UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

As of February 22, 2018

TENARIS, S.A.
(Translation of registrant's name into English)

TENARIS, S.A.
29, Avenue de la Porte-Neuve 3rd floor L-2227 Luxembourg
(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or 40-F.

Form 20-F [ X ]  Form 40-F [   ]

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12G3-2(b) under the Securities Exchange Act of 1934.

Yes [   ]  No [ X ]

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-__.

 

 

The attached material is being furnished to the Securities and Exchange Commission pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange Act of 1934, as amended. This report contains Tenaris S.A Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

        TENARIS, S.A.    
     
     
   
Date: February 22, 2018       /s/ Cecilia Bilesio    
    Cecilia Bilesio
    Corporate Secretary
   

 

 

 

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

 

 

 

 

TENARIS S.A.

 

 

 

 

 

 

 

 

CONSOLIDATED

FINANCIAL STATEMENTS

 

 

 

 

For the years ended December 31, 2017, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

29, Avenue de la Porte-Neuve – 3rd Floor.

L – 2227 Luxembourg

R.C.S. Luxembourg: B 85 203

 

 

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

CONSOLIDATED INCOME STATEMENT

 

(all amounts in thousands of US dollars, unless otherwise stated)         Year ended December 31,  
    Notes     2017     2016     2015  
Continuing operations                                
Net sales     1       5,288,504       4,293,592       6,903,123  
Cost of sales     2       (3,685,057 )     (3,165,684 )     (4,747,760 )
Gross profit             1,603,447       1,127,908       2,155,363  
Selling, general and administrative expenses     3       (1,270,016 )     (1,196,929 )     (1,593,597 )
Other operating income     5       10,516       21,127       14,603  
Other operating expenses     5       (9,359 )     (11,163 )     (410,574 )
Operating income (loss)             334,588       (59,057 )     165,795  
Finance Income     6       47,605       66,204       34,574  
Finance Cost     6       (27,072 )     (22,329 )     (23,058 )
Other financial results     6       (43,550 )     (21,921 )     3,076  
Income (loss) before equity in earnings of non-consolidated companies and income tax             311,571       (37,103 )     180,387  
Equity in earnings (losses) of non-consolidated companies     7       116,140       71,533       (39,558 )
Income before income tax             427,711       34,430       140,829  
Income tax     8       17,136       (17,102 )     (234,384 )
Income (loss) for continuing operations             444,847       17,328       (93,555 )
                                 
Discontinued operations                                
Result for discontinued operations     28       91,542       41,411       19,130  
Income (loss) for the year             536,389       58,739       (74,425 )
                                 
Attributable to:                                
Owners of the parent             544,737       55,298       (80,162 )
Non-controlling interests             (8,348 )     3,441       5,737  
              536,389       58,739       (74,425 )
Earnings per share attributable to the owners of the parent during the year:                                
Weighted average number of ordinary shares (thousands)             1,180,537       1,180,537       1,180,537  
Continuing operations                                
Basic and diluted earnings (losses) per share (U.S. dollars per share)             0.38       0.01       (0.08 )
Basic and diluted earnings (losses) per ADS (U.S. dollars per ADS) (*)             0.77       0.02       (0.17 )
Continuing and discontinued operations                                
Basic and diluted earnings (losses) per share (U.S. dollars per share)             0.46       0.05       (0.07 )
Basic and diluted earnings (losses) per ADS (U.S. dollars per ADS) (*)             0.92       0.09       (0.14 )

(*) Each ADS equals two shares.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

(all amounts in thousands of U.S. dollars)   Year ended December 31,  
    2017     2016     2015  
Income (loss) for the year     536,389       58,739       (74,425 )
Items that may be subsequently reclassified to profit or loss:                        
Currency translation adjustment     151,762       37,187       (256,260 )
Change in value of cash flow hedges     4,502       (7,525 )     10,699  
Change in value of available for sale financial instruments     -       -       2,486  
Income tax relating to components of other comprehensive income     23       (23 )     (284 )
Share of other comprehensive income of non-consolidated companies:                        
 - Currency translation adjustment     (9,548 )     3,473       (92,914 )
 - Changes in the fair value of derivatives held as cash flow hedges and others     512       421       (3,790 )
      147,251       33,533       (340,063 )
Items that will not be reclassified to profit or loss:                        
Remeasurements of post employment benefit obligations     (8,635 )     (230 )     14,181  
Income tax on items that will not be reclassified     1,338       (1,760 )     (4,242 )
Remeasurements of post employment benefit obligations of non-consolidated companies     (376 )     (5,475 )     (449 )
      (7,673 )     (7,465 )     9,490  
Other comprehensive income (loss) for the year, net of tax     139,578       26,068       (330,573 )
Total comprehensive income (loss) for the year     675,967       84,807       (404,998 )
Attributable to:                        
Owners of the parent     683,531       81,702       (410,187 )
Non-controlling interests     (7,564 )     3,105       5,189  
      675,967       84,807       (404,998 )
Total comprehensive income (loss) for the year                        
attributable to Owners of the parent arises from                        
Continuing operations     591,989       40,291       (429,317 )
Discontinued operations     91,542       41,411       19,130  
      683,531       81,702       (410,187 )

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

  - 1 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

Consolidated STATEMENT OF FINANCIAL POSITION

 

(all amounts in thousands of U.S. dollars)       At December 31, 2017   At December 31, 2016
    Notes            
ASSETS                    
Non-current assets                                      
Property, plant and equipment, net     10     6,229,143               6,001,939          
Intangible assets, net     11     1,660,859               1,862,827          
Investments in non-consolidated companies     12     640,294               557,031          
Available for sale assets     31     21,572               21,572          
Other investments     18     128,335               249,719          
Deferred tax assets     20     153,532               144,613          
Receivables, net     13     183,329       9,017,064       197,003       9,034,704  
Current assets                                      
Inventories, net     14     2,368,304               1,563,889          
Receivables and prepayments, net     15     143,929               124,715          
Current tax assets     16     132,334               140,986          
Trade receivables, net     17     1,214,060               954,685          
Other investments     18     1,192,306               1,633,142          
Cash and cash equivalents     18     330,221       5,381,154       399,737       4,817,154  
Assets of disposal group classified as held for sale     28             -               151,417  
Total assets                   14,398,218               14,003,275  
EQUITY                                      
Capital and reserves attributable to owners of the parent                   11,482,185               11,287,417  
Non-controlling interests                   98,785               125,655  
Total equity                   11,580,970               11,413,072  
LIABILITIES                                      
Non-current liabilities                                      
Borrowings     19     34,645               31,542          
Deferred tax liabilities     20     457,970               550,657          
Other liabilities     21(i)     217,296               213,617          
Provisions     22     36,438       746,349       63,257       859,073  
Current liabilities                                      
Borrowings     19     931,214               808,694          
Current tax liabilities     16     102,405               101,197          
Other liabilities     21(ii)     197,504               183,887          
Provisions     23(ii)     32,330               22,756          
Customer advances           56,707               39,668          
Trade payables           750,739       2,070,899       556,834       1,713,036  
Liabilities of disposal group classified as held for sale     28             -               18,094  
Total liabilities                   2,817,248               2,590,203  
Total equity and liabilities                   14,398,218               14,003,275  

 

Contingencies, commitments and restrictions on the distribution of profits are disclosed in Note 25.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

  - 2 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

Consolidated statement of changes in equity

(all amounts in thousands of U.S. dollars)

 

             
    Attributable to owners of the parent        
    Share Capital (1)   Legal Reserves   Share Premium   Currency Translation Adjustment   Other Reserves (2)   Retained Earnings (3)   Total   Non-controlling interests   Total
Balance at December 31, 2016     1,180,537       118,054       609,733       (965,955 )     (313,088 )     10,658,136       11,287,417       125,655       11,413,072  
                                                                         
Income (loss) for the year     -       -       -       -       -       544,737       544,737       (8,348 )     536,389  
Currency translation adjustment     -       -       -       151,080       -       -       151,080       682       151,762  
Remeasurements of post employment benefit obligations, net of taxes     -       -       -       -       (7,423 )     -       (7,423 )     126       (7,297 )
Change in value of available for sale financial instruments and cash flow hedges net of tax     -       -       -       -       4,549       -       4,549       (24 )     4,525  
Share of other comprehensive income of non-consolidated companies     -       -       -       (9,548 )     136       -       (9,412 )     -       (9,412 )
Other comprehensive income for the year     -       -       -       141,532       (2,738 )     -       138,794       784       139,578  
Total comprehensive income (loss) for the year     -       -       -       141,532       (2,738 )     544,737       683,531       (7,564 )     675,967  
Acquisition and other changes in non-controlling interests     -       -       -       -       (4,743 )     -       (4,743 )     4,694       (49 )
Dividends paid in cash     -       -       -       -       -       (484,020 )     (484,020 )     (24,000 )     (508,020 )
Balance at December 31, 2017     1,180,537       118,054       609,733       (824,423 )     (320,569 )     10,718,853       11,482,185       98,785       11,580,970  

 

(1) The Company has an authorized share capital of a single class of 2.5 billion shares having a nominal value of $1.00 per share. As of December 31, 2017 there were 1,180,536,830 shares issued. All issued shares are fully paid.

