Tenaris S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K filing, dated August 2, 2018, presents the unaudited consolidated condensed interim financial statements and interim management report for Tenaris S.A. for the six-month period ended June 30, 2018. Tenaris is a leading global manufacturer and supplier of steel pipe products and related services, primarily for the oil and gas industry. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics
Revenue and Profitability (Six Months Ended June 30, 2018):
- Net Sales: $3,654.7 million (up 52% from $2,396.7 million in 2017).
- Gross Profit: $1,122.7 million (Gross margin improved to 30.7% from 29.5%).
- Operating Income: $434.6 million (up from $87.5 million in 2017).
- Net Income (Continuing Operations): $401.7 million.
- Net Income Attributable to Owners: $403.3 million ($0.68 per ADS).
- EBITDA: $716.8 million (up 80% from $398.6 million in 2017; margin improved to 20%).
Cash Flow and Liquidity:
- Operating Cash Flow: $321.7 million provided by operating activities.
- Capital Expenditures: $195.7 million.
- Free Cash Flow: $125.9 million.
- Net Cash Position: $422.5 million (Cash and investments less borrowings).
- Dividends Paid: $330.6 million paid in May 2018 (balance of 2017 annual dividend).
Balance Sheet Highlights (as of June 30, 2018):
- Total Assets: $14,490.2 million.
- Total Liabilities: $2,963.5 million.
- Total Equity: $11,526.7 million.
- Borrowings: $840.5 million total (Current: $808.7 million; Non-current: $31.8 million).
Material Changes vs. Prior Period
The significant increase in financial performance is driven by a 47% increase in shipment volumes and a 4% increase in average selling prices. Key drivers include:
- North America: Strong increase in demand due to higher shale drilling activity in the USA and Canada.
- Operating Leverage: Higher utilization of production capacity improved the absorption of fixed costs.
- Financial Results: A net financial gain of $30.7 million in 2018 compared to a loss of $20.1 million in 2017, largely due to foreign exchange gains (Argentine peso devaluation and Euro depreciation).
- Segment Performance:
- Tubes: Sales increased 53% to $3,452 million; Operating income surged 411% to $391 million.
- Others: Sales increased 49% to $203 million; Operating income increased 297% to $44 million.
Guidance, Outlook, and Risks
Outlook: Management expects shipment volumes in the second half of 2018 to be similar to the first half, with higher shipments in North America offset by lower shipments for East Mediterranean pipeline projects. Selling prices are expected to increase moderately to compensate for US Section 232 tariffs. EBITDA and operating income are expected to be close to first-half levels in Q3 before rising in Q4.
Principal Risks and Contingencies:
- Venezuela Nationalization: Tenaris has won two ICSID arbitration awards against Venezuela totaling approximately $309.8 million (including interest as of June 30, 2018) regarding the expropriation of subsidiaries Tavsa, Matesi, and Comsigua. Venezuela has requested annulment, and Tenaris filed actions in US federal court in June 2018 to enforce the awards.
- Legal Proceedings:
- CSN Claim: Ongoing appeal by CSN regarding the 2012 Usiminas acquisition; Tenaris believes claims are groundless.
- Veracel Accident: Litigation regarding a 2007 tank rupture; estimated claims total approximately $36.6 million.
- Tax Assessment (Mexico): Potential exposure of approximately $207.3 million regarding scrap purchase deductions; Tenaris believes a material obligation is unlikely.
- Investigation: Ongoing review of potential payments related to Petrobras (Lava Jato) by Italian, Swiss, and US authorities.
- Market Risks: Exposure to oil and gas price fluctuations, raw material costs, and US Section 232 tariffs on steel imports.
Investor Verification Checklist
- Verify the status of enforcement actions regarding the $309.8 million ICSID awards against Venezuela.
- Monitor the impact of US Section 232 tariffs on selling prices and margins in the North American segment.
- Review the resolution of the Mexican tax assessment (approx. $207 million exposure) and the Veracel accident litigation.
- Assess the sustainability of the 47% volume increase given pipeline takeaway capacity constraints in the Permian region.
- Confirm the outcome of the ongoing investigation into potential FCPA violations related to Petrobras.