Tenaris S.A. Half-Year 2020 Filing Summary
Business Context and Reporting Period
This Form 6-K filing contains the unaudited consolidated condensed interim financial statements and interim management report for Tenaris S.A. for the six-month period ended June 30, 2020. Tenaris is a leading global manufacturer of pipes and related services for the energy industry. The reporting period was significantly impacted by the global COVID-19 pandemic and a severe crisis in the oil and gas sector, characterized by a collapse in oil prices and a dramatic reduction in drilling activity.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Net Sales | $3,003 million | $3,790 million |
| Gross Profit | $667 million (22.2% margin) | $1,175 million (31.0% margin) |
| Operating Income (Loss) | ($600 million) | $494 million |
| Net Income (Loss) Attributable to Owners | ($708 million) | $484 million |
| EBITDA | $338 million | $760 million |
| Free Cash Flow | $850 million | $707 million |
| Net Cash Position | $670 million | $706 million |
| Total Assets | $13,896 million | $14,843 million |
| Total Liabilities | $2,519 million | $2,657 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 21% year-over-year, driven by a 17% drop in tubular product volumes and a 4% decline in average selling prices. The decline was most severe in North America (-22%) and South America (-45%).
- Impairment Charges: The company recorded a significant non-cash impairment charge of $622 million. This primarily relates to goodwill associated with the recent acquisition of IPSCO ($357 million) and other assets in the U.S. operations (Maverick Tube Corporation and OCTG USA) due to deteriorating market conditions.
- Profitability Reversal: The company swung from a net profit of $484 million in H1 2019 to a net loss of $708 million in H1 2020. Operating margins collapsed from 13.0% to -20.0% of sales.
- Acquisition Activity: Tenaris completed the acquisition of IPSCO Tubulars, Inc. in January 2020 for a final price of approximately $1,029 million. Due to the market downturn, all IPSCO facilities were temporarily closed as of the reporting date.
- Cash Flow: Despite the operating loss, operating cash flow remained strong at $964 million, aided by a $763 million reduction in working capital. Free cash flow increased to $850 million compared to $707 million in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a further significant reduction in sales and margins during the third quarter of 2020, with EBITDA margins potentially falling to low single digits. An improvement is expected in the fourth quarter, though the timing of a full recovery remains uncertain.
- Cost Containment: To preserve liquidity, Tenaris is implementing a worldwide rightsizing program. This includes pay reductions for senior management and board members, estimated to save approximately $220 million annually by year-end. Capital expenditures and R&D expenses are being reduced by approximately $150 million compared to 2019 levels.
- Dividends: The Annual Shareholders Meeting approved that no further dividends be distributed for fiscal year 2019 beyond the interim dividend of approximately $153 million paid in November 2019.
- Operational Status: Facilities in China, Italy, and Saudi Arabia have resumed normal or near-normal operations. However, facilities in the United States (including IPSCO sites) remain temporarily closed. Operations in Argentina, Colombia, and Mexico continue at greatly reduced levels.
- Legal Contingencies: On July 17, 2020, a U.S. federal court entered a default judgment against Venezuela ordering payment of $256.4 million to Tenaris regarding nationalized assets. Enforcement may be restricted by U.S. sanctions. The company is also subject to ongoing investigations regarding alleged payments in Brazil and Italy, though management believes provisions are adequate.
Key Facts for Investor Verification
- Impairment Sensitivity: Verify the assumptions used in the $622 million impairment charge, specifically regarding future oil prices and rig counts, as further deterioration could trigger additional charges.
- IPSCO Integration: Monitor the status of IPSCO facilities and the timeline for reopening, as these assets are currently non-operational and contributed minimal revenue in H1 2020.
- Liquidity Position: Confirm the sustainability of the $670 million net cash position given the projected sales decline in Q3 and the suspension of dividends.
- Venezuela Judgment: Track the enforceability of the $256.4 million judgment against Venezuela in light of ongoing U.S. sanctions.
- Working Capital Management: Assess the sustainability of the $763 million working capital reduction, as further reductions may be limited by operational needs.