good relations with its unions, and the measures that it has
taken in order to make Siderar more competitive have not resulted in significant labor unrest. In
early 2009, following a decrease in the level of activity since the last quarter of 2008 due to the
global economic downturn, Siderar downsized contractor and subcontractor activities and temporary personnel,
triggering adverse reactions from the construction workers union and the steelworkers union. More
recently, negotiations between Siderar and the steelworkers union regarding the annual bonuses
related to results have been in progress for over three months, and the unions have called for work
stoppages and other measures. These events have not had a significant impact on Siderars
operations.
Under Argentine law, Siderar is required to pay an amount equal to up to 23% of its employees base
salaries towards the social security system. Siderar must also withhold an additional percentage
from salaries for contribution to such funds up to a certain amount. As from March 2009, the
maximum salary from which social security contributions are withheld is fixed at ARP8,711.81 (Law
n° 26417 and its regulations).
90
Under Argentine labor laws, when an employee is dismissed without cause, an employer must pay him
severance equal to one month of its best, monthly and regular salary calculated as detailed
below per each year of service or
fraction of more than three months. In principle, the monthly and regular wage used as basis of
calculation of severance may not be higher than three times the average wage under the
collective bargaining agreement applicable in the relevant company, subject to certain limitations..
As of March 31, 2009, the average monthly salary of employees included in the steel industry
collective bargaining agreement was ARP 5,668.17 and the average monthly salary of employees
included in the supervisors collective bargaining agreement was ARP 12,740.19. For employees not
included in any collective bargaining agreement, the cap applicable to the basis of calculation
will be the most favorable one. In relation to these personnel, Siderar has a program in place that
provides certain benefits in case of employment termination due to certain reasons, in addition to
the severance payment provided by law.
Mexico
In Mexico, approximately 63% of Ternium employees are unionized, and the rest are not.
Approximately 45% of Mexicos unionized workers are members of FENASA (Federación Nacional de
Asociaciones Sindicales Autónomas), the national federation of autonomous union associations, and 43% are members of FNSI ( Federación Nacional de Sindicatos Independientes), the
national federation of independent unions. The unionized employees of Peña Colorada, however, are
members of Sindicato de Trabajadores Mineros, Metalúrgicos y Similares de la República Mexicana.
The applicable collective bargaining agreements are negotiated every two years and salary
adjustments are made on an annual basis. Despite some minor social and union problems, Terniums
subsidiaries maintain good relations with its labor force in Mexico and has never experienced a
strike or work stoppage.
Under Mexican law, Terniums Mexican subsidiaries are required to pay their employees an annual
benefit of approximately 10% of pre-tax income, calculated using a methodology similar to the
methodology used for the calculation of the income tax.
To our knowledge, the total number of shares of the Company (including in the form of ADSs) owned
by our directors and executive officers as of March 31, 2009 was 1,070,980, which represents 0.05%
of our issued and outstanding shares. The following table provides information regarding share
ownership by our officers and directors.
|
|
|
|
|
Director or Officer |
|
Number of Shares Held |
|
Adrián Lajous |
|
|
740,560 |
|
Daniel Novegil |
|
|
243,000 |
|
Roberto Philipps |
|
|
82,600 |
|
Rubén Herrera |
|
|
3,320 |
|
Ricardo Prósperi |
|
|
1,500 |
|
|
|
|
|
Total |
|
|
1,070,980 |
|
|
|
|
|
Item 7. Major Shareholders and Related Party Transactions
The following table shows the beneficial ownership of our shares, as of March 31, 2009, by (1) our
principal shareholders (persons or entities that own beneficially 5% or more of the Companys
shares), (2) our directors and executive officers as a group and (3) non-affiliated public
shareholders.
91
|
|
|
|
|
|
|
|
|
Identity of Person or Group |
|
Number |
|
|
Percent |
|
I.I.I. CI(1) |
|
|
1,215,655,232 |
|
|
|
60.64 |
% |
Tenaris(2) |
|
|
229,713,194 |
|
|
|
11.46 |
% |
Usiminas(3) |
|
|
285,731,726 |
|
|
|
14.25 |
% |
Directors and executive officers as a group |
|
|
1,070,980 |
|
|
|
0.05 |
% |
Public |
|
|
272,572,310 |
|
|
|
13.60 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
I.I.I. CI is controlled by San Faustín. Rocca & Partners controls a significant portion of
the voting power of San Faustín and has the ability to influence matters affecting, or
submitted to a vote of, the shareholders of San Faustín. |
|
(2) |
|
Tenaris is controlled by I.I.I. CI, which is controlled by San Faustín. Rocca & Partners
controls a significant portion of the voting power of San Faustín and has the ability to
influence matters affecting, or submitted to a vote of, the shareholders of San Faustín. |
|
(3) |
|
Usiminas holds its shares through a wholly-owned subsidiary. |
As of March 31, 2009, 25,726,536 ADSs (representing 257,265,360 shares of common stock, or 12.83%
of all outstanding shares of common stock of the Company) were registered in the name of 88 holders
resident in the United States.
The voting rights of our principal shareholders do not differ from the voting rights of other
shareholders. We are not aware of any arrangement which may at a later date result in a change of
control of the Company.
|
B. |
|
Related Party Transactions |
Ternium is a party to several related party transactions as described below. Material related party
transactions are subject to the review of the audit committee of the Companys board of directors
and the requirements of Luxembourg law. For further detail on the approval process for related
party transactions, see Item 6.C. Directors, Senior Management and EmployeesBoard
PracticesAuditCommittee.
Grupo Imsa became a subsidiary of the Company on July 26, 2007, and consolidation of its results
began on that date. Accordingly, transactions between Grupo Imsa and related parties for the year
2007 are only shown as related-party transactions for the Company to the extent attributable to
periods beginning on or after such consolidation date.
As discussed elsewhere in this annual report, as from April 1, 2008, the Company ceased
consolidating Sidors results of operations and cash flows and classified its investment in Sidor
as an available-for-sale financial asset, with Sidors results and cash flows during each period
prior to April 1, 2008 being presented as discontinued operations. Consequentely, transactions
between Sidor and related parties for periods prior to the de-consolidation of Sidor are shown
separately. For more information, see note 29 to our audited consolidated financial statements
included elsewhere in this annual report and Item 4. Information on the CompanyA. History and
Development of the CompanySidor Nationalization Process.
Purchases of Raw Materials
In the ordinary course of business, Ternium buys raw materials and other production inputs from
subsidiaries of Tenaris. These purchases are made on similar terms and conditions to those
purchases made by the Ternium companies from unrelated third parties. These transactions include:
|
|
|
purchase of ferrous scrap and other raw material, which amounted to USD28.8 million in
2008, USD19.7 million in 2007 and USD16.8 million in 2006. |
|
|
|
|
purchase of steam and operational services from the Argentine electric power generating
facility of Siderca for Siderar in San Nicolás. These purchases amounted to USD22.3 million
in 2008, USD8.1 million in 2007 and USD6.4 million in 2006. The 2008 amount includes an
aggregate liability to Siderca of USD10,980,987, which resulted from the renegotiation of
prices for steam purchased during the period from February 2003 to October 2008, following
the forced pesification of the long-term steam sales agreement between Siderar and
Siderca to Argentine pesos at a one-to-one U.S. dollar to Argentine peso exchange rate in
2002. |
92
Sales of Steel Products and Raw Materials
In the ordinary course of business, Ternium sells flat steel products, and raw materials to
subsidiaries of Tenaris. These transactions include:
|
|
|
Sales of flat steel products to be used in the production of welded pipes and
accessories, which amounted to USD 91.6 million in 2008, USD36.6 million in 2007 and
USD35.9 million in 2006. |
|
|
|
|
Sales of pig iron, DRI, scrap, pellets and other raw materials to be used in the
production of seamless pipes, which amounted to USD16.8 million in 2008, USD11.8 million in
2007 and USD23.7 million in 2006. |
In certain circumstances, Ternium sells steel products to other companies in the Techint group.
These sales amounted to USD0.1 million in 2008, USD0.4 million in 2007 and USD0.6 million in 2006.
All these sales are made on similar terms and conditions to those sales made by Ternium to
unrelated third parties.
Purchase Agency Services
Until September 2006, Tenaris provided purchase agency services to us through its wholly-owned
subsidiary Exiros. In October 2006, we acquired a 50% interest in Exiros, while Tenaris retained
the remaining 50%. Now as a company jointly owned by the Ternium and Tenaris, Exiros continues
acting as purchase agent for the Company, Tenaris and their respective subsidiaries.
In connection with Exiros services, Ternium paid fees amounting to USD24.2 million in 2008,
USD17.8 million in 2007 and USD10.6 million in 2006.
Supply of Natural Gas
Siderars supplies of natural gas for operations are arranged with Tecpetrol, TGN, Litoral Gas and
Energy Consulting Services. Tecpetrol is a Techint group company engaged in oil and gas exploration
and production and has rights to various oil and gas fields in Argentina and elsewhere in Latin
America. TGN operates two major pipelines in Argentina connecting the major gas basins of Neuquén
and Noroeste-Bolivia to the major consumption centers in Argentina. Litoral Gas is a company that
distributes gas in the Province of Santa Fe and in the northeastern section of the Province of
Buenos Aires. Energy Consulting Services is a company engaged in energy and management consulting,
representing one of the major and most reliable natural gas traders in Argentina. The Techint group
holds significant but non-controlling interests in TGN, Litoral Gas and Energy Consulting Services.
In March 2003, Siderar entered into an agreement with Tecpetrol under which Siderar paid USD17.3
million for the advance purchase of a total of 725 million cubic meters (up to 400 thousand daily
cubic meters) of natural gas to be delivered over a period of 5 years. In May 2007, Tecpetrol
canceled the contract pursuant to a termination clause that allowed any party to terminate the
contract after the USD17.3 million paid for the advance purchase of natural gas were exhausted, and
continues to supply gas at spot prices and on spot terms and conditions. In all the cases, prices
charged by Tecpetrol are equivalent to or more competitive than those charged by Repsol YPF,
Siderars principal gas supplier. Tecpetrols sales to Siderar amounted to USD1.3 million in 2008,
USD7.1 million in 2007 and USD8.9 million in 2006.
