Tenaris S.A. Form 6-K Summary: Nine Months Ended September 30, 2010
Business Context and Reporting Period
Tenaris S.A., a Luxembourg-based holding company for steel pipe manufacturing and distribution, filed this Form 6-K on November 8, 2010. The filing presents unaudited consolidated condensed interim financial statements for the nine-month period ended September 30, 2010. The company operates globally with significant segments in Tubes, Projects, and Other operations.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2010) | Value (USD Thousands) |
|---|---|
| Net Sales | 5,647,725 |
| Gross Profit | 2,224,670 |
| Operating Income | 1,119,729 |
| Net Income (Continuing Operations) | 819,887 |
| Net Income Attributable to Equity Holders | 806,459 |
| Earnings Per Share (Basic & Diluted) | $0.68 |
| Net Cash Provided by Operating Activities | 616,981 |
| Capital Expenditures | (561,218) |
| Total Borrowings (Current + Non-Current) | 1,089,907 |
| Cash and Cash Equivalents | 919,027 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by approximately 10.4% to $5.65 billion from $6.30 billion in the same period of 2009. This was driven primarily by a significant drop in the "Projects" segment sales ($282.6M in 2010 vs. $765.4M in 2009).
- Profitability Pressure: Operating income fell 24.5% to $1.12 billion from $1.48 billion. Net income attributable to equity holders declined 14.1% to $806.5 million from $939.2 million.
- Cost Structure: Cost of sales decreased to $3.42 billion from $3.71 billion, reflecting lower volume. Gross margin percentage improved slightly to 39.4% from 41.2% in 2009.
- Cash Flow Volatility: Net cash provided by operating activities dropped significantly to $617 million from $2.65 billion in 2009, largely due to a $491 million use of cash for changes in working capital compared to a $1.53 billion source in 2009.
- Debt Reduction: Total borrowings decreased from approximately $1.45 billion at year-end 2009 to $1.09 billion at September 30, 2010.
Outlook, Risks, and Contingencies
- Venezuela Nationalization: The company continues to face the nationalization of its Venezuelan subsidiaries (Tavsa, Matesi, and Comsigua). These operations were deconsolidated as of June 30, 2009, and classified as discontinued operations. The company has reserved rights to international arbitration and holds receivables of $27.7 million from these entities.
- Legal Investigation: Tenaris disclosed an ongoing investigation regarding sales agency payments in Central Asia that may have improperly benefited customer employees. The company has voluntarily notified the SEC and DOJ and is cooperating with authorities. No estimate of potential loss can be made at this time.
- Tax Contingency: An Argentine tax assessment regarding tax loss carry-forwards remains outstanding, representing an estimated contingency of approximately $24.4 million. Management does not believe an obligation is probable.
- Dividends: The Board approved an interim dividend of $0.13 per share ($0.26 per ADS), totaling approximately $153 million, payable in November 2010.
Investor Verification Checklist
- Verify the impact of the Central Asia sales agency investigation on future operations and potential fines.
- Monitor the status of the Venezuela nationalization dispute and the recoverability of the $27.7 million receivable.
- Assess the sustainability of the working capital outflow ($491M) and its effect on future liquidity.
- Review the "Projects" segment performance, which saw a drastic revenue decline compared to 2009.
- Confirm the timeline and terms of the ongoing raw material supply contracts with Nucor and Rio Tinto.