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Ternium S.A. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K, filed on February 27, 2007, presents the consolidated financial statements of Ternium S.A., a Luxembourg-based holding company for flat and long steel manufacturing and distribution, for the fiscal year ended December 31, 2006. The company operates primarily in South and Central America, North America, and Europe. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and include a reconciliation to U.S. GAAP.

Key Financial Metrics (Year Ended Dec 31, 2006)

Margins: Gross margin was approximately 34.5% in 2006 compared to 44.0% in 2005. Operating margin was 24.9% in 2006 compared to 31.3% in 2005.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by 47.7% to $6.57 billion, driven by higher steel prices and volumes, particularly in the flat steel segment which generated $5.05 billion in sales.
• Profitability Decline: Despite revenue growth, net income attributable to equity holders decreased by 12.8% to $795.4 million. This was primarily due to a significant increase in "Other financial expenses, net" (from $261.5M to $322.4M) and a reduction in "Equity in earnings of associated companies" (from $21.5M to $4.5M).
• Debt Reduction: Total borrowings decreased by 63.7% to $1.06 billion. This reduction was achieved through the repayment of the Ternium Credit Facility (Tranche A) using proceeds from the 2006 Initial Public Offering (IPO) and the conversion of $594 million in Subordinated Convertible Loans into equity.
• Acquisitions: The company completed several strategic acquisitions in 2006, including Impeco S.A. (Argentina), Acerex S.A. de C.V. (Mexico), and additional shares of Siderar and Hylsamex, expanding its production capacity and market share.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The 2005 income statement included a one-time gain of $188.4 million from the "Excess of fair value of net assets acquired over cost" related to the Amazonia acquisition, which did not recur in 2006. Additionally, 2006 included a $46.9 million charge for changes to pension plans at Sidor.
• Financial Risks: The company is exposed to foreign exchange rate volatility, interest rate fluctuations, and commodity price risks (natural gas, iron ore). It utilizes derivative instruments (swaps, caps, forwards) to hedge these exposures.
• Contingencies: Significant litigation exists regarding a claim by PDVSA-Gas against Sidor (potential exposure of $125.7 million) and tax claims in Argentina (Siderar) and Venezuela (Sidor). Management believes the likelihood of material loss beyond recorded provisions is remote for the PDVSA case, while provisions of $4.6 million and $26.3 million have been recorded for the tax matters.
• Restrictions: Credit agreements limit the company's ability to pay dividends in excess of certain amounts and impose financial covenants regarding leverage and interest coverage. The company was in compliance with all covenants as of December 31, 2006.

Investor Verification Checklist

• Debt Covenant Compliance: Verify continued adherence to financial covenants in the Ternium and Siderar Credit Facilities, particularly given the high leverage in prior years.
• Commodity Hedging Effectiveness: Assess the impact of natural gas and electricity price volatility on margins, given the heavy reliance on these inputs for Sidor and Hylsamex operations.
• Legal Exposure: Monitor the status of the PDVSA-Gas arbitration appeal and the Argentine/Venezuelan tax disputes to ensure provisions remain adequate.
• US GAAP Reconciliation: Review the significant differences between IFRS and US GAAP net income (US GAAP net income was $841M vs IFRS $795M) driven by fixed asset valuation and pension accounting.
• Dividend Capacity: Confirm the availability of distributable retained earnings under Luxembourg law, as consolidated retained earnings may not be fully distributable.