TGN charges Siderar a price to transport its natural gas supplies that is equivalent on a
comparable basis to prices paid by other industrial users. The Argentine government regulates the
general framework under which TGN operates and prices its services. TGNs sales to Ternium amounted
to USD9.6 million in 2008, USD10.7 million in 2007 and USD4.0 million in 2006.
Litoral Gas distributes gas to Siderars northern plants. Litoral Gas sales to Ternium totaled USD
0.6 million in 2008, USD0.6 million in 2007 and USD0.7 million in 2006.
93
Energy Consulting Services provides Siderar with natural gas. Energy Consulting Services sales
amounted to USD0.03 million in 2008, USD0.9 million in 2007 and USD1.4 million in 2006.
Provision of Engineering and Labor Services
Ternium contracts with certain Techint group companies engineering, construction, specialized labor
and supervision services for civil and electromechanical works and non-specialist manual labor
services, such as cleaning, general maintenance and handling of by-products. These services can
usually be provided by other Techint group companies at more competitive prices than if Ternium
performed them and are contracted out at market rates. Fees accrued for these services amounted to
USD162.1 million in 2008, USD110.0 million in 2007 and USD116.8 million in 2006.
Sales and Purchases of Other Products and Services
Ternium entered into other transactions with Techint group companies. The most important ones
include:
|
|
|
purchase of plant equipment and spare parts from Tenova S.p.A. (formerly Techint
Compagnia Tecnica Internazionale) and other related companies, which amounted to USD5.2
million in 2008, USD9.6 million in 2007 and USD11.8 million in 2006. |
|
|
|
|
purchases of steel products from Tenariss subsidiaries, which amounted to USD0.8
million in 2008, USD0.3 million in 2007 and USD3.3 million in 2006. |
|
|
|
|
in July 2006, Ternium entered into annual contracts with Information Systems &
Technologies, a subsidiary of Tenaris, for the provision of technology and information
services. Since October 2008, these services have been provided by Siderca. Fees paid
under this contract amounted to USD1.0 million in 2008, USD2.9 million in 2007 and USD1.6
million in 2006. |
Financial Operations and Administrative Services
In order to finance the acquisition of Hylsamex, Ternium entered into certain subordinated
convertible loans with related parties. Interest paid on those loans amounted to USD1.8 million in
2006.
Finma S.A., a company owned by various Techint group companies, provides administrative and legal
support services to Techint group companies, including Siderar. In August 2006, Finma was
reorganized and Siderar acquired 33.33% of its share capital. Fees accrued under this agreement
amounted to USD8.6 million in 2008, USD6.5 million in 2007 and USD3.7 million in 2006.
Other Transactions
During 2008, Ternium acquired office space in Buenos Aires from Santa María S.A.I.F., a subsidiary
of San Faustin, for an amount of USD0.4 million. In 2007, Ternium acquired office space in Buenos
Aires from Santa María S.A.I.F. for an amount of USD3.8 million and sold office space in Buenos
Aires to Tenaris for an amount of USD2.6 million.
Ternium sold welded steel pipes to Tenaris as part of orders to a Tenaris customer for an amount of
USD0.5 million in 2008 and USD1.6 million in 2007.
Ternium Mexico earned royalties and technical assistance fees in respect of licensed technology to
Matesi. These royalties and fees amounted to USD0.5 million in the first quarter of 2008, USD 0.5
million in 2007 and USD1.6 million in 2006.
In the ordinary course of business, from time to time, Ternium carries out other transactions and
enters into other arrangements with Techint group companies, none of which are believed to be
material.
94
Transactions between Sidor and related parties prior to April 1, 2008
Purchases of Raw Materials. Sidor bought ferrous scrap from a subsidiary of Tenaris in Venezuela
for an amount of USD 0.5 million in the first quarter of 2008, USD3.0 million during 2007 and
USD2.4 million during 2006.
Sales of Steel Products and Raw Materials. Sidor sold flat steel products, steel bars and raw
materials to subsidiaries of Tenaris. These transactions included:
|
|
|
sales of flat steel products to be used in the production of welded pipes and
accessories, which amounted to USD10.0 million in the first quarter of 2008 and USD34.8
million in 2007. |
|
|
|
|
sales of steel bars to be used in the production of seamless pipes, which amounted to
USD4.6 million in the first quarter of 2008, USD45.8 million in 2007 and USD30.5 million in
2006. |
Transactions with Matesi. Sidor established Matesi jointly with a subsidiary of Tenaris to operate
an HBI production facility in Venezuela. As of December 31, 2008, Sidor held 49.8% of Matesi, while
Tenaris held the remaining 50.2%. Transactions associated with this operation included:
|
|
|
purchases of HBI pursuant to an off-take agreement, which amounted to USD7.9 million in
the first quarter of 2008, USD49.4 million in 2007 and USD77.3 million in 2006. The
agreement establishes that Matesi is required to sell to Sidor, on a take-or-pay basis,
29.9% of Matesis HBI production, or up to 49.8% at the election of Sidor. |
|
|
|
|
during 2004, Sidor entered into a management assistance agreement with Matesi. As part
of this agreement, Sidor received fees from Matesi totaling USD0.1 million in the first
quarter 2008, USD0.7 million in 2007 and USD1.1 million in 2006, related to the provision
of managerial services. |
|
|
|
|
as part of the investment agreement to finance the acquisition of Matesis assets and
its start-up, in July 2004 Sidor granted a loan to Matesi for an outstanding amount at
March 31, 2008, of USD 26.8 million. This loan bears interest at a rate of LIBOR plus 2%.
Interest earned on this loan amounted to USD0.5 million during the first quarter of 2008,
USD2.9 million in 2007 and USD3.6 million in 2006. |
|
|
|
|
during 2006, Sidor entered into a Service Agreement with Matesi under which Sidor
recycles by-products form Matesis operations into raw materials. Sidor provided services
to Matesi for an amount of USD0.9 million in 2007 and USD1.5 million in 2006. |
|
|
|
|
during 2007, Sidor entered into a Service Agreement with Matesi under which Matesi
recycles pellets from Sidor into HBI. Sidor paid USD4.5 million in the first quarter of
2008 and USD2.4 million in 2007 pursuant to this agreement. |
Provision of Engineering and Labor Services. Sidor contracted with certain Techint group companies
engineering, construction, specialized labor and supervision services for civil and
electromechanical works and non-specialist manual labor services, such as cleaning, general
maintenance and handling of by-products. Fees accrued for these services amounted to UDS 10.7
million in the first quarter of 2008, USD28.3 million in 2007 and USD 19.1 million in 2006.
Sales and Purchases of Other Products and Services. Sidor entered into other transactions with
Techint group companies, the most important of which was the purchase of plant equipment and spare
parts from Tenova S.p.A. (formerly Techint Compagnia Tecnica Internazionale) and other related
companies, which amounted to USD5.9 million in the first quarter of 2008, USD17.1 million in 2007
and USD19.8 million in 2006. In the ordinary course of business, from time to time prior to April
1, 2008, Sidor carried out other transactions and entered into other arrangements with Techint
group companies, none of which are believed to have been material.
95
|
C. |
|
Interest of Experts and Counsel |
Not applicable.
Item 8. Financial Information
|
A. |
|
Consolidated Statements and Other Financial Information |
See Item 18 and pages F-1 through F-59 for our audited consolidated financial statements.
Legal Proceedings
Ternium is involved in litigation arising from time to time in the ordinary course of business.
Based on managements assessment and the advice of legal counsel, it is not anticipated that the
ultimate resolution of existing litigation will result in amounts in excess of recorded provisions
that would be material to Terniums consolidated financial position or results of operations.
Tax matters relating to Siderar
The Argentine tax authority, the Administración Federal de Ingresos Públicos, or the AFIP, has
challenged the income tax treatment of certain disbursements that Siderar has treated as expenses
necessary to maintain industrial installations, which as such should be deducted in the year in
which they take place. The AFIP considered the treatment given by Siderar to these expenses to be
incorrect and that they should be treated as investments or improvements that must be capitalized
and, therefore, the AFIP made a reassessment of income tax due on a nominal tax basis plus fines
and interest in fiscal years 1995 to 1999 amounting to approximately USD21.7 million.
Siderar appealed these assessments before the Argentine Tax Court. On April 13, 2005, Siderar was
notified of a ruling issued by the Argentine Tax Court reducing the assessments made by the AFIP
for fiscal years 1995 and 1996 by USD14.1 million and instructing that the taxes be recalculated in
accordance with this ruling. Siderar recorded a provision amounting to USD4.7 million as of
December 31, 2008, as management of the Company considers there is a probable outflow of benefits.
The ruling issued by the Argentine Tax Court regarding fiscal years 1995 and 1996 has been appealed
by both AFIP and Siderar, but Siderar was required to pay the amounts (capital and interest) due to
the AFIP pursuant to this ruling even if, at that time, Siderars appeal had not been resolved. The
Argentine Tax Court approved the recalculation amounts and in December 2006 Siderar paid USD0.1
million. AFIP has subsequently appealed the Argentine Tax Courts approval of the amount.
For
information on legal proceedings commenced after December 31,
2008, see Item 5. Operating and Financial Review and
ProspectsG. Recent DevelopmentsArbitration with Corus.
96
Dividend Policy
We do not have, and have no current plans to establish, a formal dividend policy governing the
amount and payment of dividends or other distributions. The amount and payment of dividends will be
determined by a simple majority vote at a general shareholders meeting, typically, but not
necessarily, based on the recommendation of the Companys board
of directors. All shares of the Companys capital stock
rank pari passu with respect to the payment of dividends.
On June 4, 2008, the Companys shareholders approved a dividend of USD0.05 per share (USD0.50 per
ADS), or an aggregate of approximately USD100.2 million. The Company paid the dividend on June 12,
2008.
On June 6, 2007, the Companys shareholders approved a dividend of USD0.05 per share (USD0.50 per
ADS), or an aggregate of approximately USD100.2 million. The Company paid the dividend on June 12,
2007. This was the first dividend distribution made by the Company since its formation.
We conduct all of our operations through subsidiaries and, accordingly, our main source of cash to
pay dividends is the dividends received from our subsidiaries. See Item 3. Key InformationD.
