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Business Context and Reporting Period

Company: Ternium S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2009 (Unaudited)
Filing Date: August 4, 2009
Business Overview: Ternium is a global steel manufacturer organized into flat steel products, long steel products, and other segments. The company operates primarily in South and Central America, North America, and Europe.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by approximately 46% year-over-year, dropping from $4.31 billion to $2.31 billion, reflecting the severe impact of the global financial crisis on steel demand.
• Operating Loss: Continuing operations shifted from an operating income of $965.6 million in 2008 to an operating loss of $78.6 million in 2009. The flat steel segment recorded an operating loss of $165.3 million.
• Discontinued Operations Impact: The reported profit for the period includes a significant one-time gain of $428.0 million from the disposal of Sidor (Venezuela) assets. Without this discontinued operation, the company would have reported a net loss from continuing operations.
• Debt Reduction: Total borrowings decreased significantly from $5.11 billion to $2.82 billion, driven by net repayments of $434.4 million in financing activities.
• Liquidity Improvement: Cash and cash equivalents increased to $1.82 billion from $688.6 million, supported by strong operating cash flow and proceeds from the Sidor transaction.

Outlook, Risks, and Unusual Items

• Sidor Nationalization Resolution: On May 7, 2009, Ternium completed the transfer of its 59.7% interest in Sidor to the Venezuelan government (CVG). The company received $400 million in cash and a receivable for the remaining $1.57 billion, payable in installments. This transaction generated a $428 million gain classified as discontinued operations.
• Impairment Charges: The company recorded a $27.0 million impairment charge on intangible assets related to a steel supply contract with Corus UK Limited, which was terminated early in April 2009.
• Legal Contingencies: Corus UK initiated arbitration proceedings against Ternium and other offtakers regarding the termination of the steel supply contract, seeking damages exceeding $150 million. Ternium has filed counterclaims. The outcome remains uncertain.
• Investment Plan Adjustments: Due to the global crisis, subsidiary Siderar has rescheduled its expansion investment plan and renegotiated raw material contracts to reduce cash outflows.
• Foreign Exchange: The company recorded net foreign exchange gains of $58.5 million, largely due to USD-denominated borrowings held by Ternium Mexico.

Key Facts for Investor Verification

• Quality of Earnings: Verify the sustainability of earnings by excluding the $428 million one-time gain from discontinued operations (Sidor disposal), which masks an underlying operating loss in continuing operations.
• Sidor Receivable Risk: Assess the collectability of the $1.57 billion receivable from the Venezuelan government, which is subject to mandatory prepayments based on crude oil prices and potential sovereign risk.
• Arbitration Exposure: Monitor the status of the arbitration with Corus UK regarding the terminated steel supply contract, which could result in significant damages or counter-claims.
• Segment Performance: Review the specific performance of the flat steel segment, which drove the operating loss, versus the long steel segment, which remained profitable.
• Debt Covenants: Confirm that the significant reduction in debt and changes in asset structure comply with existing loan covenants.