 

(2) Other reserves include mainly the result of transactions with non-controlling interest that do not result in a loss of control, the remeasurement of post-employment benefit obligations and the changes in value of cash flow hedges and in available for sale financial instruments.

 

(3) The Distributable Reserve and Retained Earnings calculated according to Luxembourg Law are disclosed in Note 25.

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

  - 3 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Cont.)

 

     
(all amounts in thousands of U.S. dollars)   Attributable to owners of the parent        
    Share Capital (1)   Legal Reserves   Share Premium   Currency Translation Adjustment   Other Reserves (2)   Retained Earnings   Total  

Non-

controlling interests

  Total
Balance at December 31, 2015     1,180,537       118,054       609,733       (1,006,767 )     (298,682 )     11,110,469       11,713,344       152,712       11,866,056  
                                                                         
Income for the year     -       -       -       -       -       55,298       55,298       3,441       58,739  
Currency translation adjustment     -       -       -       37,339       -       -       37,339       (152 )     37,187  
Remeasurements of post employment benefit obligations, net of taxes     -       -       -       -       (1,781 )     -       (1,781 )     (209 )     (1,990 )
Change in value of available for sale financial instruments and cash flow hedges net of tax     -       -       -       -       (7,573 )     -       (7,573 )     25       (7,548 )
Share of other comprehensive income of non-consolidated companies     -       -       -       3,473       (5,054 )     -       (1,581 )     -       (1,581 )
Other comprehensive income (loss) for the year     -       -       -       40,812       (14,408 )     -       26,404       (336 )     26,068  
Total comprehensive income for the year     -       -       -       40,812       (14,408 )     55,298       81,702       3,105       84,807  
Acquisition of non-controlling interests     -       -       -       -       2       -       2       (1,073 )     (1,071 )
Dividends paid in cash     -       -       -       -       -       (507,631 )     (507,631 )     (29,089 )     (536,720 )
Balance at December 31, 2016     1,180,537       118,054       609,733       (965,955 )     (313,088 )     10,658,136       11,287,417       125,655       11,413,072  

 

     
    Attributable to owners of the parent        
    Share Capital (1)   Legal Reserves   Share Premium   Currency Translation Adjustment   Other Reserves (2)   Retained Earnings   Total  

Non-

controlling interests

  Total
Balance at December 31, 2014     1,180,537       118,054       609,733       (658,284 )     (317,799 )     11,721,873       12,654,114       152,200       12,806,314  
                                                                         
(Loss) income for the year     -       -       -       -       -       (80,162 )     (80,162 )     5,737       (74,425 )
Currency translation adjustment     -       -       -       (255,569 )     -       -       (255,569 )     (691 )     (256,260 )
Remeasurements of post employment benefit obligations, net of taxes     -       -       -       -       10,213       -       10,213       (274 )     9,939  
Change in value of available for sale financial instruments and cash flow hedges net of tax     -       -       -       -       12,484       -       12,484       417       12,901  
Share of other comprehensive income of non-consolidated companies     -       -       -       (92,914 )     (4,239 )     -       (97,153 )     -       (97,153 )
Other comprehensive (loss) for the year     -       -       -       (348,483 )     18,458       -       (330,025 )     (548 )     (330,573 )
Total comprehensive (loss) income for the year     -       -       -       (348,483 )     18,458       (80,162 )     (410,187 )     5,189       (404,998 )
Acquisition of non-controlling interests     -       -       -       -       659       -       659       (1,727 )     (1,068 )
Dividends paid in cash     -       -       -       -       -       (531,242 )     (531,242 )     (2,950 )     (534,192 )
Balance at December 31, 2015     1,180,537       118,054       609,733       (1,006,767 )     (298,682 )     11,110,469       11,713,344       152,712       11,866,056  

 

(1) The Company has an authorized share capital of a single class of 2.5 billion shares having a nominal value of $1.00 per share. As of December 31, 2016 and 2015 there were 1,180,536,830 shares issued. All issued shares are fully paid.

 

(2) Other reserves include mainly the result of transactions with non-controlling interest that do not result in a loss of control, the remeasurement of post-employment benefit obligations and the changes in value of cash flow hedges and in available for sale financial instruments.

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

  - 4 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

CONSOLIDATED STATEMENT OF CASH FLOWS

 

(all amounts in thousands of U.S. dollars)       Year ended December 31,
    Notes   2017   2016   2015
Cash flows from operating activities                            
Income (loss) for the year         536,389       58,739       (74,425 )
Adjustments for:                            
Depreciation and amortization   10 & 11     608,640       662,412       658,778  
Impairment charge   5     -       -       400,314  
Income tax accruals less payments   27(ii)     (193,989 )     (128,079 )     (91,080 )
Equity in (earnings) losses of non-consolidated companies   7     (116,140 )     (71,533 )     39,558  
Interest accruals less payments, net   27(iii)     11,550       (2,567 )     26,622  
Changes in provisions         (17,245 )     15,597       (20,678 )
Income from the sale of Conduit business   28     (89,694 )     -       -  
Changes in working capital   27(i)     (855,282 )     348,199       1,373,985  
Currency translation adjustment and others         93,746       (19,203 )     (98,070 )
Net cash (used in) provided by operating activities         (22,025 )     863,565       2,215,004  
                             
Cash flows from investing activities                            
Capital expenditures   10 & 11     (558,236 )     (786,873 )     (1,131,519 )
Changes in advance to suppliers of property, plant and equipment         7,077       50,989       49,461  
Proceeds from disposal of Conduit business   28     327,631       -       -  
Investment in non-consolidated companies   12     -       (17,108 )     (4,400 )
Acquisition of subsidiaries   26     (10,418 )     -       -  
Investment in companies under cost method         (3,681 )     -       -  
Loan to non-consolidated companies   12 c     (7,056 )     (42,394 )     (22,322 )
Proceeds from disposal of property, plant and equipment and intangible assets         5,443       23,609       10,090  
Dividends received from non-consolidated companies   12     22,971       20,674       20,674  
Changes in investments in securities         565,387       652,755       (695,566 )
Net cash provided by (used in) investing activities         349,118       (98,348 )     (1,773,582 )
                             
Cash flows from financing activities                            
Dividends paid   9     (484,020 )     (507,631 )     (531,242 )
Dividends paid to non-controlling interest in subsidiaries         (24,000 )     (29,089 )     (2,950 )
Acquisitions of non-controlling interests         (49 )     (1,071 )     (1,068 )
Proceeds from borrowings         1,196,781       1,180,727       2,064,218  
Repayments of borrowings         (1,090,129 )     (1,295,560 )     (2,063,992 )
Net cash used in financing activities         (401,417 )     (652,624 )     (535,034 )
                             
(Decrease) increase  in cash and cash equivalents         (74,324 )     112,593       (93,612 )
Movement in cash and cash equivalents                            
At the beginning of the year         398,580       286,198       416,445  
Effect of exchange rate changes         5,834       (211 )     (36,635 )
(Decrease) increase  in cash and cash equivalents         (74,324 )     112,593       (93,612 )
At December 31,   27(iv)     330,090       398,580       286,198  
                             
          At December 31,  
Cash and cash equivalents         2017       2016       2015  
Cash and bank deposits         330,221       399,900       286,547  
Bank overdrafts   19     (131 )     (1,320 )     (349 )
          330,090       398,580       286,198  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

  - 5 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

Index TO the notes to the consolidated financial statements

 

