Tenaris S.A. — 2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018; the filing is an annual report, not a standalone fourth-quarter report. It does not provide a clear set of Q4-only financial results. Financial statements are prepared under IFRS, in U.S. dollars.
Business context and financial performance
Tenaris manufactures and supplies seamless and welded steel pipe products and related services, primarily to the oil and gas industry. Its Tubes segment generated 94% of 2018 sales. Results are sensitive to drilling activity, oil and gas prices, and steel and energy input costs.
| Metric | 2018 | 2017 | Change/comment |
|---|---|---|---|
| Net sales | $7.659 billion | $5.289 billion | Up 45% |
| Gross profit / margin | $2.379 billion / 31.1% | $1.603 billion / 30.3% | Margin improved 0.8 percentage points |
| Operating income / margin | $872 million / 11.4% | $335 million / 6.3% | Strong recovery; 2018 included $109 million extra customer-relationship amortization |
| Net income from continuing operations | $874 million | $445 million | Up substantially |
| Net income attributable to parent owners | $876 million | $545 million | 2017 included $92 million from discontinued operations |
| Basic and diluted EPS | $0.74/share | $0.46/share | 2018 continuing and total EPS were both $0.74 |
| EBITDA (company-reported alternative performance measure) | $1.5 billion; 20% margin | Not clearly stated in the supplied text | Up 63% year over year |
Sales and operating drivers
- Tubes sales rose 46% to $7.233 billion; shipment volumes increased 36% and average selling prices rose 7%.
- Sales grew in every reported region. North America contributed $3.488 billion; Middle East and Africa sales reached $1.541 billion, boosted by exceptional East Mediterranean offshore line-pipe shipments.
- Tubes operating income was $777 million, compared with $292 million in 2017. Management said it would have been $886 million, or 12% of sales, excluding the $109 million one-time amortization charge.
- Equity earnings from non-consolidated companies were $194 million, principally reflecting Tenaris’s investment in Ternium. The 2018 income tax charge was $229 million, versus a $17 million tax credit in 2017; 2017 benefited from tax-rate reductions.
Cash flow, debt and liquidity
- Operating cash flow was $611 million, versus $22 million used in 2017. Working capital absorbed $738 million, mainly as trade receivables increased $518 million and inventories increased $176 million.
- Capital expenditures were $349 million, down from $558 million. Reported free cash flow was $261 million.
- Cash and cash equivalents were $428 million; current and non-current investments totaled about $606 million. Net cash was $485 million at year-end, down from $647 million.
- Total borrowings fell to $539 million from $966 million; $510 million was due within one year. The company reported compliance with its borrowing covenants. The current ratio, based on reported current assets and liabilities, was approximately 3.2.
- Dividends paid were $484 million. The board proposed a $0.41 per-share annual dividend for 2018, including the $0.13 interim dividend already paid.
- Total assets were $14.251 billion, total liabilities $2.376 billion, and total equity $11.875 billion at December 31, 2018.
Material changes versus 2017
- Revenue, shipments, operating income and continuing-operations earnings rose with stronger drilling activity, particularly in North America, and better production-capacity utilization.
- North American OCTG demand recovered; the company restarted its Conroe, Texas mill in October 2018. Bay City, Texas, increased seamless capacity following completion of the new mill.
- Reported operating performance included a $109 million non-cash amortization charge after the remaining useful life of Maverick Tubes customer relationships was reduced to zero.
- Despite positive operating cash flow, net cash declined, reflecting dividends, debt repayments, working-capital investment and other cash uses. The company also reduced capital spending as Bay City construction wound down.
Outlook, risks and notable items
- 2019 outlook: Management expected to consolidate sales and margins at levels broadly in line with the second half of 2018. It expected stable U.S. drilling, lower Canadian activity, a recovery in Mexico, and gradual improvement in Eastern Hemisphere drilling. The company expected lower Canada sales and no repeat of the exceptional East Mediterranean line-pipe shipments, but anticipated premium-connection sales growth and Saudi operations contribution. With stable sales and limited capital needs, management expected lower working capital and stronger free cash flow. 2019 capital spending was expected to remain near 2018 levels.
- Market and cost risks: Oil-price volatility and drilling cycles, industry overcapacity and competition, steel and energy price increases, and inability to pass through cost increases could affect results. Oil prices fell about 40% in Q4 2018 before partially recovering in early 2019. Trade measures, including U.S. Section 232 tariffs and quotas, also affect the business.
- Regional and operating risks: The filing highlights political, currency, inflation, labor, energy-supply and security risks in operating markets, particularly Argentina, Mexico, and the Middle East and Africa. Manufacturing disruptions, product liability, environmental obligations and cyber incidents are additional risks.
- Acquisitions and investment: In January 2019, Tenaris acquired 47.79% of Saudi Steel Pipe for about $141 million. In February 2019, it agreed to a 49% interest in a proposed Russian welded-pipe plant costing an estimated $240 million. In March 2019, it agreed to acquire IPSCO for $1.209 billion, subject to approvals and closing conditions.
- Contingencies: Material matters include Brazilian litigation relating to the Veracel accident, a $48 million contractor claim concerning Bay City construction, a $22.5 million Petroamazonas penalty under arbitration, Brazilian alleged price-overcharge charges, and investigations concerning alleged payments potentially benefiting Confab. The company states that outcomes or loss ranges cannot be reliably estimated in several matters. Mexican scrap-purchase tax assessments were challenged; the Segeta assessment was reversed, while the Tamsa matter remained pending.
- Other notable items: A special Argentine tax revaluation regime contributed an approximately $59 million tax charge in 2018. U.S. and other sanctions changes led Tenaris to wind down Iran-related deliveries by October 2018; reported 2018 Tenaris revenue from the disclosed transactions was approximately $11.2 million. In February 2019, Techgen refinanced its loan; Tenaris’s prior corporate guarantee was released after repayment, with sponsor standby letters of credit of about $9.8 million under the new facility.
Most important facts for investors to verify
- Review the audited IFRS statements and the company’s definition and reconciliation of EBITDA and free cash flow; these are alternative performance measures.
- Assess whether the 2018 sales and margin recovery is sustainable given the oil-price decline, regional drilling outlook and non-repeat of exceptional offshore shipments.
- Track working-capital conversion, especially receivables and inventory, and confirm whether management delivered the expected 2019 free-cash-flow improvement.
- Check refinancing and liquidity needs: most year-end borrowings were current, and the Saudi Steel Pipe, Russian plant and proposed IPSCO investment affect future capital demands.
- Monitor outcomes and potential financial exposure from the disclosed legal, tax, bribery-related and arbitration matters; several loss estimates are not provided or are uncertain.
- Confirm shareholder approval and payment of the proposed $0.41 per-share 2018 dividend, and review the effects of the controlling shareholder’s 60.45% ownership.