Tenaris S.A. — 2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. This is an annual filing, not a standalone fourth-quarter report. The filing says fourth-quarter 2017 sales were 52% higher year over year but does not provide a clear standalone quarterly sales value in the supplied text. Financial statements are prepared under IFRS in U.S. dollars.
Business context
Tenaris is a global manufacturer and supplier of steel pipe products and related services, primarily for oil and gas drilling and infrastructure. Its Tubes segment accounted for 94% of 2017 sales. Results are highly sensitive to drilling activity, oil and gas prices, product pricing, and steel and energy input costs.
Financial results and position
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Net sales, continuing operations | $5.289 billion | $4.294 billion | Up 23%; Tubes sales rose 24%. Tube shipment volumes increased 32%, while average selling prices fell 6%. |
| Gross profit / margin | $1.603 billion / 30.3% | $1.128 billion / 26.3% | Margin improved 4.0 percentage points. |
| Operating income / margin | $335 million / 6.3% | Loss of $59 million / (1.4%) | Recovery reflected higher volumes, improved fixed-cost absorption, and lower severance costs. |
| Net income, continuing operations | $445 million | $17 million | 2017 included tax benefits from rate reductions, partly offset by an Italian tax settlement charge. |
| Net income attributable to parent shareholders | $545 million | $55 million | Includes discontinued operations; consolidated net income was $536 million in 2017. |
| Basic and diluted EPS | $0.46 per share | $0.05 per share | Continuing-operations EPS was $0.38 versus $0.01. |
| Operating cash flow | Use of $22 million | Source of $864 million | Driven mainly by an $855 million working-capital increase, including an $804 million inventory build. |
| Capital expenditures | $558 million | $787 million | Included continued investment in the Bay City, Texas, mill. |
| Borrowings / net cash | $966 million / $680 million | $840 million / $1.441 billion | Net cash declined with investment, working-capital needs, and dividends. $931 million of borrowings were due within one year. |
At year-end, current assets were $5.381 billion and current liabilities were $2.071 billion; total equity was $11.581 billion. Liquid financial assets were 11% of total assets, versus 16% in 2016. Management reported compliance with borrowing covenants. Tenaris reported that EBITDA increased 58% year over year, but the supplied filing text does not provide a clear EBITDA amount.
Material changes versus 2016
- Recovery was concentrated in North America: Tubes sales there rose 87%, while sales declined 5% in South America, 8% in Europe, and 11% in the Middle East and Africa. Asia Pacific sales rose 50%.
- Tubes operating income improved to $292 million from a $71 million loss. Severance charges fell to $32 million from $67 million, and SG&A declined as a share of sales.
- Tenaris sold Republic Conduit to Nucor in January 2017 for $328 million net of transaction costs and recorded an approximately $90 million after-tax gain. Its results are presented as discontinued operations.
- Tenaris inaugurated its Bay City seamless mill in December 2017. The project budget was approximately $1.8 billion, with about $1.7 billion invested by year-end; planned capacity is approximately 600,000 tons annually.
- Raw-material and steel-coil costs increased. Company-referenced average U.S. hot-rolled coil prices rose to $680 per ton in 2017 from $571 in 2016.
Outlook, risks, and unusual items
- Outlook: Management expected 2018 sales to increase in most regions and product lines, with strong year-over-year growth in each quarter. It expected global OCTG demand growth to be more modest than 2017 and concentrated in major markets. Management anticipated lower 2018 capital expenditures than in 2017 and expected higher raw-material costs to be accompanied by price increases as demand improved.
- Market and operating risks: Demand and margins depend on oil and gas investment and drilling. Competition and global pipe overcapacity, input-cost volatility, supply constraints, lower plant utilization, and the ability to pass costs through to customers may pressure results. Climate policy and alternative energy could reduce longer-term fossil-fuel demand.
- Trade and geographic exposure: The filing discusses U.S. steel tariffs of 25% under Section 232, with temporary country exemptions announced at the time, and notes uncertainty about their eventual scope and impact. Political, currency, regulatory, energy-supply, and labor risks affect multiple operating countries.
- Legal and contingent matters: Disclosed matters include an investigation by Italian and Swiss authorities concerning alleged payments potentially connected with Confab; a contractor arbitration claim exceeding $90 million related to the Bay City project; Ecuadorian penalties of approximately $22.5 million; and a Mexican tax assessment with estimated exposure of approximately $219 million as of March 31, 2018. Tenaris said outcomes or potential losses could not be reliably estimated for several matters. It also disclosed ICSID awards against Venezuela relating to nationalized subsidiaries; enforcement and annulment proceedings remained ongoing.
- Other notable items: A $49 million foreign-exchange charge related to euro-denominated intercompany liabilities was largely offset in equity translation reserves. A $63 million deferred-tax gain reflected tax-rate reductions in Argentina and the United States, while the Italian tax settlement generated an additional approximately $29 million charge. The board proposed a 2017 annual dividend of $0.41 per share ($0.82 per ADS), subject to shareholder approval.
Important facts for investors to verify
- Whether the 2018 sales and pricing outlook materialized, particularly against rising raw-material costs and uncertain tariff effects.
- Bay City mill ramp-up, utilization, remaining investment needs, and returns on the approximately $1.8 billion project.
- Working-capital recovery and cash conversion after the 2017 inventory build; operating cash flow was negative despite the earnings rebound.
- Near-term refinancing or repayment of the $931 million of borrowings classified as due within one year, and the sustainability of the net-cash position.
- Developments and potential financial exposure in the disclosed investigations, tax matters, contractor arbitration, Ecuadorian claim, and Venezuelan awards.
- The composition of earnings: the Republic Conduit gain, tax-rate benefits, equity-method earnings, and other non-recurring items contributed to 2017 results.