I GENERAL INFORMATION IV OTHER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    1 Segment information
II ACCOUNTING POLICIES (“AP”) 2 Cost of sales
A Basis of presentation 3 Selling, general and administrative expenses
B Group accounting 4 Labor costs (included in Cost of sales and in Selling, general and administrative expenses)
C Segment information 5 Other operating income and expenses
D Foreign currency translation 6 Financial results
E Property, plant and equipment 7 Equity in earnings (losses) of non-consolidated companies
F Intangible assets 8 Income tax
G Impairment of non-financial assets 9 Dividends distribution
H Other investments 10 Property, plant and equipment, net
I Inventories 11 Intangible assets, net
J Trade and other receivables 12 Investments in non-consolidated companies
K Cash and cash equivalents 13 Receivables - non current
L Equity 14 Inventories
M Borrowings 15 Receivables and prepayments
N Current and deferred income tax 16 Current tax assets and liabilities
O Employee benefits 17 Trade receivables
P Provisions 18 Cash and cash equivalents and other investments
Q Trade payables 19 Borrowings
R Revenue recognition 20 Deferred income tax
S Cost of sales and other selling expenses 21 Other liabilities
T Earnings per share 22 Non-current allowances and provisions
U Financial instruments 23 Current allowances and provisions
V Non-current assets held for sale and discontinued operations 24 Derivative financial instruments
    25 Contingencies, commitments and restrictions on the distribution of profits
III FINANCIAL RISK MANAGEMENT 26 Acquisition of subsidiaries
    27 Cash flow disclosures
A Financial Risk Factors 28 Net assets of disposal group classified as held for sale
B Category of Financial Instruments and Classification Within the Fair Value Hierarchy 29 Related party transactions
C Fair value estimation 30 Principal subsidiaries
D Accounting for derivative financial instruments and hedging activities 31 Nationalization of Venezuelan subsidiaries
    32 Fees paid to the Company's principal accountant
    33 Subsequent event

 

  - 6 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

I. GENERAL INFORMATION

 

Tenaris S.A. (the “Company”) was established as a public limited liability company ( societé anonyme ) under the laws of the Grand-Duchy of Luxembourg on December 17, 2001. The Company holds, either directly or indirectly, controlling interests in various subsidiaries in the steel pipe manufacturing and distribution businesses. References in these Consolidated Financial Statements to “Tenaris” refer to the Company and its consolidated subsidiaries. A list of the principal Company’s subsidiaries is included in Note 30 to these Consolidated Financial Statements.

 

The Company’s shares trade on the Buenos Aires Stock Exchange, the Italian Stock Exchange and the Mexican Stock Exchange; the Company’s American Depositary Securities (“ADS”) trade on the New York Stock Exchange.

 

These Consolidated Financial Statements were approved for issuance by the Company’s Board of Directors on February 21, 2018.

 

II. Accounting policies

 

The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

A Basis of presentation

 

The Consolidated Financial Statements of Tenaris have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and in accordance with IFRS as adopted by the European Union, under the historical cost convention, as modified by the revaluation of available for sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit or loss and plan assets measured at fair value. The Consolidated Financial Statements are, unless otherwise noted, presented in thousands of U.S. dollars (“$”).

 

Whenever necessary, certain comparative amounts have been reclassified to conform to changes in presentation in the current year.

 

Following the sale of the steel electric conduit business in North America, known as Republic Conduit, the results of the mentioned business are presented as discontinued operations in accordance with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations". Consequently, all amounts related to discontinued operations within each line item of the Consolidated Income Statement are reclassified into discontinued operations. The Consolidated Statement of Cash Flows includes the cash flows for continuing and discontinued operations, cash flows from discontinued operations and earnings per share are disclosed separately in Note 28, as well as additional information detailing net assets of disposal group classified as held for sale and discontinued operations.

 

The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make certain accounting estimates and assumptions that might affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the reporting dates, and the reported amounts of revenues and expenses during the reporting years. Actual results may differ from these estimates.

 

(1) New and amended standards not yet adopted and relevant for Tenaris

 

IFRS 9, “Financial instruments”

 

In July 2014, the IASB issued IFRS 9, "Financial instruments", which replaces the guidance in IAS 39. IFRS 9 includes new requirements on the classification and measurement of financial assets and liabilities, as well as a new impairment model based on expected credit losses rather than the incurred loss impairment model of IAS 39. It also introduces new rules for hedge accounting. IFRS 9 must be applied on annual periods beginning on or after January 1, 2018.

 

The Company will apply the new rules retrospectively from 1 January 2018. Comparative amounts for previous years will not be restated.

 

The Company has reviewed its financial assets and liabilities and is expecting that the other investments categorized as held to maturity and carried at amortized cost will qualify for classification at fair value through other comprehensive income. Accordingly, Tenaris expects an increase in the valuation of its financial assets of approximately $3 million.

 

  - 7 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

A Basis of presentation (Cont.)

 

(1) New and amended standards not yet adopted and relevant for Tenaris (Cont.)

 

IFRS 9, “Financial instruments” (Cont.)

 

The new impairment model requires recognition of impairment provisions based on expected credit losses rather than on incurred credit losses. Based on the assessments undertaken, Tenaris expects a decrease of $ 6 million in the allowance for doubtful accounts.

 

The Company does not expect any significant impact related to the new hedge accounting rules.

 

IFRS 15, “Revenue from contracts with customers”

 

In May 2014, the IASB issued IFRS 15, "Revenue from contracts with customers", which sets out the requirements in accounting for revenue arising from contracts with customers and which is based on the principle that revenue is recognized when control of a good or service is transferred to the customer. IFRS 15 must be applied on annual periods beginning on or after January 1, 2018.

 

The Company has assessed the effects of applying the new standard and the main areas affected will be the accounting for sales of shipping services, free of charge services and rights of return.

 

The impact of the adoption as of January 1, 2018 on the aggregate of revenues, cost of sales and selling expenses is expected to be a decrease of $ 0.7 million net.

 

The Company intends to adopt this standard using the modified retrospective approach, meaning that the cumulative impact of the adoption will be recognized in retained earnings as of January 1, 2018 and that comparatives will not be restated.

 

IFRS 16, “Leases”

 

In January 2016, the IASB issued IFRS 16, "Leases". The new standard will result in almost all leases recognized on the balance sheet, as the distinction between operating and finance leases is removed. IFRS 16 must be applied on annual periods beginning on or after January 1, 2019.

 

The Company's management is currently assessing the potential impact that the application of this standard may have on the Company's financial condition or results of operations.

 

These standards were endorsed by the EU.

 

Other accounting pronouncements that became effective during 2017 have no material effect on the Company’s financial condition or results of operations.

 

B Group accounting

 

(1) Subsidiaries and transactions with non-controlling interests

 

Subsidiaries are all entities over which Tenaris has control. Tenaris controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is exercised by the Company and are no longer consolidated from the date control ceases.

 

The acquisition method of accounting is used to account for the acquisition of subsidiaries by Tenaris. The cost of an acquisition is measured as the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition-related costs are expensed as incurred. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Any non-controlling interest in the acquiree is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the aggregate of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the Consolidated Income Statement.

 

  - 8 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

B Group accounting (Cont.)

 

(1) Subsidiaries and transactions with non-controlling interests (Cont.)

 

Contingent consideration is classified either as equity or as a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognized in profit or loss.

 

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognized in profit or loss.

 

Transactions with non-controlling interests that do not result in a loss of control are accounted as transactions with equity owners of the Company. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

 

Material intercompany transactions, balances and unrealized gains (losses) on transactions between Tenaris subsidiaries have been eliminated in consolidation. However, since the functional currency of some subsidiaries is its respective local currency, some financial gains (losses) arising from intercompany transactions are generated. These are included in the Consolidated Income Statement under Other financial results .

 

(2) Non-consolidated companies

 

Non-consolidated companies are all entities in which Tenaris has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in non-consolidated companies (associated and joint ventures) are accounted for by the equity method of accounting and are initially recognized at cost. The Company’s investment in non-consolidated companies includes goodwill identified in acquisition, net of any accumulated impairment loss.

 

Under the equity method of accounting, the investments are initially recognized at cost and adjusted thereafter to recognize Tenaris’s share of the post-acquisition profits or losses of the investee in profit or loss, and Tenaris’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognized as a reduction in the carrying amount of the investment.

 

Unrealized results on transactions between Tenaris and its non-consolidated companies are eliminated to the extent of Tenaris’s interest in the non-consolidated companies. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment indicator of the asset transferred. Financial statements of non-consolidated companies have been adjusted where necessary to ensure consistency with IFRS.

 

The Company’s pro-rata share of earnings in non-consolidated companies is recorded in the Consolidated Income Statement under Equity in earnings (losses) of non-consolidated companies . The Company’s pro-rata share of changes in other reserves is recognized in the Consolidated Statement of Changes in Equity under Other Reserves.

 

At December 31, 2017, Tenaris holds 11.46% of Ternium S.A (“Ternium”)’s common stock. The following factors and circumstances evidence that Tenaris has significant influence (as defined by IAS 28, “Investments in associates companies and Joint Ventures”) over Ternium, and as a result the Company’s investment in Ternium has been accounted for under the equity method:

 

§ Both the Company and Ternium are under the indirect common control of San Faustin S.A.;
§ Four out of eight members of Ternium’s Board of Directors (including Ternium’s chairman) are also members of the Company’s Board of Directors;
§ Under the shareholders’ agreement by and between the Company and Techint Holdings S.à r.l, a wholly owned subsidiary of San Faustin S.A. and Ternium’s main shareholder, dated January 9, 2006, Techint Holdings S.à r.l, is required to take actions within its power to cause (a) one of the members of Ternium’s Board of Directors to be nominated by the Company and (b) any director nominated by the Company to be only removed from Ternium’s Board of Directors pursuant to previous written instructions of the Company.

