Tenaris S.A. Q3 2010 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited consolidated results for Tenaris S.A. for the quarter and nine months ended September 30, 2010. The company, a global manufacturer of tubular products and services for the oil and gas industry, reported results prepared in accordance with IFRS. The period reflects a recovery in global drilling activity, particularly in North America, offset by operational challenges in Italy and Mexico.
Key Financial Metrics
| Metric (US$ Million) | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net Sales | 2,027.2 | 1,771.5 | 5,647.7 | 6,302.1 |
| Operating Income | 405.1 | 360.6 | 1,119.7 | 1,483.0 |
| Net Income (Shareholders) | 304.8 | 229.9 | 806.5 | 939.2 |
| EBITDA | 531.1 | 488.3 | 1,497.6 | 1,858.8 |
| Operating Margin | 20.0% | 20.4% | 19.8% | 23.5% |
| EBITDA Margin | 26.2% | 27.6% | 26.5% | 29.5% |
| Cash Flow from Operations | 122.1 | 772.4 | 617.0 | 2,647.0 |
| Capital Expenditures | 212.8 | 101.5 | 561.2 | 327.8 |
| Net Cash Position | 471.1 | 675.7 (Dec 2009) | 471.1 | 675.7 (Dec 2009) |
| Total Financial Debt | 1,090.0 | 1,446.9 (Dec 2009) | 1,090.0 | 1,446.9 (Dec 2009) |
Note: Net Cash Position is defined as total financial debt less cash and other current investments. Total Financial Debt decreased to US$1.1 billion at September 30, 2010.
Material Changes vs. Prior Periods
- Revenue Growth: Q3 2010 net sales increased 14% year-over-year (YoY) and 2% sequentially. The Tubes segment drove this growth with a 31% YoY increase in sales, despite a 25% reduction in average selling prices year-over-year for the nine-month period.
- Profitability: Net income attributable to shareholders rose 33% YoY in Q3 2010. Earnings per ADS increased to US$0.52 from US$0.39 in Q3 2009.
- Segment Performance:
- Tubes: Sales volume increased 66% YoY in Q3, driven by a 43% increase in seamless and 206% increase in welded tubes. North American sales rose 65% YoY.
- Projects: Sales declined 67% YoY in Q3 due to lower deliveries in Brazil and Argentina. Operating income fell 79% YoY.
- Others: Sales increased 20% YoY, primarily due to higher sucker rod sales.
- Cash Flow: Operating cash flow dropped significantly to US$122.1 million in Q3 2010 compared to US$772.4 million in Q3 2009, largely due to a US$427.9 million increase in working capital (inventory and receivables) caused by uneven shipment distribution.
Guidance, Outlook, and Risks
Outlook: Management expects the recovery in drilling activity to continue into Q4 2010 and 2011. While dry gas drilling in North America may reduce, this is expected to be offset by increases in oil and liquid-rich gas drilling. Revenues and operating income are projected to increase gradually in Q4 and more strongly in the first half of 2011.
Dividends: The Board approved an interim dividend of US$0.13 per share (US$0.26 per ADS), totaling approximately US$153 million, payable November 25, 2010.
Risks and Contingencies:
- Operational Disruptions: Prolonged shutdown of the Italian plant and reduced activity in Mexico due to severe weather (hurricanes) impacted Q3 results.
- Market Volatility: Results remain sensitive to future oil and gas prices and investment programs by oil and gas companies.
- FX Exposure: Other financial results included a loss of US$16.2 million in Q3, largely attributable to foreign exchange variations between subsidiaries' functional currencies and the U.S. dollar.
Investor Verification Checklist
- Verify the sustainability of the 33% YoY earnings growth given the 25% decline in average selling prices over the nine-month period.
- Monitor the recovery of the "Projects" segment, which saw a 67% sales drop in Q3, to confirm management's expectation of a rebound in coming quarters.
- Assess the impact of the US$427.9 million working capital increase on future liquidity and cash flow generation.
- Track the start-up progress of the new rolling mill in Mexico and the Dalmine mill investments, which drove Q3 capital expenditures to US$212.8 million.
- Confirm the timeline for the Italian plant restart and its effect on European sales, which declined 10% sequentially.