Risk FactorsRisks Relating to the Structure of the CompanyAs a holding company, our ability to
pay dividends and obtain financing depends on the results of operations and financial condition of
our subsidiaries and could be restricted by legal, contractual or other limitations. These
dividend payments will likely depend on our subsidiaries results of operations, financial
condition, cash and capital requirements, future growth prospects and other factors deemed relevant
by their respective boards of directors, as well as on any applicable legal restrictions. See Item
3. Key InformationD. Risk FactorsRisks Relating to the Countries in Which We
OperateArgentina and Item 10. Additional InformationB. Memorandum and Articles of
AssociationDividends for a discussion of the current Argentine restrictions on the payment of
dividends.
Pursuant to our articles of association, the board of directors has the power to distribute interim
dividends in accordance with applicable Luxembourg law, but dividend payments must be approved by
our shareholders at the annual general meeting, subject to the approval of our annual accounts.
Dividends may be lawfully declared and paid if our net profits and distributable reserves are
sufficient under Luxembourg law.
Under Luxembourg law, at least 5% of our net profits per year must be allocated to the creation of
a legal reserve until such reserve has reached an amount equal to 10% of our issued share capital.
If the legal reserve later falls below the 10% threshold, at least 5% of net profits again must be
allocated toward the reserve. The legal reserve is not available for distribution.
Except as otherwise disclosed in this annual report, there has been no undisclosed significant
change since the date of the annual financial statements.
Item 9. The Offer and Listing
|
A. |
|
Offer and Listing Details |
The Companys ADSs are listed on the NYSE under the symbol TX. Trading on the NYSE began on
February 1, 2006. As of March 31, 2009, a total of 2,004,743,442 shares were registered in the
Companys shareholder register.
97
As of March 31, 2009, a total of 273,643,290 shares were registered in the name of the depositary
for the Companys ADR program. On June 26, 2009, the closing sales price for the Companys ADSs on
the NYSE was USD17.80.
New York Stock Exchange
As of March 31, 2009, a total of 27,364,329 ADSs were registered of record. Each ADS represents 10
shares of the Companys stock. The Bank of New York Mellon acts as the Companys depositary for
issuing ADRs evidencing the ADSs. The following tables sets forth, for the periods indicated, the
high and low quoted prices for the Companys shares, in the form of ADSs, traded on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
Price per ADS |
|
Year |
|
High |
|
|
Low |
|
2006 |
|
|
30.50 |
|
|
|
19.91 |
|
2007 |
|
|
42.48 |
|
|
|
23.30 |
|
2008 |
|
|
18.14 |
|
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
Price per ADS |
|
2007 |
|
High |
|
|
Low |
|
First quarter |
|
|
30.74 |
|
|
|
23.00 |
|
Second quarter |
|
|
31.80 |
|
|
|
25.28 |
|
Third quarter |
|
|
34.18 |
|
|
|
23.30 |
|
Fourth quarter |
|
|
42.48 |
|
|
|
30.88 |
|
|
|
|
|
|
|
|
|
|
|
|
Price per ADS |
|
2008 |
|
High |
|
|
Low |
|
First quarter |
|
|
40.40 |
|
|
|
30.01 |
|
Second quarter |
|
|
45.99 |
|
|
|
31.86 |
|
Third quarter |
|
|
41.94 |
|
|
|
14.75 |
|
Fourth quarter |
|
|
18.14 |
|
|
|
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
Price per ADS |
|
Last Six Months |
|
High |
|
|
Low |
|
January 2009 |
|
|
11.39 |
|
|
|
8.02 |
|
February 2009 |
|
|
10.41 |
|
|
|
6.41 |
|
March 2009 |
|
|
7.95 |
|
|
|
5.46 |
|
April 2009 |
|
|
8.78 |
|
|
|
6.64 |
|
May 2009 |
|
|
17.52 |
|
|
|
8.41 |
|
June 1 to June 26, 2009 |
|
|
18.30 |
|
|
|
17.68 |
|
Not applicable.
See Offer and Listing Details.
Not applicable.
Not applicable.
98
Not applicable.
Item 10. Additional Information
Not applicable.
|
B. |
|
Memorandum and Articles of Association |
General
The following is a summary of certain rights of holders of the Companys shares. These rights are
set out in the Companys articles of association or are provided by applicable Luxembourg law, and
may differ from those typically provided to shareholders of U.S. companies under the corporation
laws of some states of the United States of America. This summary is not exhaustive and does not
contain all information that may be important to you. For more complete information, you should
read the Companys articles of association, which are attached as an exhibit to this annual report.
The Company is a joint stock corporation (société anonyme holding) organized under the laws of
Luxembourg. Its object and purpose, as set forth in Article 2 of its articles of association, is
the taking of interests, in any form, in corporations or other business entities, and the
administration, management, control and development thereof. The Company is registered under the
number B98 668 in the Registre du Commerce et des Sociétés.
The Company has an authorized share capital of a single class of 3.5 billion shares having a
nominal value of USD1.00 per share. As of the date of this annual report, there are 2,004,743,442
shares issued. All issued shares are fully paid.
The Companys articles of association currently authorize the board of directors, for a period that
ends on October 26, 2010, to issue shares within the limits of its authorized share capital at such
times and on such terms and conditions as the board of directors or its delegates may determine.
Accordingly, until October 26, 2010, shares may be issued up to the authorized share capital limit
of US$3.5 billion by a decision of the board of directors.
The Companys shareholders have authorized the board of directors to waive, suppress or limit any
pre-emptive subscription rights of shareholders provided for by law to the extent it deems such
waiver, suppression or limitation advisable for any issue or issues of shares within the authorized
share capital. However, if and from the date the Companys shares are listed on a regulated market
(and only for as long as they are so listed), any issuance of shares for cash within the limits of
the authorized share capital shall be subject to the pre-emptive subscription rights of the then
existing shareholders (as set out in the articles of association), except in the following cases
(in which cases no pre-emptive rights shall apply):
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any issuance of shares for, within, in conjunction with or related to, an initial
public offering of the Companys shares on one or more regulated markets (in one or more
instances); |
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any issuance of shares against a contribution other than in cash; |
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any issuance of shares upon conversion of convertible bonds or other instruments
convertible into shares; provided, however, that the pre-emptive subscription rights of
the then existing shareholders shall apply by provision of the Companys articles of
association in connection with any issuance of convertible bonds or other instruments
convertible into shares for cash; and |
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any issuance of shares (including by way of free shares or at a discount), up to
an amount of 1.5% of the issued share capital of the Company, to the Companys
directors, officers, agents or employees, to the directors, officers, agents or
employees of the Companys direct or indirect subsidiaries or of the Companys
affiliates, including without limitation the direct issue of shares upon the exercise of
options, rights convertible into shares, or similar instruments convertible or
exchangeable into shares issued for the purpose of, or in relation to, compensation or
incentive of any such persons. |
Our authorized share capital is fixed by our articles of association, as amended from time to time,
with the approval of shareholders at an extraordinary general shareholders meeting.
Dividends
Subject to applicable law, all shares (including shares underlying ADSs) are entitled to
participate equally in dividends when, as and if declared by the shareholders at the ordinary
general shareholders meeting, out of funds legally available for such purposes. Under Luxembourg
law, claims for dividends will lapse five years after the date such dividends are declared.
However, we may elect to pay a declared dividend after such period. The shareholders may, at the
ordinary general shareholders meeting, which every shareholder has the right to attend in person
or by proxy, declare a dividend under Article 21 of the Companys articles of association.
Under Article 21 of the articles of association, our board of directors has the power to distribute
interim dividends in accordance with the conditions that apply to commercial companies set forth in
particular in Section 72-2 of the Luxembourg law of August 10, 1915, on commercial companies.
Voting Rights; Shareholders Meetings; Election of Directors
Each share (including shares underlying ADSs) entitles the holder to one vote at the Companys
general shareholders meetings. Shareholder action by written consent is not permitted, but proxy
voting is permitted. Notices of general shareholders meetings are governed by the provisions of
Luxembourg law and the Companys articles of association. Notices of such meetings must be
published twice, at least at eight-day intervals, the second notice appearing at least eight days
prior to the meeting, in the Luxembourg Official Gazette and in a leading newspaper having general
circulation in Luxembourg. If an extraordinary general shareholders meeting is adjourned for lack
of a quorum, notices must be published twice, in the Luxembourg Official Gazette and two Luxembourg
newspapers, at 15-day intervals, the second notice appearing at least 15 days prior to the meeting.
In case our shares are listed on a foreign regulated market, notices of general shareholders
meetings shall also be published in accordance with the publicity requirements of such regulated
market. No attendance quorum is required at annual ordinary general shareholders meetings and
resolutions are adopted by a simple majority vote of the shares present or represented and voted at
the meeting. An extraordinary general shareholders meeting must have a quorum of at least 50% of
the issued and outstanding shares. If a quorum is not reached, such meeting may be reconvened at a
later date with no quorum requirements by means of the appropriate notification procedures provided
for by Luxembourg company law. In both cases, Luxembourg company law and the Companys articles of
association require that any resolution of an extraordinary general shareholders meeting be
adopted by a two-thirds majority vote of the shares present or represented. If a proposed
resolution consists of changing the Companys nationality or of increasing the shareholders
commitments, the unanimous consent of all shareholders is required. Directors are elected at annual
ordinary general shareholders meetings. Cumulative voting is not permitted. As the Companys
articles of association do not provide for staggered terms, directors are elected for a maximum of
one year and may be reappointed or removed at any time, with or without cause, by resolution passed
by a simple majority vote of the shares present or represented and voted.
The Companys articles of association provide that annual ordinary general shareholders meetings,
at which its annual financial statements are approved and the members of its board of directors are
appointed, must take place in Luxembourg on the first Wednesday of every June at 2:30 p.m.,
Luxembourg time. If that day is a legal or banking holiday in Luxembourg, the meeting shall be held
on the following business day.
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Any shareholder who holds one or more shares of the Company on the fifth calendar day preceding the
general shareholders meeting (the Record Date) shall be admitted to a general shareholders
meeting. Those shareholders who have sold their shares between the Record Date and the date of the
general shareholders meeting, may not attend or be represented at the meeting.