 

At December 31, 2017, Tenaris holds through its Brazilian subsidiary Confab Industrial S.A. (“Confab”), 5.2% of the shares with voting rights and 3.08% of Usinas Siderúrgicas de Minas Gerais S.A. (“Usiminas”) total share capital.

 

  - 9 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

B Group accounting (Cont.)

 

(2) Non-consolidated companies (Cont.)

 

The acquisition of Usiminas shares was part of a larger transaction performed on January 16, 2012, pursuant to which Ternium, certain of its subsidiaries and Confab joined Usiminas’ existing control group through the acquisition of ordinary shares representing 27.7% of Usiminas’ total voting capital and 13.8% of Usiminas’ total share capital. The rights of Ternium and its subsidiaries and Confab within the Ternium - Tenaris Group are governed under a separate shareholders agreement. Those circumstances evidence that Tenaris has significant influence over Usiminas, consequently, accounted it for under the equity method (as defined by IAS 28).

 

In April and May 2016 Tenaris’s subsidiary Confab subscribed, in the aggregate, to 1.3 million preferred shares (BRL1.28 per share) for a total amount of BRL1.6 million (approximately $0.5 million) and 11.5 million ordinary shares (BRL5.00 per share) for a total amount of BRL57.5 million (approximately $16.6 million). The preferred and ordinary shares were issued on June 3, 2016 and July 19, 2016, respectively. Consequently as of December 31, 2017 Tenaris owns 36.5 million ordinary shares and 1.3 million preferred shares of Usiminas.

 

Tenaris carries its investment in Ternium and Usiminas under the equity method, with no additional goodwill or intangible assets recognized. Tenaris reviews investments in non-consolidated companies for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable, such as a significant or prolonged decline in fair value below the carrying value. At December 31, 2017, 2016 and 2015, no impairment provisions were recorded on Tenaris’s investment in Ternium while in 2015, an impairment charge was recorded on Tenaris’s investment in Usiminas. See Note 7 and Note 12.

 

C Segment information

 

The Company is organized in one major business segment, Tubes, which is also the reportable operating segment.

 

The Tubes segment includes the production and sale of both seamless and welded steel tubular products and related services mainly for the oil and gas industry, particularly oil country tubular goods (OCTG) used in drilling operations, and for other industrial applications with production processes that consist in the transformation of steel into tubular products. Business activities included in this segment are mainly dependent on the oil and gas industry worldwide, as this industry is a major consumer of steel pipe products, particularly OCTG used in drilling activities. Demand for steel pipe products from the oil and gas industry has historically been volatile and depends primarily upon the number of oil and natural gas wells being drilled, completed and reworked, and the depth and drilling conditions of these wells. Sales are generally made to end users, with exports being done through a centrally managed global distribution network and domestic sales are made through local subsidiaries. Corporate general and administrative expenses have been allocated to the Tubes segment.

 

Others includes all other business activities and operating segments that are not required to be separately reported, including the production and selling of sucker rods, industrial equipment, coiled tubing, utility conduits for buildings, energy and raw materials that exceed internal requirements.

 

Tenaris’s Chief Operating Decision Maker (CEO) holds monthly meetings with senior management, in which operating and financial performance information is reviewed, including financial information that differs from IFRS principally as follows:

 

§ The use of direct cost methodology to calculate the inventories, while under IFRS it is at full cost, including absorption of production overheads and depreciations;
§ The use of costs based on previously internally defined cost estimates, while, under IFRS, costs are calculated at historical cost;
§ Other timing differences, if any.

 

Tenaris presents its geographical information in five areas: North America, South America, Europe, Middle East and Africa and Asia Pacific. For purposes of reporting geographical information, net sales are allocated to geographical areas based on the customer’s location; allocation of assets, capital expenditures and associated depreciations and amortizations are based on the geographical location of the assets.

 

  - 10 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

D Foreign currency translation

 

(1) Functional and presentation currency

 

IAS 21 (revised) “The effects of changes in foreign exchange rates” defines the functional currency as the currency of the primary economic environment in which an entity operates.

 

The functional and presentation currency of the Company is the U.S. dollar. The U.S. dollar is the currency that best reflects the economic substance of the underlying events and circumstances relevant to Tenaris’s global operations.

 

Except for the Brazilian and Italian subsidiaries whose functional currencies are their local currencies, Tenaris determined that the functional currency of its other subsidiaries is the U.S. dollar, based on the following principal considerations:

 

§ Sales are mainly negotiated, denominated and settled in U.S. dollars. If priced in a currency other than the U.S. dollar, the sales price may consider exposure to fluctuation in the exchange rate versus the U.S. dollar;
§ Prices of their critical raw materials and inputs are priced and settled in U.S. dollars;
§ Transaction and operational environment and the cash flow of these operations have the U.S. dollar as reference currency;
§ Significant level of integration of the local operations within Tenaris’s international global distribution network;
§ Net financial assets and liabilities are mainly received and maintained in U.S. dollars;
§ The exchange rate of certain legal currencies has long-been affected by recurring and severe economic crises.

 

(2) Transactions in currencies other than the functional currency

 

Transactions in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the date of the transactions or valuation where items are re-measured.

 

At the end of each reporting period: (i) monetary items denominated in currencies other than the functional currency are translated using the closing rates; (ii) non-monetary items that are measured in terms of historical cost in a currency other than the functional currency are translated using the exchange rates prevailing at the date of the transactions; and (iii) non-monetary items that are measured at fair value in a currency other than the functional currency are translated using the exchange rates prevailing at the date when the fair value was determined.

 

Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than the functional currency are recorded as gains and losses from foreign exchange and included in “Other financial results” in the Consolidated Income Statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

 

(3) Translation of financial information in currencies other than the functional currency

 

Results of operations for subsidiaries whose functional currencies are not the U.S. dollar are translated into U.S. dollars at the average exchange rates for each quarter of the year. Financial statement positions are translated at the year-end exchange rates. Translation differences are recognized in a separate component of equity as currency translation adjustments. In the case of a sale or other disposal of any of such subsidiaries, any accumulated translation difference would be recognized in income as a gain or loss from the sale.

 

Goodwill and fair value adjustments arising from the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

 

  - 11 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

E Property, plant and equipment

 

Property, plant and equipment are recognized at historical acquisition or construction cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Property, plant and equipment acquired through acquisitions accounted for as business combinations have been valued initially at the fair market value of the assets acquired.

 

Major overhaul and rebuilding expenditures are capitalized as property, plant and equipment only when it is probable that future economic benefits associated with the item will flow to the group and the investment enhances the condition of assets beyond its original condition. The carrying amount of the replaced part is derecognized. Maintenance expenses on manufacturing properties are recorded as cost of products sold in the year in which they are incurred.

 

Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.

 

Borrowing costs that are attributable to the acquisition or construction of certain capital assets are capitalized as part of the cost of the asset, in accordance with IAS 23(R) “Borrowing Costs”. Assets for which borrowing costs are capitalized are those that require a substantial period of time to prepare for their intended use.

 

Depreciation method is reviewed at each year end. Depreciation is calculated using the straight-line method to depreciate the cost of each asset to its residual value over its estimated useful life, as follows:

 

  Land No Depreciation
  Buildings and improvements 30-50 years
  Plant and production equipment 10-40 years
  Vehicles, furniture and fixtures, and other equipment 4-10 years

 

The assets’ residual values and useful lives of significant plant and production equipment are reviewed and adjusted, if appropriate, at each year-end date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

 

Management’s re-estimation of assets useful lives, performed in accordance with IAS 16 “Property, Plant and Equipment”, did not materially affect depreciation expenses for 2017, 2016 and 2015.

 

Tenaris depreciates each significant part of an item of property, plant and equipment for its different production facilities that (i) can be properly identified as an independent component with a cost that is significant in relation to the total cost of the item, and (ii) has a useful operating life that is different from another significant part of that same item of property, plant and equipment.

 

During 2017, the Company decided to redefine the subcategories within property, plant and equipment items, in order to better reflect the nature and intended use of the assets. Comparative figures were reclassified following the new subcategories.

 

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of assets and are recognized under Other operating income or Other operating expenses in the Consolidated Income Statement.

 

F Intangible assets

 

(1) Goodwill

 

Goodwill represents the excess of the acquisition cost over the fair value of Tenaris’s share of net identifiable assets acquired as part of business combinations determined mainly by independent valuations. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Goodwill is included in the Consolidated Statement of Financial Position under Intangible assets, net.

