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Business Context and Reporting Period

This Form 6-K filing by Ternium S.A., a Luxembourg-based holding company for flat and long steel manufacturing and distribution, presents combined consolidated financial statements for the years ended December 31, 2005, 2004, and 2003. The filing date is February 28, 2006. The 2005 period reflects a major corporate restructuring, including the acquisition of controlling interests in Hylsamex (Mexico) and Amazonia (Venezuela), and the preparation for an Initial Public Offering (IPO) completed in January 2006.

Key Financial Metrics (Year Ended Dec 31, 2005)

Margins (2005): Gross Margin was 44.4%; Operating Margin was 31.3%.

Material Changes vs. Prior Period

• Revenue Surge: Net sales increased 178% to $4.45 billion, driven primarily by the consolidation of Hylsamex and Amazonia, which contributed $723.8 million and $1.86 billion in revenue respectively during 2005.
• Profitability: Net income rose 43% to $1.07 billion. A significant non-recurring gain of $188.4 million was recognized from the acquisition of Amazonia due to the fair value of net assets exceeding the purchase price.
• Balance Sheet Expansion: Total assets more than tripled to $8.66 billion, largely due to the acquisition of property, plant, and equipment (PP&E) from Hylsamex and Amazonia. PP&E increased from $1.24 billion to $5.46 billion.
• Debt Increase: Total borrowings increased significantly to $2.92 billion to finance the acquisitions. This includes a $1.0 billion Ternium Credit Facility and $594 million in Subordinated Convertible Loans.
• Financial Expenses: Net financial expenses turned negative at $310.7 million (compared to $202.3 million income in 2004), primarily due to higher interest costs and a $265.2 million loss from the Participation Account related to Amazonia consolidation.

Guidance, Outlook, Risks, and Unusual Items

• Initial Public Offering (IPO): The Company completed an IPO in January 2006, raising approximately $496.9 million. Proceeds were used to repay Tranche A of the Ternium Credit Facility. Underwriters exercised an option to purchase additional shares in February 2006.
• Debt Conversion: Subordinated Convertible Loans totaling $594 million were converted into shares in February 2006 upon the completion of the IPO.
• Acquisitions: The acquisition of Hylsamex (completed August 2005) and the consolidation of Amazonia (February 2005) are the primary drivers of 2005 results. An additional acquisition of Impeco S.A. assets was completed in January 2006.
• Risks and Contingencies:
  • Legal/Tax: Significant tax claims exist in Argentina (Siderar) and Venezuela (Amazonia/Sidor). A provision of $4.6 million was recorded for Argentine tax claims, while Venezuelan tax provisions total $23.2 million.
  • Supply Chain: Sidor relies heavily on state-owned Venezuelan entities for gas and electricity. Disruptions could significantly impact operations.
  • Financial Covenants: The Company is subject to strict financial covenants under its credit facilities, which limit dividend payments and capital expenditures.
• Unusual Items: The $188.4 million gain on the Amazonia acquisition and the $54.3 million charge for the derecognition of an abandoned Hylsamex mill are notable non-operating or one-time items.

Investor Verification Checklist

• Acquisition Integration: Verify the operational integration and synergies realized from the Hylsamex and Amazonia acquisitions in subsequent periods.
• Debt Servicing: Confirm the Company's ability to meet interest obligations on the $2.9 billion debt load, particularly given the floating rate exposure.
• Regulatory Risks: Monitor the status of tax litigation in Argentina and Venezuela, as well as the stability of energy supply contracts in Venezuela.
• Dividend Policy: Review the impact of Luxembourg GAAP restrictions on distributable reserves versus consolidated retained earnings.
• Commodity Exposure: Assess the Company's hedging strategies for raw materials (iron ore, natural gas) and finished steel prices.