In the case of shares held through fungible securities accounts, each shareholder may exercise all
rights attached to his shares and, in particular, may participate in and vote at shareholders
meetings of the Company upon presentation of a certificate issued by the financial institution or
professional depositary holding the shares, evidencing such deposit and certifying the number of
shares recorded in the relevant account on the Record Date. Such certificate must be filed at least
five days before the meeting with the Company at its registered address or at the address stated in
the convening notice or, in case the shares of the Company are listed on a regulated market, with
an agent of the Company located in the country of the listing and designated in the convening
notice. In case any such holder wishes to vote by proxy, the holder shall have to present a
completed proxy form together with the certificate previously referred, by the same date and time
and at the same addresses.
The board of directors and the shareholders meeting may, if they deem so advisable, reduce these
periods of time for all shareholders and admit all shareholders (or their proxies) who have filed
the appropriate documents to the general shareholders meeting, irrespective of these time limits.
Access to Corporate Records
Luxembourg law and the Companys articles of association do not generally provide for shareholder
access to corporate records. Shareholders may inspect the annual accounts and auditors reports at
the Companys registered office during the fifteen-day period prior to a general shareholders
meeting.
Appraisal Rights
In the event the shareholders approve any of the following:
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the delisting of the Companys shares from all regulated markets where the
Companys shares are listed at that time, excluding a delisting made pursuant to an
offer to all of the Companys shareholders made by a business entity subject to common
control with the Company, whereby such business entity offers to issue, in exchange for
the Companys shares, shares to be listed on the same regulated market(s) on which the
Companys shares are listed; |
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a merger in which the Company is not the surviving entity (unless the shares or
other equity securities of such entity are listed on the New York or London stock
exchanges); |
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a sale, lease, exchange or other disposition of all or substantially all of the
Companys assets; |
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an amendment to the Companys articles of association that has the effect of
materially changing its corporate purpose; |
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the relocation of the Companys domicile outside the Grand Duchy of Luxembourg;
or |
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amendments to the Companys articles of association that restrict the rights of
its shareholders (excluding any amendments in relation with, or to, the authorized share
capital and/or the waiver or suppression of any preferential subscription rights
relating thereto); |
dissenting or absent shareholders have the right to have their shares repurchased by the Company at
(i) the average market value of the shares over the 90 calendar days preceding the applicable
general shareholders meeting or (ii) in the event that the Companys shares are not traded on any
regulated market, the amount that results from applying the proportion of the Companys equity that
the shares being sold represent over the Companys net worth as determined in its last consolidated
financial statements approved by the shareholders or in its last interim
consolidated financial statements approved by the board of directors, whichever is more recent.
Shareholders who voted in favor of the relevant resolution are not entitled to exercise this right.
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Dissenting or absent shareholders must present their claim within one month following the date of
the applicable general shareholders meeting and supply the Company with evidence of their
shareholding at the time of such meeting. The Company must (to the extent permitted by applicable
laws and regulations and in compliance therewith) repurchase its shares within six months following
the date of the applicable general shareholders meeting. If delisting from one or more, but not
all, of the regulated markets where the Companys shares are listed is approved by the
shareholders, only dissenting or absent shareholders with shares held through participants in the
local clearing system for that market or those markets can exercise this appraisal right if:
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they held the shares as of the date of the announcement by the Company of its
intention to delist or as of the date of publication of the first convening notice for
the general shareholders meeting that approved the delisting; |
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they present their claim within one month following the date of the general
shareholders meeting and supply evidence of their shareholding as of the date of the
Companys announcement or the publication of the first convening notice to the meeting;
and |
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the delisting is not being made pursuant to an offer to all of the Companys
shareholders made by a business entity subject to common control with the Company,
whereby such business entity offers to issue, in exchange for the Companys shares,
shares to be listed on the same regulated market(s) on which such dissenting or absent
shareholders hold their shares through participants in the local clearing system for
that market or markets. |
In the event a shareholder exercises its appraisal right, applicable Luxembourg law provisions
shall apply.
Distribution of Assets on Winding-up
In the event of the Companys liquidation, dissolution or winding-up, the net assets remaining
after allowing for the payment of all debts, charges and expenses shall be paid out to holders of
the Companys shares in proportion to their respective holdings.
Transferability and Form
The Companys articles of association do not impose restrictions on the transfer of its shares. The
shares are issuable in registered form.
Pursuant to the Companys articles of association, the ownership of registered shares is evidenced
by the inscription of the name of the shareholder, the number of shares held by such shareholder
and the amount paid on each share in our shareholders register. In addition, the Companys
articles of association provide that shares may be held through fungible securities accounts with
financial institutions or other professional depositaries. Shares held through fungible securities
accounts have the same rights and obligations as shares recorded in the Companys shareholders
register.
Shares held through fungible securities accounts may be transferred in accordance with customary
procedures for the transfer of securities in book-entry form. Shares that are not held through
fungible securities accounts may be transferred by a written statement of transfer signed by both
the transferor and the transferee or their respective duly appointed attorney-in-fact and recorded
in our shareholders register. The transfer of shares may also be made in accordance with the
provisions of Article 1690 of the Luxembourg Civil Code. As evidence of the transfer of registered
shares, the Company may also accept any correspondence or other documents evidencing the agreement
between transferor and transferee as to the transfer of registered shares.
BGL
Société Anonyme maintains the Companys shareholders register.
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Repurchase of Company Shares
The Company may repurchase its own shares in the cases and subject to the conditions set by the
Luxembourg law of August 10, 1915, as amended. See Item 16.E Purchases of Equity Securities by the
Issuer and Affiliated Purchasers for further information on the authorization granted on June 3,
2009, by the Companys annual general shareholders meeting to the Company or its subsidiaries to
repurchase the Companys shares, including shares represented by ADRs.
Limitation on Securities Ownership
There are no limitations currently imposed by Luxembourg law or the articles of association on the
rights of non-resident shareholders to hold or vote the Companys shares.
Change in Control
The Companys articles of association do not contain any provision that would have the effect of
delaying, deferring or preventing a change in control of the Company and that would operate only
with respect to a merger, acquisition or corporate restructuring involving the Company. In
addition, the Company does not know of any significant agreements or other arrangements to which
the Company is a party and which take effect, alter or terminate in the event of a change of
control of the Company.
There are no rights associated with the Companys shares other than those described above.
For a summary of any material contract entered into by us outside of the ordinary course of
business during the last two years, see Item 4. Information on the CompanyB. Business
OverviewRaw Materials and Energy. For a summary of the notes evidencing CVGs indebtedness to
the Company in connection with the Sidor nationalization process, see Item 4. Information on the
CompanyA. History and Development of the CompanySidor Nationalization Process.
Many of the countries which are important markets for us or in which we have substantial assets
have a history of substantial government intervention in currency markets, volatile exchange rates
and government-imposed currency controls. These include Argentina and Mexico. Currently, only
Argentina has exchange controls or limitations on capital flowsincluding requirements for the
repatriation of export proceedsin place.
Argentina
Since 2002, the Argentine government has maintained a dirty float of the peso. In addition,
following the enactment of the Public Emergency and Foreign Exchange System Reform Law No. 25,562
in January 2002, several rules and regulations have been introduced to reduce volatility in the
ARP/USD exchange rate. Below is a summary of the principal limitations on the transfer of foreign
currency in and out of Argentina:
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the proceeds of certain foreign financial debt incurred by Argentine residents (including
private Argentine entities) as well as certain inflows for the purpose of investments in the
capital markets must remain in Argentina for at least 365 calendar days and post a
non-transferable, non-remunerated deposit denominated in U.S. dollars for an amount equal to
30% of the underlying transaction. This deposit shall be held for a period of 365 calendar
days and may not be used as collateral in any credit transaction; |
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outflows from proceeds of investments in capital markets are restricted and subject to
certain requirements, such as, in certain cases, the mantainance of the investment for a
specific period of time; |
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inflows and outflows of foreign currency through the local exchange market, and
indebtedness transactions by local residents that may result in a foreign currency payment to
non-residents, must be registered with the Argentine Central Bank; and |
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funds from export revenues or financial loans received that are credited in foreign
currency overseas must be converted into local currency and credited to a local banking
account within a specific period of time. |
Regulations issued by the Argentine Central Bank establish specific exceptions pursuant to which
some of these requirements may not apply to foreign trade, export finance-related transactions and
certain medium term financial loans (subject to compliance with certain requirements), nor to the
primary placement of publicly traded securities listed in one or more regulated markets.
Increasingly during 2008 and into 2009, the Argentine government has been imposing new restrictions
on foreign exchange outflows, including through certain transactions on securities traded locally.
Also, in October 2008, the time periods for the repatriation of export revenues credited in foreign
currency overseas were, in practice, substantially shortened.
For additional information regarding factors affecting the value of the Argentine peso, see Item 3.
Key InformationD. Risk FactorsRisks Relating to the Countries in Which We OperateArgentina.
The market exchange rate of the Argentine peso against the U.S. dollar continues to be determined
by the forces of supply and demand in the foreign exchange market, although the Argentine
government, acting through the Argentine Central Bank, has a number of means by which it may act to
maintain exchange rate stability. See Item 3. Key InformationD. Risk FactorsRisks Relating to
our Business Changes in exchange rates or any limitation in the Ternium companies ability to
hedge against exchange rate fluctuations could adversely affect Terniums business and results.
During 2008 the Argentine Central Bank maintained the value of the U.S. dollar around ARP3.0 and
ARP3.2 per U.S. dollar. However, during the first four months of 2009, the exchange rate between
the U.S. dollar and the Argentine peso has been following an upward trend, closing at ARS 3.72/USD
on March 31, 2009.