 

For the purpose of impairment testing, goodwill is allocated to a subsidiary or group of subsidiaries that are expected to benefit from the business combination which generated the goodwill being tested.

 

  - 12 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

F Intangible assets (Cont.)

 

(2) Information systems projects

 

Costs associated with maintaining computer software programs are generally recognized as an expense as incurred. However, costs directly related to the development, acquisition and implementation of information systems are recognized as intangible assets if it is probable that they have economic benefits exceeding one year and comply with the recognition criteria of IAS 38.

 

Information systems projects recognized as assets are amortized using the straight-line method over their useful lives, generally not exceeding a period of 3 years. Amortization charges are mainly classified as Selling, general and administrative expenses in the Consolidated Income Statement.

 

Management’s re-estimation of assets useful lives, performed in accordance with IAS 38 “Intangible Assets”, did not materially affect amortization expenses for 2017, 2016 and 2015.

 

(3) Licenses, patents, trademarks and proprietary technology

 

Licenses, patents, trademarks, and proprietary technology acquired in a business combination are initially recognized at fair value at the acquisition date. Licenses, patents, proprietary technology and those trademarks that have a finite useful life are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost over their estimated useful lives, and does not exceed a period of 10 years. Amortization charges are mainly classified as Selling, general and administrative expenses in the Consolidated Income Statement.

 

The balance of acquired trademarks that have indefinite useful lives according to external appraisal amounts to $86.7 million at December 31, 2017 and 2016, included in Hydril CGU. Main factors considered in the determination of the indefinite useful lives, include the years that they have been in service and their recognition among customers in the industry.

 

Management’s re-estimation of assets useful lives, performed in accordance with IAS 38, did not materially affect amortization expenses for 2017, 2016 and 2015.

 

(4) Research and development

 

Research expenditures as well as development costs that do not fulfill the criteria for capitalization are recorded as Cost of sales in the Consolidated Income Statement as incurred. Research and development expenditures included in Cost of sales for the years 2017, 2016 and 2015 totaled $63.7 million, $68.6 million and $89.0 million, respectively.

 

(5) Customer relationships

 

In accordance with IFRS 3 "Business Combinations" and IAS 38, Tenaris has recognized the value of customer relationships separately from goodwill attributable to the acquisition of Maverick and Hydril groups.

 

Customer relationships acquired in a business combination are recognized at fair value at the acquisition date, have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight line method over the expected life of approximately 14 years for Maverick and 10 years for Hydril.

 

In 2015 the Company reviewed the useful life of Prudential’s customer relationships, related to Maverick acquisition, and decided to reduce the remaining amortization period from 5 years to 2 years, ending December 2017.

 

As of December 2017 the residual value of Maverick’s customer relationships amount to $193 million and the residual useful life is 3 years, while Hydril’s customer relationships is fully amortized .

 

  - 13 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

G Impairment of non-financial assets

 

Long-lived assets including identifiable intangible assets are reviewed for impairment at the lowest level for which there are separately identifiable cash flows (cash generating units, or CGU). Most of the Company’s principal subsidiaries that constitute a CGU have a single main production facility and, accordingly, each of such subsidiary represents the lowest level of asset aggregation that generates largely independent cash inflows.

 

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets with indefinite useful lives, including goodwill, are subject to at least an annual impairment test.

 

In assessing whether there is any indication that a CGU may be impaired, external and internal sources of information are analyzed. Material facts and circumstances specifically considered in the analysis usually include the discount rate used in Tenaris’s cash flow projections and the business condition in terms of competitive and economic factors, such as the cost of raw materials, oil and gas prices, capital expenditure programs for Tenaris’s customers and the evolution of the rig count.

 

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher between the asset’s value in use and fair value less costs of disposal. Any impairment loss is allocated to reduce the carrying amount of the assets of the CGU in the following order:

 

(a) first, to reduce the carrying amount of any goodwill allocated to the CGU; and
(b) then, to the other assets of the unit (group of units) pro-rata on the basis of the carrying amount of each asset in the unit (group of units), considering not to reduce the carrying amount of the asset below the highest of its fair value less cost of disposal, its value in use or zero.

 

The value in use of each CGU is determined on the basis of the present value of net future cash flows which would be generated by such CGU. Tenaris uses cash flow projections for a five year period with a terminal value calculated based on perpetuity and appropriate discount rates.

 

For purposes of calculating the fair value less costs of disposal, Tenaris uses the estimated value of future cash flows that a market participant could generate from the corresponding CGU.

 

Management judgment is required to estimate discounted future cash flows. Actual cash flows and values could vary significantly from the forecasted future cash flows and related values derived using discounting techniques.

 

Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal at each reporting date.

 

H Other investments

 

Other investments consist primarily of investments in financial instruments and time deposits with a maturity of more than three months at the date of purchase.

 

Certain non-derivative financial assets that the Company has both the ability and the intention to hold to maturity have been categorized as held to maturity financial assets. They are carried at amortized cost and the results are recognized in Financial Results in the Consolidated Income Statement using the effective interest method. Held to maturity instruments with maturities greater than 12 months after the balance sheet date are included in the non-current assets.

 

All other investments in financial instruments and time deposits are categorized as financial assets “at fair value through profit or loss” because such investments are both (i) held for trading and (ii) designated as such upon initial recognition because they are managed and their performance is evaluated on a fair value basis. The results of these investments are recognized in Financial Results in the Consolidated Income Statement.

 

Purchases and sales of financial investments are recognized as of their settlement date.

 

The fair values of quoted investments are generally based on current bid prices. If the market for a financial investment is not active or the securities are not listed, Tenaris estimates the fair value by using standard valuation techniques (see Section III Financial Risk Management).

 

  - 14 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

I Inventories

 

Inventories are stated at the lower between cost and net realizable value. The cost of finished goods and goods in process is comprised of raw materials, direct labor, utilities, freights and other direct costs and related production overhead costs, and it excludes borrowing costs. Allocation of fixed production costs is based on the normal level of production capacity. Supplies and raw material cost is mainly based on FIFO method while goods in progress and finished goods cost is mainly based on specific historical production costs for each production order. Tenaris estimates net realizable value of inventories by grouping, where applicable, similar or related items. Net realizable value is the estimated selling price in the ordinary course of business, less any estimated costs of completion and selling expenses. Third parties goods in transit as of year-end are valued based on the supplier’s invoice cost.

 

Tenaris establishes an allowance for obsolete or slow-moving inventories related to finished goods, goods in process, supplies and spare parts. For slow moving or obsolete finished products, an allowance is established based on management’s analysis of product aging. An allowance for obsolete and slow-moving inventory of supplies and spare parts is established based on management's analysis of such items to be used as intended and the consideration of potential obsolescence due to technological changes, aging and consumption patterns.

 

J Trade and other receivables

 

Trade and other receivables are recognized initially at fair value, generally the original invoice amount. Tenaris analyzes its trade receivables on a regular basis and, when aware of a specific counterparty’s difficulty or inability to meet its obligations, impairs any amounts due by means of a charge to an allowance for doubtful accounts. In addition, trade accounts receivable overdue by more than 180 days and which are not covered by a credit collateral, guarantee, insurance or similar surety, are provisioned.

 

K Cash and cash equivalents

 

Cash and cash equivalents are comprised of cash at banks, liquidity funds and short-term investments with a maturity of less than three months at the date of purchase which are readily convertible to known amounts of cash. Assets recorded in cash and cash equivalents are carried at fair market value or at historical cost which approximates fair market value.

 

In the Consolidated Statement of Financial Position, bank overdrafts are included in Borrowings in current liabilities.

 

For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents includes overdrafts.

 

L Equity

 

(1) Equity components

 

The Consolidated Statement of Changes in Equity includes:

 

§ The value of share capital, legal reserve, share premium and other distributable reserves calculated in accordance with Luxembourg law;
§ The currency translation adjustment, other reserves, retained earnings and non-controlling interest calculated in accordance with IFRS.

 

(2) Share capital

 

The Company has an authorized share capital of a single class of 2.5 billion shares having a nominal value of $1.00 per share. Total ordinary shares issued and outstanding as of December 31, 2017, 2016 and 2015 are 1,180,536,830 with a par value of $1.00 per share with one vote each. All issued shares are fully paid.

 

(3) Dividends distribution by the Company to shareholders

 

Dividends distributions are recorded in the Company’s financial statements when Company’s shareholders have the right to receive the payment, or when interim dividends are approved by the Board of Directors in accordance with the by-laws of the Company.

 

Dividends may be paid by the Company to the extent that it has distributable retained earnings, calculated in accordance with Luxembourg law (see Note 25 (iii)).

