Tenaris S.A. Form 6-K Summary
Business Context and Reporting Period
Tenaris S.A., a global leader in steel pipe manufacturing and distribution, reported its Consolidated Condensed Interim Financial Statements for the nine-month period ended September 30, 2018. The filing was submitted to the SEC on November 2, 2018. The company operates primarily through its "Tubes" segment, with significant investments in non-consolidated companies including Ternium, Usiminas, and Techgen.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 2018):
- Net Sales: $5,553.6 million (up from $3,699.6 million in 2017).
- Gross Profit: $1,716.3 million (Gross Margin: 30.9%).
- Operating Income: $693.1 million (Operating Margin: 12.5%).
- Net Income (Continuing Operations): $648.8 million.
- Earnings Per Share (Basic/Diluted): $0.55 per share ($1.10 per ADS).
Cash Flow and Liquidity:
- Operating Cash Flow: $371.5 million (compared to a net use of $9.1 million in 2017).
- Capital Expenditures: $273.7 million.
- Cash and Cash Equivalents: $236.3 million as of September 30, 2018.
- Total Borrowings: $734.1 million ($702.6 million current; $31.6 million non-current).
Material Changes vs. Prior Period
The nine-month period in 2018 demonstrated significant improvement over the same period in 2017:
- Revenue Growth: Net sales increased by approximately 50%, driven by higher volumes and improved pricing in the Tubes segment.
- Profitability Surge: Operating income increased from $166.6 million in 2017 to $693.1 million in 2018. This was largely due to a turnaround in the Tubes segment, which moved from a management view operating loss of $15 million in 2017 to a profit of $492 million in 2018.
- Financial Results: Net financial results improved from a net expense of $27.3 million in 2017 to a net income of $43.8 million in 2018, primarily due to favorable foreign exchange results on Argentine peso and Euro denominated liabilities.
- Discontinued Operations: The 2017 period included a one-time after-tax gain of $89.7 million from the sale of the Conduit business, which is not present in the 2018 continuing operations.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Transactions:
- Acquisition: On September 25, 2018, Tenaris agreed to acquire 47.79% of Saudi Steel Pipe Company (SSP) for $144 million, expected to close in Q1 2019.
- Dividends: The Board approved an interim dividend of $0.13 per share ($0.26 per ADS), totaling approximately $153 million, payable in November 2018.
Risks and Contingencies:
- Venezuela Nationalization: Tenaris holds ICSID arbitration awards against Venezuela totaling approximately $414 million (including interest) for the expropriation of subsidiaries Tavsa, Matesi, and Comsigua. Enforcement actions are ongoing in U.S. federal courts.
- Legal Proceedings:
- CSN Claim: Ongoing appeal by CSN regarding the 2012 Usiminas acquisition; Tenaris believes claims are groundless.
- Veracel Accident: A settlement of $3.5 million was reached with insurer Chubb, but a separate court ruling ordered a payment of ~$14.25 million to Veracel, which Tenaris is appealing.
- Investigations: Ongoing investigations by Italian, Swiss, and U.S. authorities regarding alleged payments related to Petrobras ("Operation Lava Jato"). Tenaris has voluntarily notified the SEC and DOJ.
- Tax Assessments: A Mexican tax assessment against subsidiaries Tamsa and Segeta involves an estimated exposure of approximately $220.3 million.
Accounting Changes: The company adopted IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) effective January 1, 2018, using retrospective approaches that did not materially restate comparatives.
Investor Verification Checklist
- Verify the status of the $414 million arbitration award against Venezuela and the progress of enforcement in U.S. courts.
- Monitor the outcome of the ongoing investigations by Italian, Swiss, and U.S. authorities regarding alleged payments to Petrobras officials.
- Assess the impact of the pending Mexican tax assessment (~$220 million) on future cash flows.
- Review the integration and financial performance of the pending Saudi Steel Pipe Company (SSP) acquisition.
- Confirm the sustainability of the gross margin expansion (30.9%) given the cyclical nature of the steel industry.