Mexico
Between November 1991 and December 1994, the Mexican Central Bank maintained the exchange rate
between the U.S. dollar and the Mexican peso within a predetermined range through intervention in
the foreign exchange market. The Mexican Central Bank intervened in the foreign exchange market as
the exchange rate reached either the minimum or the maximum of the predetermined range in order to
reduce day-to-day fluctuations in the exchange rate. On December 20, 1994, the Mexican government
modified the predetermined range within which the Mexican peso was permitted to float by increasing
the maximum Mexican peso price of the U.S. dollar by MXN0.53, which implied an effective 15.3%
devaluation of the Mexican peso. On December 22, 1994, the Mexican government suspended
intervention by the Mexican Central Bank in the foreign exchange market and allowed the Mexican
peso to float freely against the U.S. dollar. Factors that contributed to this decision included
the size of Mexicos current account deficit, a decline in the Mexican Central Banks foreign
exchange reserves, rising interest rates for other currencies (especially the U.S. dollar) and
reduced confidence in the Mexican economy on the part of investors due to political uncertainty
associated with events in the state of Chiapas and presidential and congressional elections in that
year. The value of the Mexican peso suffered a steep deterioration against the U.S. dollar,
declining by 42.9% from December 19, 1994 to December 31, 1994. The Mexican government has since
allowed the Mexican peso to float freely against the U.S. dollar. Since September 2008, the value
of the Mexican peso against the U.S. dollar has been rapidly declining, mainly as a consecuence of
the global economic downturn. Throughout 2008, the Mexican peso suffered a 24.6% devaluation with
respect to the U.S. dollar, and suffered an additional devaluation of 2.8% during the first quarter
of 2009.
Historically, the Mexican economy has suffered balance of payment deficits and shortages in foreign
exchange reserves. While the Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert Mexican pesos to U.S. dollars and the terms of NAFTAto
which Mexico is a signatory
generally prohibit exchange controls, the Mexican government could institute a restrictive exchange
control policy in the future.
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For additional information regarding factors affecting the value of the Mexican peso, see Item 3.
Key InformationD. Risk FactorsRisks Relating to the Countries in Which We OperateMexico.
The following discussion of the material Luxembourg and United States federal income tax
consequences of an investment in our ADSs is based upon laws and relevant interpretations thereof
in effect as of the date of this annual report, all of which are subject to change. This discussion
does not address all possible tax consequences relating to an investment in our ADSs, such as the
tax consequences under United States state and local tax laws.
Grand Duchy of Luxembourg
This section describes the material Luxembourg tax consequences of owning or disposing of ADSs.
You should consult your own tax adviser regarding the Luxembourg tax consequences of owning and
disposing of ADSs in your particular circumstances.
Holding company status
The tax treatment described below results from the tax status of the Company as a holding company
under the law of July 31, 1929 and the billionaire provisions relating there.
Following a decision by the European Commission, the Grand-Duchy of Luxembourg terminated its 1929
holding company regime, effective January 1, 2007. However, under the implementing legislation,
pre-existing publicly-listed companies including us are entitled to continue benefiting from
their current tax regime until December 31, 2010.
During the transitional period, the Company must comply with certain reporting requirements to
maintain its right to benefit from the special tax exempt status transition period, including an
annual certification and the submission of such certification to the Luxembourg tax authorities.
Ownership and disposition of the Companys ADSs
Holders of the Companys ADSs will not be subject to Luxembourg income tax, wealth tax or capital
gains tax in respect of those ADSs, except for:
(i) individual residents of Luxembourg, entities organized in Luxembourg or foreign entities
domiciled or having a permanent establishment in Luxembourg. For purposes of Luxembourg tax law,
you are deemed to be an individual resident in Luxembourg, subject to treaty provisions, if you
have your domicile or your usual place of residence in Luxembourg, or
(ii) non-resident holders are taxed with respect to the disposition of the Companys ADSs held
for less than six months if such non-resident holder has owned alone, or if such non-resident
holder is an individual, together with his spouse or minor children, directly or indirectly at any
time during the five years preceding the date of disposition more than 10% of the Companys share
capital, or
(iii) non-resident holders are taxed with respect to the disposition of the Companys ADSs
held for more than six months(x) if such non-resident holder has owned alone, or together with his
spouse or minor children, directly or indirectly, at any time during the five years preceding the
date of disposition, more than 10% of the Companys share capital and (y) was a Luxembourg resident
taxpayer for more than 15 years and has become a non-resident tax payer less than 5 years before
the moment of disposition of the ADSs.
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No inheritance tax is payable by a holder of the Companys ADSs except if the deceased holder was a
resident of Luxembourg at the time of death.
There is no Luxembourg transfer duty or stamp tax on the purchase or disposition of the ADSs.
Dividends received on the Companys ADSs by non-Luxembourg resident holders
No withholding tax applies in Luxembourg on dividends distributed by the Company. No taxes apply in
Luxembourg on dividends received by holders who are not resident in Luxembourg and who do not
maintain a permanent establishment in Luxembourg to which the holding of the ADSs is effectively
connected. Dividends received by holders who are individual residents of Luxembourg, entities
organized in Luxembourg or entities domiciled or having a permanent establishment in Luxembourg are
subject to tax.
United States federal income taxation
This section describes the material United States federal income tax consequences to a U.S. holder
(as defined below) of owning ADSs. It applies to you only if you hold your ADSs as capital assets
for tax purposes. This section does not apply to you if you are a member of a special class of
holders subject to special rules, including:
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a dealer in securities, |
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a bank, |
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a trader in securities that elects to use a mark-to-market method of accounting for
securities holdings, |
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a tax-exempt organization, |
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a person who invests through a pass-through entity, including a partnership, |
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a life insurance company, |
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a person liable for alternative minimum tax, |
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a person that actually or constructively owns 10% or more of the Companys voting
stock or its ADSs, |
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a person that holds ADSs as part of a straddle or a hedging or conversion
transaction, or |
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a person whose functional currency is not the U.S. dollar. |
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history,
existing and proposed regulations, published rulings and court decisions, as well as on the Income
Tax Treaty between Luxembourg and the United States (the Treaty). These laws are subject to
change, possibly on a retroactive basis. In addition, this section is based in part upon the
representations of the depositary and the assumption that each obligation in the deposit agreement
and any related agreement will be performed in accordance with its terms.
If a partnership holds the ADSs, the tax treatment of a partner will generally depend upon the
status of the partner and the activities of the partnership. Each such partner holding the ADSs is
urged to consult his, her or its own tax advisor.
You are a U.S. holder if you are a beneficial owner of ADSs and you are:
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a citizen or resident of the United States, |
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a domestic corporation, |
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an estate whose income is subject to United States federal income tax
regardless of its source, or |
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a trust if a United States court can exercise primary supervision over
the trusts administration and one or more United States persons are
authorized to control all substantial decisions of the trust. |
In general, and taking into account the earlier assumptions, for United States federal
income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the
shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will
not be subject to United States federal income tax.
Taxation of dividends
Under the United States federal income tax laws, and subject to the passive foreign investment
company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend
the Company pays out of its current or accumulated earnings and profits (as determined for United
States federal income tax purposes) is subject to United States federal income taxation. If you are
a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2011
that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15%
provided that you hold the ADSs for more than 60 days during the 121-day period beginning
60 days before the ex-dividend date and meet other holding period requirements. Dividends the
Company pays with respect to the ADSs generally will be qualified dividends.
You must include any Luxembourg tax withheld from the dividend payment in this gross amount even
though you do not in fact receive it. The dividend is taxable to you
when you receive the dividend, actually or constructively.
The dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other
United States corporations. Distributions in excess of current and accumulated earnings and profits, as
determined for United States federal income tax purposes, will be treated as a
non-taxable return of capital to the extent of your basis in the ADSs and thereafter as capital
gain.
Subject to certain limitations, any Luxembourg tax withheld in accordance with the Treaty and paid
over to Luxembourg will be creditable against your United States federal income tax liability.
Special rules apply in determining the foreign tax credit limitation with respect to dividends that
are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to
you under Luxembourg law or under the Treaty, the amount of tax withheld that is refundable will
not be eligible for credit against your United States federal income tax liability.
Dividends
will be income from sources outside the United States of America and depending on
your circumstances, will generally be either passive or general income for purposes of computing the foreign tax credit allowable to you.
Taxation of capital gains
Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise
dispose of your ADSs, you will recognize capital gain or loss for United States federal
income tax purposes equal to the difference between the U.S. dollar value of the amount that you
realize and your tax basis, determined in U.S. dollars, in your ADSs. Capital gain of a
noncorporate U.S. holder that is recognized in taxable years beginning before January 1, 2011, is
generally taxed at a maximum rate of 15% where the holder has a holding period greater than one
year. The gain or loss will generally be income or loss from sources
within the United States for foreign tax credit limitation purposes.
Your ability to deduct capital losses is subject to limitations.
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PFIC rules
Based on the Companys expected income and assets, we believe that the ADSs should not be treated
as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual
determination that is made annually and thus may be subject to change. If the Company were to be
treated as a PFIC, unless a U.S. holder elects to be taxed annually on a mark-to-market basis with
respect to the ADSs, gain realized on the sale or other disposition of your ADSs would in general
not be treated as capital gain. Instead, if you are a U.S. holder, you would be treated as if you
had realized such gain and certain excess distributions ratably over your holding period for the
ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was
allocated, together with an interest charge in respect of the tax attributable to each such year.
With certain exceptions, your ADSs will be treated as stock in a PFIC if the Company were a PFIC at
any time during your holding period in your ADSs. Dividends that you receive from the Company will
not be eligible for the special tax rates applicable to qualified dividend income if the Company is
treated as a PFIC with respect to you either in the taxable year of the distribution or the
preceding taxable year, but instead will be taxable at rates applicable to ordinary income.
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Dividends and Paying Agents |
Not applicable.
Not applicable.
We are required to file annual and special reports and other information with the SEC. You may read
and copy any documents filed by the Company at the SECs public reference room at 100 F.Street,
N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC also maintains a website at http://www.sec.gov
which contains reports and other information regarding registrants that file electronically with
the SEC.
We are
subject to the reporting requirements of the U.S. Securities Exchange
Act of 1934, as amended as applied to foreign
private issuers (the
Exchange Act). Because we are a foreign private issuer, the SECs rules do not require us to
deliver proxy statements or to file quarterly reports. In addition, our insiders are not subject
to the SECs rules that prohibit short-swing trading. We prepare quarterly and annual reports
containing consolidated financial statements in accordance with IFRS. Our annual consolidated
financial statements are certified by an independent accounting firm. We submit quarterly financial
information to the SEC on Form 6-K simultaneously with or promptly following the publication of
that information in Luxembourg or any other jurisdiction in which our securities are listed, and
will file annual reports on Form 20-F within the time period required by the SEC, which is
currently six months from the close of the fiscal year on December 31. These quarterly and annual
reports may be reviewed at the SECs Public Reference Room. Reports and other information filed
electronically with the SEC are also available at the SECs website.