 

  - 15 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

M Borrowings

 

Borrowings are recognized initially at fair value net of transaction costs incurred and subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or loss over the period of the borrowings using the effective interest method.

 

N Current and Deferred income tax

 

The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Tax is recognized in the Consolidated Income Statement, except for tax items recognized in the Consolidated Statement of Other Comprehensive Income.

 

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions when appropriate.

 

Deferred income tax is recognized applying the liability method on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the financial statements. The principal temporary differences arise from fair value adjustments of assets acquired in business combinations, the effect of currency translation on depreciable fixed assets and inventories, depreciation on property, plant and equipment, valuation of inventories and provisions for pension plans. Deferred tax assets are also recognized for net operating loss carry-forwards. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the time period when the asset is realized or the liability is settled, based on tax laws that have been enacted or substantively enacted at the reporting date.

 

Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. At the end of each reporting period, Tenaris reassesses unrecognized deferred tax assets. Tenaris recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable income will allow the deferred tax asset to be recovered.

 

Deferred tax liabilities and assets are not recognized for temporary differences between the carrying amount and tax basis of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

 

O Employee benefits

 

 

(1) Short-term obligations

 

Liabilities for wages and salaries are recognized in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current employee benefit obligations in the balance sheet.

 

(2) Post employment benefits

 

The Company has defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

 

The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, if any. The defined benefit obligation is calculated annually (at year end) by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation.

 

  - 16 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

O Employee benefits (Cont.)

 

(2) Post employment benefits (Cont.)

 

Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in Other comprehensive income in the period in which they arise. Past-service costs are recognized immediately in the Income Statement.

 

For defined benefit plans, net interest income/expense is calculated based on the surplus or deficit derived by the difference between the defined benefit obligations less fair value of plan assets. For defined contribution plans, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expenses when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

Tenaris sponsors funded and unfunded defined benefit pension plans in certain subsidiaries. The most significant are:

 

§ An unfunded defined benefit employee retirement plan for certain senior officers. The plan is designed to provide certain benefits to those officers (additional to those contemplated under applicable labor laws) in case of termination of the employment relationship due to certain specified events, including retirement. This unfunded plan provides defined benefits based on years of service and final average salary. As of December 31, 2017 the outstanding liability for this plan amounts to $46.8 million.

 

§ Employees’ service rescission indemnity: the cost of this obligation is charged to the Consolidated Income Statement over the expected service lives of employees. This provision is primarily related to the liability accrued for employees at Tenaris’s Italian subsidiary. As from January 1, 2007 as a consequence of a change in an Italian law, employees were entitled to make contributions to external funds, thus, Tenaris’s Italian subsidiary pays every year the required contribution to the funds with no further obligation. As a result, the plan changed from a defined benefit plan to a defined contribution plan effective from that date, but only limited to the contributions of 2007 onwards. As of December 31, 2017 the outstanding liability for this plan amounts to $19.3 million.

 

§ Funded retirement benefit plans held in Canada for salary and hourly employees hired prior a certain date based on years of service and, in the case of salaried employees, final average salary. Plan assets consist primarily of investments in equities and money market funds. Both plans were replaced for defined contribution plans. Effective June 2016 the salary plan was frozen for the purposes of credited service as well as determination of final average pay. As of December 31, 2017 the outstanding liability for this plan amounts to $16.7 million.

 

§ Funded retirement benefit plan held in the US for the benefit of some employees hired prior a certain date, frozen for the purposes of credited service as well as determination of final average pay for the retirement benefit calculation. Plan assets consist primarily of investments in equities and money market funds. Additionally, an unfunded postretirement health and life plan is present that offers limited medical and life insurance benefits to the retirees, hired before a certain date. As of December 31, 2017 the outstanding liability for this plan amounts to $12.3 million.

 

(3) Other long term benefits

 

During 2007, Tenaris launched an employee retention and long term incentive program (the “Program”) applicable to certain senior officers and employees of the Company, who will be granted a number of Units throughout the duration of the Program. The value of each of these Units is based on Tenaris’s shareholders’ equity (excluding non-controlling interest). Also, the beneficiaries of the Program are entitled to receive cash amounts based on (i) the amount of dividend payments made by Tenaris to its shareholders, and (ii) the number of Units held by each beneficiary to the Program. Units vest ratably over a period of four years and will be mandatorily redeemed by the Company ten years after grant date, with the option of an early redemption at seven years after the grant date. As the cash payment of the benefit is tied to the book value of the shares, and not to their market value, Tenaris valued this long-term incentive program as a long term benefit plan as classified in IAS 19 “Employee Benefits”.

 

As of December 31, 2017 and 2016, the outstanding liability corresponding to the Program amounts to $79.2 million and $78.7 million, respectively. The total value of the units granted (vested and unvested) to date under the program, considering the number of units and the book value per share as of December 31, 2017 and 2016, is $94.8 million and $92.9 million, respectively.

 

  - 17 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

O Employee benefits (Cont.)

 

(4) Termination benefits

 

Terminations benefits are payable when employment is terminated by Tenaris before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. Tenaris recognizes termination benefits at the earlier of the following dates: (a) when it can no longer withdraw the offer of those benefits; and (b) when the costs for a restructuring that is within the scope of IAS 37 and involves the payment of terminations benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer.

 

(5) Other compensation obligations

 

Employee entitlements to annual leave and long-service leave are accrued as earned.

 

Compensation to employees in the event of dismissal is charged to income in the year in which it becomes payable.

 

P Provisions

 

Tenaris is subject to various claims, lawsuits and other legal proceedings, including customer claims, in which a third party is seeking payment for alleged damages, reimbursement for losses or indemnity. Tenaris’s potential liability with respect to such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Management periodically reviews the status of each significant matter and assesses potential financial exposure. If, as a result of past events, a potential loss from a claim or proceeding is considered probable and the amount can be reliably estimated, a provision is recorded. Accruals for loss contingencies reflect a reasonable estimate of the losses to be incurred based on information available to management as of the date of preparation of the financial statements, and take into consideration Tenaris’s litigation and settlement strategies. These estimates are primarily constructed with the assistance of legal counsel. As the scope of liabilities become better defined, there may be changes in the estimates of future costs which could have a material adverse effect on its results of operations, financial condition and cash flows.

 

If Tenaris expects to be reimbursed for an accrued expense, as would be the case for an expense or loss covered under an insurance contract, and reimbursement is considered virtually certain, the expected reimbursement is recognized as a receivable.

 

This note should be read in conjunction with Note 25.

 

Q Trade and other payables

 

Trade and other payables are recognized initially at fair value, generally the nominal invoice amount and subsequently measured at amortised cost. They are presented as current liabilities unless payment is not due within 12 months after the reporting period.

 

R Revenue recognition

 

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of Tenaris’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group.

 

Tenaris’s products and services are sold based upon purchase orders, contracts or upon other persuasive evidence of an arrangement with customers, including that the sales price is known or determinable. Sales are recognized as revenue upon delivery, when neither continuing managerial involvement nor effective control over the products is retained by Tenaris and when collection is reasonably assured. Delivery is defined by the transfer of risk and may include delivery to a storage facility located at one of the Company’s subsidiaries. For bill and hold transactions revenue is recognized only to the extent (a) it is highly probable delivery will be made; (b) the products have been specifically identified and are ready for delivery; (c) the sales contract specifically acknowledges the deferred delivery instructions; (d) the usual payment terms apply.

 

  - 18 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

R Revenue recognition (Cont.)

 

The percentage of total sales that were generated from bill and hold arrangements for products located in Tenaris’s storage facilities that have not been shipped to customers amounted to 3.3%, 2.8% and 3.0% as of December 31, 2017, 2016 and 2015, respectively. The Company has not experienced any material claims requesting the cancellation of bill and hold transactions.

 

Other revenues earned by Tenaris are recognized on the following basis:

 

§ Construction contracts (mainly applicable to Tenaris Brazilian subsidiaries and amounted to $11 million, 0.21% of total sales). The revenue recognition of the contracts follows the IAS 11 ”Construction Contracts" guidance, that means, when the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract by reference to the stage of completion (measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of total estimated costs for each contract).
§ Interest income: on the effective yield basis.
§ Dividend income from investments in other companies: when Tenaris’s right to receive payment is established.

 

S Cost of sales and other selling expenses

 

Cost of sales and other selling expenses are recognized in the Consolidated Income Statement on the accrual basis of accounting.

 

Commissions, freights and other selling expenses, including shipping and handling costs, are recorded in Selling, general and administrative expenses in the Consolidated Income Statement.

 

T Earnings per share

 

Earnings per share are calculated by dividing the income attributable to owners of the parent by the daily weighted average number of common shares outstanding during the year.

