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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: Three months ended March 31, 2006 (Unaudited)
Filing Date: April 28, 2006
Business Overview: Ternium is a Luxembourg corporation holding investments in flat and long steel manufacturing and distributing companies. Operations are primarily located in North America (U.S., Canada, Mexico) and South/Central America (Argentina, Brazil, etc.).

Key Financial Metrics

Note: Q1 2005 Net Income included a one-time gain of $188.3 million from the excess of fair value of net assets acquired over cost, which is not present in Q1 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 99% year-over-year to $1.53 billion, driven by the consolidation of Amazonia (acquired in 2005) and strong market demand.
• Profitability Decline: Net income attributable to equity holders decreased 51% to $165 million. This decline is primarily due to the absence of the $188.3 million non-recurring gain recorded in Q1 2005 and higher financial expenses.
• Financial Expenses: Net financial expenses surged to $123.5 million (from $38.9 million in Q1 2005), largely due to a $83.3 million loss from the Participation Account and $9.0 million in write-offs of debt issue costs related to the IPO.
• Debt Reduction: Total borrowings decreased significantly from $4.01 billion (Dec 31, 2005) to $1.75 billion (Mar 31, 2006). This reduction was funded by the Initial Public Offering (IPO) proceeds and the conversion of subordinated convertible loans into equity.
• Equity Increase: Total equity rose to $4.85 billion from $3.58 billion, reflecting the IPO proceeds ($525 million net) and the conversion of $606 million in debt to equity.

Guidance, Outlook, and Material Events

• Initial Public Offering (IPO): Completed in January 2006. Gross proceeds totaled $496.9 million, with an additional $46.0 million from the underwriters' option exercise. Proceeds were used to repay Tranche A of the credit facility.
• Debt Conversion: $594 million in Subordinated Convertible Loans were converted into 302.9 million new shares in February 2006.
• Acquisitions:
  • Acindar/Impeco: Completed acquisition of welded steel pipe assets in Argentina for $55.2 million. Contributed $9.9 million in revenue in Q1 2006.
  • Acerex (Post-Balance Sheet): In April 2006, acquired a 50% interest in Acerex S.A. de C.V. for $44.6 million, with plans to acquire the remaining 50% later in 2006.
• Dividends: Siderar (Argentine subsidiary) approved a cash dividend distribution of approximately $40.0 million in April 2006.
• Contingencies: Litigation exposure with PDVSA-Gas C.A. increased by $7.8 million, reaching a total potential exposure of $102.1 million.
• Restrictions: Dividend distribution is subject to Luxembourg law requirements regarding legal reserves and distributable retained earnings.

Investor Verification Checklist

• Debt Structure: Verify the impact of the $606 million debt-to-equity conversion on future interest obligations and leverage ratios.
• Participation Account Loss: Confirm the nature and sustainability of the $83.3 million loss from the Participation Account included in financial expenses.
• Acquisition Integration: Assess the revenue contribution and integration status of the Acindar/Impeco assets and the pending Acerex acquisition.
• Litigation Risk: Monitor the status of the $102.1 million claim against PDVSA-Gas C.A. and potential cash flow impacts.
• Dividend Policy: Review the specific calculation of distributable retained earnings under Luxembourg GAAP versus IFRS to understand actual dividend capacity.