As a foreign private issuer under the Securities Act, we are not subject to the proxy rules of
Section 14 of the Exchange Act or the
insider short-swing profit reporting requirements of Section 16 of the Exchange Act.
We have appointed The Bank of New York Mellon to act as depositary for our ADSs. During the time
the deposit agreement remains in force, we will furnish the depositary with:
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our annual reports; and |
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summaries of all notices of general meetings of shareholders and other reports
and communications that are made generally available to our shareholders. |
108
The depositary will, as provided in the deposit agreement, if we so request, arrange for the
mailing of summaries in English of the reports and communications to all record holders of our
ADSs. Any record holder of ADSs may read the reports, notices, or summaries thereof, and
communications at the depositarys office located at 480 Washington Blvd., Jersey City, New Jersey
07310.
Whenever a reference is made in this annual report to a contract or other document, please be aware
that such reference is not necessarily complete and that you should refer to the exhibits that are
a part of this annual report for a copy of the contract or other document. You may review a copy of
the annual report at the SECs public reference room in Washington, D.C.
|
I. |
|
Subsidiary Information |
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
The multinational nature of our operations and customer base expose us to the risk of changes in
interest rates, foreign currency exchange rates and, to a limited extent, commodity prices. We
selectively manage these exposures through the use of derivative instruments to mitigate market
risk. Otherwise, we do not use derivative financial instruments for trading, other speculative
purposes or other exposures. In addition, in the ordinary course of business Ternium also faces
risks with respect to financial instruments that are either non-financial or non-quantifiable. Such
risks principally include country risk and credit risk and are not presented in the following
analysis. For additional information about our financial risk management, see note 33 to our
audited consolidated financial statements included in this annual report.
The following tables provide a breakdown of Terniums debt instruments at December 31, 2008 and
2007, which included fixed and variable interest rate obligations detailed maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
Expected maturity date, as of December 31, |
|
In thousands of U.S. Dollars |
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Total |
|
Non-current Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
Floating Rate |
|
|
|
|
|
|
542,882 |
|
|
|
493,427 |
|
|
|
1,289,558 |
|
|
|
|
|
|
|
|
|
|
|
2,325,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
227,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,276 |
|
Floating Rate |
|
|
714,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) (2) |
|
|
941,460 |
|
|
|
542,882 |
|
|
|
493,427 |
|
|
|
1,289,558 |
|
|
|
|
|
|
|
|
|
|
|
3,267,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
Expected maturity date, as of December 31, |
|
In thousands of U.S. Dollars |
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Total |
|
Non-current Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,661 |
|
|
|
7,661 |
|
Floating Rate |
|
|
|
|
|
|
370,407 |
|
|
|
319,790 |
|
|
|
1,732,767 |
|
|
|
1,210,473 |
|
|
|
34,974 |
|
|
|
3,668,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
186,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,977 |
|
Floating Rate |
|
|
219,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) (2) |
|
|
406,239 |
|
|
|
370,407 |
|
|
|
319,790 |
|
|
|
1,732,767 |
|
|
|
1,210,473 |
|
|
|
42,635 |
|
|
|
4,082,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Borrowings are primarily bank borrowings with third parties. See Item 5. Operating and
Financial Review and ProspectsB. Liquidity and Capital ResourcesPrincipal Sources of
FundingFinancial Liabilities. |
|
(2) |
|
As most borrowings are subject to floating rates that approximate market rates, with
contractual repricing that occurs every three to six months, the fair value of each borrowing
approximates its carrying amount and is not disclosed separately. |
109
Our nominal weighted average interest rate for our debt instruments was 2.79% and 6.15% for 2008
and 2007, respectively. These rates were calculated using the rates set for each instrument in its
corresponding currency and weighted using the dollar-equivalent outstanding principal amount of
each instrument as of December 31, 2008, and 2007, respectively.
Total Debt by Currency
|
|
|
|
|
|
|
|
|
In thousands of U.S. Dollars |
|
2008 |
|
|
2007 |
|
USD |
|
|
3,188,169 |
|
|
|
3,995,606 |
|
MXN |
|
|
40,404 |
|
|
|
84,638 |
|
ARS |
|
|
38,754 |
|
|
|
2,067 |
|
|
|
|
|
|
|
|
Total |
|
|
3,267,327 |
|
|
|
4,082,311 |
|
|
|
|
|
|
|
|
Interest Rate Exposure Risk
Interest rate movements create a degree of risk by affecting the amount of Terniums interest
payments and the value of Terniums fixed rate debt. Most of Terniums long-term borrowings are at
variable rates that are partially fixed through swaps and options. Terniums total variable
interest rate debt amounted to USD3,040 million (93% of total borrowings) for the year ended
December 31, 2008 and USD3,888 million (95% of total borrowings) for the year ended December 31,
2007.
Interest Rate Derivative Contracts
As of December 31, 2008, most of the Companys long-term borrowings were at variable rates.
Ternium Mexico entered into derivative instruments to manage the impact of the floating interest
rate changes on its financial debt.
On February 23, 2007, Ternium Mexico entered into four interest rate collar agreements that fix the
interest rate to be paid over an aggregate notional amount of USD250 million, in an average range
of 4.16% to 6.00%. These agreements expire in November 2011 and March 2012.
On September 21, 2007, Ternium Mexico entered into several interest rate collars that fix the
interest rate to be paid over an aggregate notional amount of USD 1,500 million, in an average
range of 3.28% to 5.50%. These agreements expire in July 2009.
On June 18, 2008, Ternium Mexico entered into four knock-in swap agreements over an aggregate
notional amount of USD 894 million, in an average swap level of 5.22% and a knock-in (KI) level
of 2.5%. These agreements expire in July 2012. As of December 31, 2008, these contracts were
accounted for under the hedge accounting method and generated a pre-tax reserve in equity for USD
70,241 thousand.
As of December 31, 2008, Ternium Mexico was a party to interest rate collar and knock-in swaps
agreements as detailed in the table below:
|
|
|
|
|
At December 31, 2008 |
|
Total |
|
Fair Value |
|
|
|
|
|
Interest Rate Collars Ternium Mèxico |
|
|
|
|
Contract amount (in USD thousands) |
|
250,000 |
|
(16,754) |
Average fixed pay range |
|
6.00%4.16% |
|
|
|
|
|
|
|
Contract amount (in USD thousands) |
|
1,500,000 |
|
(10,158) |
Average fixed pay range |
|
5.50%3.28% |
|
|
Floating received rate |
|
|
|
|
|
|
|
|
|
Knock-in swap agreements |
|
|
|
|
Contract amount (in USD thousands) |
|
894,000 |
|
(70,241) |
Average swap level and knock-in level |
|
5.22%2.50% |
|
|
110
Foreign Exchange Exposure Risk
A portion of Terniums business is carried out in currencies other than the U.S. dollar, Terniums
reporting currency. As a result of this foreign currency exposure, exchange rate fluctuations
impact Terniums results as reported in its income statement in the form of both translation risk
and transaction risk. Translation risk is the risk that Terniums consolidated financial statements
for a particular period or as of a certain date may be affected by changes in the prevailing rates
of the various functional currencies of the reporting subsidiaries against the U.S. dollar.
Transaction risk is the risk that the value of transactions executed in currencies other than the
subsidiarys functional currency may vary according to currency fluctuations.
The following table shows a breakdown of Terniums assessed balance sheet exposure to currency risk
as of December 31, 2008. These balances include intercompany positions where the intervening
parties have different functional currencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
USD million |
|
Functional Currency |
|
Exposure to |
|
USD |
|
|
MXN |
|
|
ARS |
|
US dollar (USD) |
|
|
(n/a |
) |
|
|
(2,286.3 |
) |
|
|
(152.8 |
) |
EU euro (EUR) |
|
|
30.2 |
|
|
|
(6.4 |
) |
|
|
55.2 |
|
Other currencies |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
We estimate that if the Argentine peso and Mexican peso had devaluated by 1% against the US dollar
with all other variables held constant, total pre-tax income for the year would have been USD 24.3
million lower, as a result of foreign exchange gains/losses on translation of US dollar-denominated
financial position, mainly trade receivables and borrowings. This effect would have been offset by
the change in the currency translation adjustment recorded in equity.
Considering the same variation of the currencies against the US dollar of all net investments in
foreign operations amounting to USD 3.3 billion, the currency translation adjustment included in
total equity would have been USD 33.4 million lower, arising from the adjustment on translation of
the equity related to the Mexican peso and the Argentine peso.
Foreign Exchange Derivative Contracts
Ternium aims to manage the negative impact of fluctuations in the value of other currencies with
respect to the U.S. dollar. However, the fact that some subsidiaries have measurement currencies
other than the U.S. dollar may, at times, distort the result of these efforts as reported under
IFRS.
Ternium operates and sells its products in different countries, and as a result is exposed to
foreign exchange rate volatility. Terniums subsidiaries may use derivative contracts in order to
hedge their exposure to exchange rate risk derived from their trade and financial operations.
Beginning in November 2008, Siderar entered into several forward agreements to manage the exchange
rate exposure generated by its sales in Euros. The notional amount covered as of December 31, 2008
was EUR 9.2 million with an average forward price of 1.30 US Dollars per Euro.
During December 2008, Siderar hedged its purchases of machinery denominated in Canadian dollars
(CAD) with a zero cost collar for a notional amount of CAD 1.9 million and strike prices of 1.17
and 1.30. This contract was settled in January 2009.
111
As of December 31, 2008, Prosid Investments had several non-deliverable forward (NDF) agreements
with a notional amount of ARP100 million at an average exchange rate of 3.62 Argentine pesos per
U.S. dollar. These NDF agreements cover indirect exposure of short term debt denominated in
Argentine pesos. These NDF agreements were settled in January 2009.
During 2003, Ternium Mexico entered into a cross currency swap contract with Bank of America to
manage its exposure to changes in the Mexican peso against the U.S. dollar and the impact of the
floating interest rate changes on certain debt certificates. As of December 31, 2008, the notional
amount totaled USD 52.6 million and the fixed interest rate was 9.30% per annum. This agreement was
settled on May 27, 2009.