 

There are no dilutive potential ordinary shares.

 

U Financial instruments

 

Non derivative financial instruments comprise investments in financial debt instruments and equity, time deposits, trade and other receivables, cash and cash equivalents, borrowings and trade and other payables. Tenaris’s non derivative financial instruments are classified into the following categories:

 

§ Financial instruments at fair value through profit and loss: comprise mainly Other Investments current, investments in certain financial debt instruments and time deposits held for trading expiring in less than ninety days from the measurement date (included within cash and cash equivalents).
§ Loans and receivables: comprise cash and cash equivalents, trade receivables and other receivables and are measured at amortized cost using the effective interest rate method less any impairment.
§ Available for sale assets: comprise the Company’s interest in the Venezuelan Companies (see Note 31).
§ Held to maturity: comprise financial assets that the Company has both the ability and the intention to hold to maturity. They are measured at amortized cost using the effective interest method.
§ Other financial liabilities: comprise borrowings, trade and other payables and are measured at amortized cost using the effective interest rate method.

 

The classification depends on the nature and purpose that the Company sets to the financial instrument.

 

Financial assets and liabilities are recognized and derecognized on their settlement date.

 

Accounting for derivative financial instruments and hedging activities is included within the Section III, Financial Risk Management.

 

  - 19 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

V Non-current assets held for sale and discontinued operations

 

Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits and financial assets that are carried at fair value.

 

An impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognized for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognized.

 

Non-current assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognized.

 

Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.

 

A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate line of business or geographical area of operations, is part of a single coordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the Consolidated Income Statement. See Note 28.

 

iii. Financial risk management

 

The multinational nature of Tenaris’s operations and customer base exposes the Company to a variety of risks, mainly related to market risks (including the effects of changes in foreign currency exchange rates and interest rates), credit risk and capital market risk. In order to manage the volatility related to these exposures, management evaluates exposures on a consolidated basis, taking advantage of exposure netting. The Company or its subsidiaries may then enter into various derivative transactions in order to prevent potential adverse impacts on Tenaris’s financial performance. Such derivative transactions are executed in accordance with internal policies and hedging practices.

 

A. Financial Risk Factors

 

(i) Capital Risk Management

 

Tenaris seeks to maintain a low debt to total equity ratio considering the industry and the markets where it operates. The year-end ratio of debt to total equity (where “debt” comprises financial borrowings and “total equity” is the sum of financial borrowings and equity) is 0.08 as of December 31, 2017 and 0.07 as of December 31, 2016. The Company does not have to comply with regulatory capital adequacy requirements.

 

(ii) Foreign exchange risk

 

Tenaris manufactures and sells its products in a number of countries throughout the world and consequently is exposed to foreign exchange rate risk. Since the Company’s functional currency is the U.S. dollar the purpose of Tenaris’s foreign currency hedging program is mainly to reduce the risk caused by changes in the exchange rates of other currencies against the U.S. dollar.

 

Tenaris’s exposure to currency fluctuations is reviewed on a periodic consolidated basis. A number of derivative transactions are performed in order to achieve an efficient coverage in the absence of operative or natural hedges. Almost all of these transactions are forward exchange rates contracts (see Note 24 Derivative financial instruments).

 

  - 20 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

A. Financial Risk Factors (Cont.)

 

(ii) Foreign exchange risk (Cont.)

 

Tenaris does not enter into derivative financial instruments for trading or other speculative purposes, other than non-material investments in structured products.

 

In the case of subsidiaries with functional currencies other than the U.S. dollar, the results of hedging activities, reported in accordance with IFRS, may not reflect entirely the management’s assessment of its foreign exchange risk hedging program. Intercompany balances between Tenaris’s subsidiaries may generate financial gains (losses) to the extent that functional currencies differ.

 

The value of Tenaris’s financial assets and liabilities is subject to changes arising from the variation of foreign currency exchange rates. The following table provides a breakdown of Tenaris’s main financial assets and liabilities (including foreign exchange derivative contracts) which impact the Company’s profit and loss as of December 31, 2017 and 2016:

 

All amounts Long / (Short) in thousands of U.S. dollars   As of December 31,
Currency Exposure / Functional currency   2017   2016
Argentine Peso / U.S. Dollar     (64,482 )     (60,204 )
Euro / U.S. Dollar     (365,926 )     (406,814 )
U.S. Dollar / Brazilian Real     (183 )     125,880  

 

The main relevant exposures correspond to:

 

§ Argentine Peso / U.S. dollar

 

As of December 31, 2017 and 2016 consisting primarily of Argentine Peso-denominated financial, trade, social and fiscal payables at certain Argentine subsidiaries whose functional currency is the U.S. dollar. A change of 1% in the ARS/USD exchange rate would have generated a pre-tax gain / loss of $0.6 million as of December 31, 2017 and 2016.

 

§ Euro / U.S. dollar

 

As of December 31, 2017 and 2016, consisting primarily of Euro-denominated intercompany liabilities at certain subsidiaries whose functional currency is the U.S. dollar. A change of 1% in the EUR/USD exchange rate would have generated a pre-tax gain / loss of $3.7 million and $4.1 million as of December 31, 2017 and 2016, respectively, which would have been to a large extent offset by changes in currency translation adjustment included in Tenaris’s net equity position.

 

§ U.S. dollar / Brazilian Real

 

As of December 31, 2016 consisting primarily of Cash and cash equivalent and Other investments denominated in U.S. dollar at subsidiaries whose functional currency is the Brazilian real. A change of 1% in the BRL/USD exchange rate would generate a pre-tax gain / loss of $1.3 million in December 31, 2016 (including a gain / loss of $0.5 million in 2016 due to foreign exchange derivative contracts entered to preserve the U.S. dollar value of trade receivables and cash denominated in Brazilian Real), which would have been to a large extent offset by changes in currency translation adjustment included in Tenaris’s net equity position.

 

Considering the balances held as of December 31, 2017 on financial assets and liabilities exposed to foreign exchange rate fluctuations, Tenaris estimates that the impact of a simultaneous 1% appreciation / depreciation movement in the levels of foreign currencies exchange rates relative to the U.S. dollar, would be a pre-tax gain / loss of $5.3 million (including a loss / gain of $6.7 million due to foreign exchange derivative contracts), which would be partially offset by changes to Tenaris’s net equity position of $3.4 million. For balances held as of December 31, 2016, a simultaneous 1% favorable / unfavorable movement in the foreign currencies exchange rates relative to the U.S. dollar, would have generated a pre-tax gain / loss of $6.6 million (including a loss / gain of $4.0 million due to foreign exchange derivative contracts), which would have been partially offset by changes to Tenaris’s net equity position of $4.2 million.

 

  - 21 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

A. Financial Risk Factors (Cont.)

 

(iii)       Interest rate risk

 

Tenaris is subject to interest rate risk on its investment portfolio and its debt. The Company uses a mix of variable and fixed rate debt in combination with its investment portfolio strategy. From time to time, the Company may choose to enter into foreign exchange derivative contracts and / or interest rate swaps to mitigate the exposure to changes in the interest rates.

 

The following table summarizes the proportions of variable-rate and fixed-rate debt as of each year end.

 

    As of December 31,
    2017   2016
    Amount in thousands of U.S. dollars   %   Amount in thousands of U.S. dollars   %
Fixed rate (*)     946,215       98 %     820,600       98 %
Variable rate     19,644       2 %     19,636       2 %
Total     965,859               840,236          

 

(*) Out of the $946 Million fixed rate borrowings $913 Million are short-term.

 

The Company estimates that, if market interest rates applicable to Tenaris’s borrowings had been 100 basis points higher, then the additional pre-tax loss would have been $8.0 million in 2017 and $8.8 million in 2016.

 

(iv) Credit risk

 

Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Company also actively monitors the creditworthiness of its treasury, derivative and insurance counterparties in order to minimize its credit risk.

 

There is no significant concentration of credit risk from customers. No single customer comprised more than 10% of Tenaris’s net sales in 2017, 2016 and 2015.

 

Tenaris’s credit policies related to sales of products and services are designed to identify customers with acceptable credit history and to allow Tenaris to require the use of credit insurance, letters of credit and other instruments designed to minimize credit risks whenever deemed necessary. Tenaris maintains allowances for impairment for potential credit losses (See Section II J).

 

As of December 31, 2017 and 2016 trade receivables amount to $1,214.1 million and $954.7 million respectively. Trade receivables have guarantees under credit insurance of $190.7 million and $222.1 million, letter of credit and other bank guarantees of $42.2 million and $117.8 million, and other guarantees of $14.1 million and $15.6 million as of December 31, 2017 and 2016 respectively.

