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Tenaris S.A. Q1 2020 Financial Summary

Business Context and Reporting Period

This Form 6-K filing presents the Consolidated Condensed Interim Financial Statements for Tenaris S.A. for the three-month period ended March 31, 2020. The company, a global leader in steel pipe manufacturing, operates primarily in the oil and gas sector. The reporting period coincided with the onset of the global COVID-19 pandemic and a severe collapse in oil prices, leading to unprecedented market oversupply and reduced drilling activity.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by approximately 5.8% year-over-year, driven by lower volumes and selling prices in the North American market due to the oil price collapse and pandemic-related demand destruction.
• Significant Impairment Charge: The company recorded a non-cash impairment charge of $622.4 million. This primarily impacted goodwill for the OCTG USA ($225 million), IPSCO ($357 million), and Coiled Tubing ($4 million) cash-generating units, as well as fixed assets for Rods USA ($36 million).
• Profitability Reversal: The company swung from an operating income of $259 million in Q1 2019 to an operating loss of $509.5 million in Q1 2020. Gross margin contracted from 32.0% to 26.6%.
• Acquisition of IPSCO: On January 2, 2020, Tenaris acquired IPSCO Tubulars, Inc. for approximately $1.067 billion. While IPSCO contributed $105 million in revenue, its facilities were temporarily closed due to market conditions shortly after acquisition.
• Liquidity Position: Cash and cash equivalents decreased by approximately $712 million compared to the beginning of the period, largely due to the IPSCO acquisition ($1.06 billion outflow) and a reduction in liquidity funds, though operating cash flow remained positive at $516 million.

Outlook, Risks, and Management Commentary

• Market Conditions: Management highlights the dual impact of the COVID-19 pandemic and the oil/gas crisis. Oil prices fell below $30 per barrel, and WTI futures briefly turned negative. Customers are significantly cutting investment plans and drilling activities.
• Operational Adjustments: Tenaris has temporarily closed several U.S. facilities (including the newly acquired IPSCO plants) and reduced activity in Argentina, Colombia, Mexico, and Saudi Arabia. China operations have resumed fully.
• Cost Containment: The company is implementing a worldwide rightsizing program and cost containment plan targeting approximately $220 million in annual savings by year-end. This includes pay reductions for senior management and board members, and a reduction in capital expenditures and R&D by approximately $150 million compared to 2019.
• Dividend Policy: The Board of Directors proposed to the Annual Shareholders Meeting that no further dividends be distributed for fiscal year 2019 beyond the interim dividend of approximately $153 million paid in November 2019, to preserve liquidity.
• Liquidity Outlook: Management maintains a net cash position of approximately $271 million (as of March 31, 2020) and believes it has sufficient resources to service debt and meet working capital needs despite the adverse scenario.
• Legal Contingencies: The filing details ongoing legal proceedings, including the CSN lawsuit in Brazil regarding the Usiminas acquisition, the Veracel accident litigation, and investigations related to alleged payments involving Petrobras (Lava Jato). Management believes provisions are adequate but outcomes remain uncertain.

Investor Verification Checklist

• Impairment Sensitivity: Verify the assumptions used in the impairment tests (discount rates, growth rates, oil price forecasts) given the high volatility in the energy sector.
• IPSCO Integration and Closure: Monitor the status of the temporarily closed IPSCO facilities and the timeline for their potential reopening.
• TMK Master Distribution Agreement: Review the status of negotiations with TMK regarding the $512 million purchase commitment under the Master Distribution Agreement (MDA) in light of the market crisis.
• Cash Burn Rate: Track the company's ability to maintain its liquidity position amidst reduced operating cash flows and the suspension of dividends.
• Legal Exposure: Monitor developments in the CSN/Usiminas case and the Italian investigation involving company directors, as these could result in material financial liabilities.