Furthermore, during December 2008, our wholly-owned subsidiary Ternium Treasury Services entered
into a forward agreement over an aggregate notional amount of 14 million Euro, at an exchange rate
of 1.43 U.S. dollars per Euro, to manage its exposure to investments in Euros. This forward was
settled on January 20, 2009.
The net fair values of the exchange rate derivative contracts as of December 31, 2008 and December
31, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD |
|
|
|
|
|
|
|
|
|
Thousands |
|
|
|
|
|
|
|
Fair Value at December 31, |
|
Currencies |
|
Contract |
|
Notional amount |
|
|
2008 |
|
|
2007 |
|
USD/EUR |
|
Forward |
|
|
31,935 |
|
|
|
(423 |
) |
|
|
|
|
CAD/USD |
|
Collar |
|
|
1,613 |
|
|
|
6 |
|
|
|
|
|
MXN/USD |
|
Cross Currency Swap |
|
|
52,583 |
|
|
|
(12,678 |
) |
|
|
(2,486 |
) |
MXN/USD |
|
Forward |
|
|
|
|
|
|
|
|
|
|
(1,220 |
) |
ARS/USD |
|
ND Forward |
|
|
27,751 |
|
|
|
1,058 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,037 |
) |
|
|
(3,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities Exposure Risk
Terniums subsidiaries use certain commodities and raw materials that are subject to price
volatility caused by supply and weather conditions, political situations, financial variables and
other unpredictable factors. As a result, they are exposed to the volatility in the price of these
commodities and raw materials. Terniums policy is to manage this risk by partially fixing the
underlying price or limiting its volatility for a defined period.
Natural Gas
As discussed in Item 4. Information on the CompanyB. Business OverviewRaw Materials and
Energy, Siderar covers its needs for the supply of natural gas at sport market conditions. On the
other hand, Ternium Mexico purchases all of its natural gas from Pemex and GIMSA. Natural gas is
affected by commodity pricing and is, therefore, subject to price volatility caused by weather,
production problems and other factors that are outside Ternium Mexicos control and which are
generally unpredictable. Ternium Mexico constantly monitors the natural gas markets to manage this
exposure.
112
Commodities Derivative Contracts
Ternium Mexico entered into derivative structures to manage the impact of the fluctuation of
natural gas price over its cost.
As of December 2008, Ternium Mexico had two structures outstanding with an aggregate notional
amount of 7 million MMBTU (100 contracts a month). These structures cover 23% of Ternium Mexicos
natural gas consumption until July 2009. As of December 31, 2008, these contracts were accounted
for under the hedge accounting method and generated a pre-tax reserve in equity for USD 12,338
thousand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, |
|
Contract |
|
Average price |
|
Notional amount |
|
2008 |
|
|
2007 |
|
Call Purchases |
|
9.79/9.55 |
|
7,000 MMBTU |
|
|
129 |
|
|
|
1,200 |
|
Call Sales |
|
13.50 |
|
7,000 MMBTU |
|
|
(7 |
) |
|
|
(29 |
) |
Put Sales |
|
9.79@KI 7.50 /9.55@KI 6.80 |
|
7,000 MMBTU |
|
|
(21,248 |
) |
|
|
(594 |
) |
Put Purchases |
|
6.50 |
|
7,000 MMBTU |
|
|
8,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,338 |
) |
|
|
577 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Commodities and raw materials
In the past, management has used commodity derivative instruments to cover fluctuations in the
market prices of certain raw materials used in the production processes, such as zinc, aluminum and
tin. While these markets are monitored periodically, during 2007 and 2008 Ternium has not hedged
any commodity positions other that those of natural gas.
Item 12. Description of Securities Other Than Equity Securities
Not applicable.
113
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-5(e) under the Exchange Act as of December 31, 2008. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2008, our disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and to ensure that such information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives. Our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are effective at a reasonable assurance level.
Managements report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934.) Terniums internal control over financial reporting was designed by management to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
and fair presentation of its financial statements for external purposes in accordance with
International Financial Reporting Standards.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements or omissions. In addition, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted its assessment of the effectiveness of Terniums internal control over
financial reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management has concluded that Terniums internal control over financial
reporting, as of December 31, 2008, is effective to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes.
The effectiveness of Terniums internal control over financial reporting as of December 31, 2008
has been audited by Price Waterhouse & Co S.R.L., an independent registered public accounting firm,
as stated in their report included herein. See Report of Independent Registered Public Accounting
Firm.
Change in Internal Control over Financial Reporting
During the period covered by this report, there were no changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
114
Item 16A. Audit Committee Financial Expert
On June 3, 2009, our board of directors has determined that none independent member of the audit
committee, meet the attributes defined in Item 16A of Form 20-F for audit committee financial
experts. We do not have an audit committee financial expert because we have concluded that the
membership of the audit committee as a whole has sufficient recent and relevant financial
experience to properly discharge its functions. In addition, the audit committee, from time to time
as it deems necessary, engages persons that meet all of the attributes of an audit committee
financial expert as consultants.
Item 16B. Code of Ethics
We have adopted a code of ethics that applies specifically to our principal executive officers, and
principal financial and accounting officer and controller, as well as persons performing similar
functions. We have also adopted a code of conduct that applies to all company employees, including
contractors, subcontractors and suppliers.
The text of our code of ethics for senior financial officers and code of conduct for employees is
posted on our web site at: www.ternium.com/en/Investor/corporategovernance.asp.
Item 16C. Principal Accountant Fees and Services
Fees Paid to the Companys Principal Accountant
In 2008, PricewaterhouseCoopers served as the principal external auditor for the Company. Fees
payable to PricewaterhouseCoopers in 2008, 2007 and 2006 are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
In thousands of U.S. dollars |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees |
|
|
2,842 |
|
|
|
2,664 |
|
|
|
1,988 |
|
Audit-Related Fees |
|
|
162 |
|
|
|
175 |
|
|
|
635 |
|
Tax Fees |
|
|
8 |
|
|
|
19 |
|
|
|
81 |
|
All Other Fees |
|
|
188 |
|
|
|
327 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,200 |
|
|
|
3,185 |
|
|
|
2,832 |
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
Audit fees were paid for professional services rendered by the auditors for the audit of the
consolidated financial statements of the Company and the statutory financial statements of the
Company and its subsidiaries.
Audit-Related Fees
Audit-related fees are typically services that are reasonably related to the performance of the
audit or review of the consolidated financial statements and are not reported under the audit fee
item above. This item includes fees for attestation services on financial information of the
Company and its subsidiaries included in their annual reports that are filed with their respective
regulators.
Tax Fees
Tax fees were paid for tax compliance and tax advice professional services.
115
All Other Fees
Fees disclosed in the table above under All Other Fees consisted primarily of fees paid for
consulting services provided in connection with processing documentation. It also included fees
paid for services provided to Siderar related to fiscal information that is filed with the tax
regulators.
Audit Committees Pre-approval Policies and Procedures
The Companys audit committee is responsible for, among other things, the oversight of the
Companys independent auditors. The audit committee has adopted a policy of pre-approval of audit
and permissible non-audit services provided by its independent auditors in its charter.
Under the policy, the audit committee makes its recommendations through the board of Directors to
the shareholders meeting concerning the continuing appointment or termination of the Companys
independent auditors. On a yearly basis, the audit committee reviews together with management and
the independent auditor, the audit plan, audit related services and other non-audit services and
approves the related fees. Any changes to the approved fees must be reviewed and approved by the
audit committee. In addition, the audit committee delegated to its Chairman the authority to
consider and approve, on behalf of the Audit Committee, additional non-audit services that were not
recognized at the time of engagement, which must be reported to the other members of the audit
committee at its next meeting. No services outside the scope of the audit committees approval can
be undertaken by the independent auditor.
During 2008, the audit committee did not approve any fees pursuant to the de minimis exception to
the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Between October 1 and December 12, 2008, I.I.I. CI purchased a total of 3,158,600 ADRs in a number
of on exchange transactions in the NYSE, for an aggregate amount of USD 35,517,831.66, which ADRs
were surrendered and converted into 31,586,000 shares of common stock of the Company. To our
knowledge, there were no other purchases of any class of registered equity securities of the
Company by the Company or any affiliated purchaser (as such term is defined in Rule 10b-18(a)(3)
under the Exchange Act) in 2008.
On June 3, 2009, the annual general meeting of shareholders of the Company resolved to authorize
the Company and the Companys subsidiaries to acquire shares of the Company, including shares
represented by ADRs, at such times and on such other terms and conditions as may be determined by
the board of directors of the Company or the board of directors or other governing body of the
relevant Company subsidiary, provided that, among other conditions, the nominal value of the
shares so acquired, together with shares previously acquired by the Company, the Companys
wholly-owned subsidiaries or any other person acting on the Companys behalf, and not cancelled,
shall not exceed 10% of the Companys issued and outstanding shares or, in the case of acquisitions
of shares made through a stock exchange in which the shares or ADRs are traded, such lower amount
as may not be exceeded pursuant to any applicable laws or regulations of such market, and that the
purchase price per ADR to be paid in cash may not exceed 125% (excluding transaction costs and
expenses), nor may it be lower than 75% (excluding transaction costs and expenses), in each case of
the average of the closing prices of the ADRs in the New York Stock Exchange during the five
trading days in which transactions in the ADRs were recorded in the New York Stock Exchange
preceding (but excluding) the day on which the ADRs are purchased and, in the case of purchases of
shares other than in the form of ADRs, the per share purchase price may not exceed the maximum nor
may it be lower than the minimum purchase prices that would have applied in case of an ADR purchase
divided by the number of underlying shares represented by an ADR at the time of the relevant
purchase. In addition, the acquisitions of shares or ADRs carried out pursuant to this
authorization shall comply with the relevant provisions of he Luxembourg law of August 10, 1915 on
commercial companies and, where applicable, with the laws and regulations of the markets where the
shares or other securities representing shares are traded.
116
In the future, we may, on the terms and subject to the conditions above referred, initiate a stock
repurchase or similar program or engage in other transactions pursuant to which we would
repurchase, directly or indirectly, the Companys ordinary shares, ADSs or both. In addition, we or
our subsidiaries may enter into transactions involving sales or purchases of derivatives or other
instruments (either settled in cash or through physical delivery of securities) with returns linked
to the Companys ordinary shares, ADSs or both. The timing and amount of repurchase transactions
under any such program, or sales or purchases of derivatives or other instruments, would depend on
market conditions as well as other corporate and regulatory considerations.
Item 16F. Change in Registrants Certifying Accountant.
None.
Item 16G. Corporate Governance
Our corporate governance practices are governed by Luxembourg law (particularly the law of August
10th, 1915 on commercial companies) and our Articles of Association. As a Luxembourg company
listed on the New York Stock Exchange (the NYSE), we are not required to comply with all of the
corporate governance listing standards of the NYSE. We, however, believe that our corporate
governance practices meet or exceed, in all material respects, the corporate governance standards
that are generally required for controlled companies by the NYSE but the following is a summary of
the significant ways that our corporate governance practices differ from the corporate governance
standards required for controlled companies by the NYSE (provided that our corporate governance
practices may differ in non-material ways from the standards required by the NYSE that are not
detailed here):
Non-management Directors Meetings
Under NYSE standards, non-management directors must meet at regularly scheduled executive sessions
without management present and, if such group includes directors who are not independent, a meeting
should be scheduled once per year including only independent directors. Neither Luxembourg law nor
our Articles of Association require the holding of such meetings and we do not have a set policy
for these meetings. Our Articles of Association provide, however, that the board shall meet as
often as required by the interests of the Company and at least four times a year, upon notice by
the chairperson or by any two directors.
In addition, NYSE-listed companies are required to provide a method for interested parties to
communicate directly with the non-management directors as a group. While we do not have such a
method, we have set up a compliance line for investors and other interested parties to communicate
their concerns to members of our audit committee (which, as already said, are independent).
Audit Committee
Under NYSE standards, listed U.S. companies are required to have an audit committee composed of
independent directors that satisfies the requirements of
Rule 10A-3 promulgated under the Exchange Act. Our articles of association currently require us to have an
audit committee composed of three members, of which at least two must be independent (as defined in
our articles of association) and our audit committee complies with such requirements. In accordance
with NYSE standards, we have an audit committee entirely composed of independent directors.
Under NYSE standards, all audit committee members of listed U.S. companies are required to be
financially literate or must acquire such financial knowledge within a reasonable period and at
least one of its members shall have experience in accounting or financial administration. In
addition, if a member of the audit committee is simultaneously a member of the audit committee of
more than three public companies, and the listed company does not limit the number of audit
committees on which its members may serve, then in each case the board must determine whether the
simultaneous service would prevent such member from effectively serving on the listed companys
audit committee and shall publicly disclose its decision. No comparable provisions on audit
committee membership exist under Luxembourg law or our articles of association.
117
Standards for Evaluating Director Independence
Under NYSE standards, the board is required, on a case by case basis, to express an opinion with
regard to the independence or lack of independence of each individual director. Neither Luxembourg
law nor our Articles of Association require the board to express such an opinion. In addition, the
definition of independent under the rules of the NYSE differs in some non-material respects from
the definition contained in our Articles of Association.
Audit Committee Responsibilities
Pursuant to our Articles of Association, the audit committee shall assist the board of directors in
fulfilling its oversight responsibilities relating to the integrity of the Companys financial
statements, including periodically reporting to the Board of Directors on its activity and the
adequacy of the Companys system of internal controls over financial reporting. As per the audit
committee charter, as amended, the audit committee shall make recommendations for the appointment,
compensation, retention and oversight of, and consider the independence of, the Companys external
auditors. The audit committee is required to review material transactions (as defined by the
Articles of Association) between us or our subsidiaries with related parties and also perform the
other duties entrusted to it by the board.
The NYSE requires certain matters to be set forth in the audit committee charter of U.S. listed
companies. Our audit committee charter provides for many of the responsibilities that are expected
from such bodies under the NYSE standard; however, due to our equity structure and holding company
nature, the charter does not contain all such responsibilities, including provisions related to
setting hiring policies for employees or former employees of independent auditors, discussion of
risk assessment and risk management policies, and an annual performance evaluation of the audit
committee.
Shareholder Voting on Equity Compensation Plans
Under NYSE standards, shareholders must be given the opportunity to vote on equity-compensation
plans and material revisions thereto, except for employment inducement awards, certain grants,
plans and amendments in the context of mergers and acquisitions, and certain specific types of
plans. We do not currently offer equity-based compensation to our directors, executive officers or
employees, and therefore do not have a policy on this matter.
Disclosure of Corporate Governance Guidelines
NYSE-listed companies must adopt and disclose corporate governance guidelines. Neither Luxembourg
law nor our Articles of Association require the adoption or disclosure of corporate governance
guidelines. Our board of directors follows corporate governance guidelines consistent with our
equity structure and holding company nature, but we have not codified them and therefore do not
disclose them on our website.
Code of Business Conduct and Ethics
Under NYSE standards, listed companies must adopt and disclose a code of business conduct and
ethics for directors, officers and employees, and promptly disclose any waivers of the code for
directors or executive officers. Neither Luxembourg law nor our Articles of Association require the
adoption or disclosure of such a code of conduct. We have adopted a code of conduct that applies
to all directors, officers and employees, which is posted on our website and complies with the
NYSEs requirements, except that does not require the disclosure of waivers of the code for
directors and officers. In addition we have adopted a supplementary code of ethics for senior
financial officers which is also posted on our website.
Chief Executive Officer Certification
A chief executive officer of a U.S. company listed on NYSE must annually certify that he or she is
not aware of any violation by the company of NYSE corporate governance standards. In accordance
with NYSE rules applicable to foreign private issuers, our chief executive officer is not required
to provide NYSE with this annual compliance certification. However, in accordance with NYSE rules
applicable to all listed companies, our chief executive officer
must promptly notify NYSE in writing after any of our executive officers becomes aware of any
material noncompliance with any applicable provision of NYSEs corporate governance standards. In
addition, we must submit an executed written affirmation annually and an interim written
affirmation each time a change occurs to the board or the audit committee.
118
PART III
Item 17. Financial Statements
We have responded to Item 18 in lieu of responding to this Item.
Item 18. Financial Statements
See pages F-1 through F-59 of this annual report.
Item 19. Exhibits
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Exhibit |
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Number |
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Description |
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1.1 |
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Updated and Consolidated Articles of Association of Ternium S.A., dated as of March 17, 2006* |
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2.1 |
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Deposit Agreement entered into between Ternium S.A. and The Bank of New York** |
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4.1 |
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Shareholders Agreement, dated July 20, 2005, between I.I.I.Industrial Investments Inc.
and Usinas Siderurgicas de Minas Gerais, S.A.USIMINAS*** |
|
4.2 |
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Shareholders Agreement, dated January 9, 2006, between Tenaris S.A. and Inversora
Siderurgica Limited**** |
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4.3 |
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Promissory Notes (pagarés) numbered 1 to 7 issued by CVG on May 7, 2009. |
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8.1 |
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List of subsidiaries of Ternium S.A. |
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12.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
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12.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
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13.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
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13.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
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* |
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Incorporated by reference to the Annual Report on Form 20-F, filed by Ternium S.A. on June 30,
2006 (File No. 001-32734). |
|
** |
|
Incorporated by reference to the Registration Statement on Form F-6, filed by Ternium S.A. on
January 11, 2006 (File No. 333-130952). |
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*** |
|
Incorporated by reference to the F-1 Registration Statement filed by Ternium S.A. on January
11, 2006 (File No. 333-130950). |
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**** |
|
Incorporated by reference to the F-1 Registration Statement filed by Ternium S.A. on January
27, 2006 (File No. 333-130950). |
119
SIGNATURES
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that
it has duly caused and authorized the undersigned to sign this annual report on its behalf.
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June 30, 2009 |
TERNIUM S.A. |
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By |
/s/ Roberto Philipps |
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Name: |
Roberto Philipps |
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Title: |
Chief Financial Officer |
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TERNIUM S.A.
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2008 and 2007 and
for the years ended December 31, 2008, 2007 and 2006
46a, Avenue John F. Kennedy, 2nd floor
L 1855
R.C.S. Luxembourg : B 98 668
TERNIUM S.A.
Index to financial statements
Consolidated Financial Statements
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Page |
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F-1 |
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F-2 |
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F-3 |
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F-4 |
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F-7 |
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F-8 |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ternium S.A.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in shareholders equity present fairly, in all
material respects, the financial position of Ternium S.A. and its subsidiaries at December 31, 2008
and 2007, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with International Financial Reporting Standards
as issued by the International Accounting Standards Board. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys
management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Managements Report on Internal Control Over Financial
Reporting appearing under Item 15. Our responsibility is to express opinions on these financial
statements and on the Companys internal control over financial reporting based on our audits
(which were integrated audits in 2008 and 2007). We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Buenos Aires, Argentina
June 30, 2009
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PRICE WATERHOUSE & CO. S.R.L. |
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by
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(Partner) |
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Marcelo D. Pfaff |
F-1
TERNIUM S.A.
Consolidated financial statements
as of December 31, 2008 and 2007 and
for the years ended December 31, 2008, 2007 and 2006
(All amounts in USD thousands)
CONSOLIDATED INCOME STATEMENTS
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Year ended December 31, |
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Notes |
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2008 |
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2007 |
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2006 |
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Continuing operations |
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Net sales |
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30 |
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8,464,885 |
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5,633,366 |
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4,484,918 |
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Cost of sales |
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6 & 30 |
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(6,128,027 |
) |
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(4,287,671 |
) |
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(3,107,629 |
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Gross profit |
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2,336,858 |
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1,345,695 |
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1,377,289 |
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Selling, general and administrative expenses |
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7 |
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(669,473 |
) |
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(517,433 |
) |
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(370,727 |
) |
Other operating income (expenses), net |
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9 |
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8,662 |
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8,514 |
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(4,739 |
) |
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Operating income |
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1,676,047 |
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836,776 |
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1,001,823 |
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Interest expense |
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30 & 31 |
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(136,111 |
) |
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(133,109 |
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(96,814 |
) |
Interest income |
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30 |
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32,178 |
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41,613 |
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33,903 |
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Other financial expenses, net |
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10 |
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(693,192 |
) |
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(38,498 |
) |
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(40,432 |
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Equity in earnings of associated companies |
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14 |
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1,851 |
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434 |
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671 |
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Income before income tax expense |
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880,773 |
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707,216 |
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899,151 |
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