 

As of December 31, 2017 and 2016 past due trade receivables amounted to $230.9 million and $249.0 million, respectively. Out of those amounts $27.3 million and $83.1 million are guaranteed trade receivables while $78.4 million and $85.7 million are included in the allowance for doubtful accounts. Both the allowance for doubtful accounts and the existing guarantees are sufficient to cover doubtful trade receivables.

 

  - 22 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

A. Financial Risk Factors (Cont.)

 

(v) Counterparty risk

 

Tenaris has investment guidelines with specific parameters to limit issuer risk on marketable securities. Counterparties for derivatives and cash transactions are limited to high credit quality financial institutions, normally investment grade.

 

Approximately 71% of Tenaris’s liquid financial assets correspond to Investment Grade-rated instruments as of December 31, 2017, in comparison with approximately 82% as of December 31, 2016.

 

(vi) Liquidity risk

 

Tenaris financing strategy aims to maintain adequate financial resources and access to additional liquidity. During 2017, Tenaris has counted on cash flows from operations as well as additional bank financing to fund its transactions.

 

Management maintains sufficient cash and marketable securities to finance normal operations and believes that Tenaris also has appropriate access to market for short-term working capital needs.

 

Liquid financial assets as a whole (comprising cash and cash equivalents and other investments) were 11% of total assets at the end of 2017 compared to 16% at the end of 2016.

 

Tenaris has a conservative approach to the management of its liquidity, which consists of i) cash and cash equivalents (cash in banks, liquidity funds and investments with a maturity of less than three months at the date of purchase), and ii) Other Investments (fixed income securities, time deposits, and fund investments). 

 

Tenaris holds primarily investments in money market funds and variable or fixed-rate securities from investment grade issuers. As of December 31, 2017 and 2016, Tenaris does not have direct exposure to financial instruments issued by European sovereign counterparties.

 

Tenaris holds its investments primarily in U.S. dollars. As of December 31, 2017 and 2016, U.S. dollar denominated liquid assets represented approximately 93% and 95% of total liquid financial assets respectively.

 

(vii) Commodity price risk

 

In the ordinary course of its operations, Tenaris purchases commodities and raw materials that are subject to price volatility caused by supply conditions, political and economic variables and other factors. As a consequence, Tenaris is exposed to risk resulting from fluctuations in the prices of these commodities and raw materials. Tenaris fixes the prices of such raw materials and commodities for short-term periods, typically not in excess of one year, in general Tenaris does not hedge this risk.

 

  - 23 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

B. Category of Financial Instruments and Classification Within the Fair Value Hierarchy

 

Accounting policies for financial instruments have been applied to classify as either: loans and receivables, held-to-maturity, available-for-sale, or fair value through profit and loss. For financial instruments that are measured in the statement of financial position at fair value, IFRS 13 requires a disclosure of fair value measurements by level according to the following fair value measurement hierarchy:

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

 

Level 3 - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

 

The following tables present the financial instruments by category and levels as of December 31, 2017 and 2016.

 

        Measurement Categories   At Fair Value
December 31, 2017   Carrying Amount   Loans & Receivables   Held to Maturity   Available for sale   Fair value through profit and loss   Level 1   Level 2   Level 3
Assets                                
Cash and cash equivalents     330,221       150,948       -       -       179,273       179,273       -       -  
Cash at banks     150,948       150,948       -       -       -       -       -       -  
Liquidity funds     66,033       -       -       -       66,033       66,033       -       -  
Short – term investments     113,240       -       -       -       113,240       113,240       -       -  
Other investments     1,192,306       -       220,838       -       971,468       459,476       511,992       -  
Fixed income (time-deposit, zero coupon bonds, commercial papers)     437,406       -       -       -       437,406       9,943       427,463       -  
Certificates of deposits     297,788       -       -       -       297,788       -       297,788       -  
Commercial papers     9,943       -       -       -       9,943       9,943       -       -  
Other notes     129,675       -       -       -       129,675       -       129,675       -  
Bonds and other fixed income     754,800       -       220,838       -       533,962       449,533       84,429       -  
U.S. government securities     130,477       -       -       -       130,477       130,477       -       -  
Non - U.S. government securities     161,063       -       36,283       -       124,780       124,780       -       -  
Corporates securities     378,831       -       184,555       -       194,276       194,276       -       -  
Structured notes     68,044       -       -       -       68,044       -       68,044       -  
Mortgage and asset-backed securities     16,385       -       -       -       16,385       -       16,385       -  
Others     100       -       -       -       100       -       100       -  
Other Investments Non- current     128,335       -       123,498       -       4,837       -       -       4,837  
Bonds and other fixed income     123,498       -       123,498       -       -       -       -       -  
Other investments     4,837       -       -       -       4,837       -       -       4,837  
Trade receivables     1,214,060       1,214,060       -       -       -       -       -       -  
Receivables C and NC     327,258       176,716       -       -       8,230       -       8,230       -  
Foreign exchange derivatives contracts     8,230       -       -       -       8,230       -       8,230       -  
Other receivables     176,716       176,716       -       -       -       -       -       -  
Other receivables (non-financial)     142,314       -       -       -       -       -       -       -  
Available for sale assets  (*)     21,572       -       -       21,572       -       -       -       21,572  
Total             1,541,724       344,336       21,572       1,163,808       638,749       520,222       26,409  
Liabilities                                                                
Borrowings C and NC     965,859       965,859       -       -       -       -       -       -  
Trade payables     750,739       750,739       -       -       -       -       -       -  
Other liabilities     197,504       -       -       -       39,799       -       39,799       -  
Foreign exchange derivatives contracts     39,799       -       -       -       39,799       -       39,799       -  
Other liabilities (non-financial)     157,705       -       -       -       -       -       -       -  
Total             1,716,598       -       -       39,799       -       39,799       -  

 

  - 24 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

B. Category of Financial Instruments and Classification Within the Fair Value Hierarchy (Cont.)

 

        Measurement Categories   At Fair Value
December 31, 2016   Carrying Amount   Loans & Receivables   Held to Maturity   Available for sale   Fair value through profit and loss   Level 1   Level 2   Level 3
Assets                                
Cash and cash equivalents     399,737       92,730       -       -       307,007       307,007       -       -  
Cash at banks     92,730       92,730       -       -       -       -       -       -  
Liquidity funds     215,807       -       -       -       215,807       215,807       -       -  
Short – term investments     91,200       -       -       -       91,200       91,200       -       -  
Other investments Current     1,633,142       -       246,031       -       1,387,111       607,866       779,245       -  
Fixed income (time-deposit, zero cupon bonds, commercial papers)     782,029       -       -       -       782,029       76,260       705,769       -  
Non - U.S. sovereign bills     41,370       -       -       -       41,370       41,370       -       -  
Certificates of deposits     525,068       -       -       -       525,068       -       525,068       -  
Commercial papers     34,890       -       -       -       34,890       34,890       -       -  
Other notes     180,701       -       -       -       180,701       -       180,701       -  
Bonds and other fixed income     841,638       -       246,031       -       595,607       522,131       73,476       -  
U.S. government securities     216,732       -       -       -       216,732       216,732       -       -  
Non - U.S. government securities     88,805       -       32,644       -       56,161       56,161       -       -  
Corporates securities     462,625       -       213,387       -       249,238       249,238       -       -  
Mortgage and asset-backed securities     73,476       -       -       -       73,476       -       73,476       -  
Fund investments     9,475       -       -       -       9,475       9,475       -       -  
Other Investments Non- current     249,719       -       248,049       -       1,670       -       -       1,670  
Bonds and other fixed income     248,049       -       248,049       -       -       -       -       -  
Other investments     1,670       -       -       -       1,670       -       -       1,670  
Trade receivables     954,685       954,685       -       -       -       -       -       -  
Receivables C and NC     321,718       176,990       -       -       2,759       -       2,759       -  
Foreign exchange derivatives contracts     2,759       -       -       -       2,759       -       2,759       -  
Other receivables     176,990       176,990       -       -       -       -       -       -  
Other receivables (non-financial)     141,969       -       -       -       -       -       -       -  
Available for sale assets  (*)     21,572       -       -       21,572       -       -       -       21,572  
Total             1,224,405       494,080       21,572       1,698,547       914,873       782,004       23,242  
Liabilities                                                                
Borrowings C and NC     840,236       840,236       -       -       -       -       -       -  
Trade payables     556,834       556,834       -       -       -       -       -       -  
Other liabilities     183,887       -       -       -       42,635       -       42,635       -  
Foreign exchange derivatives contracts     42,635       -       -       -       42,635       -       42,635       -  
Other liabilities (non-financial)     141,252       -       -       -       -       -       -       -  
Total             1,397,070       -       -       42,635       -       42,635       -  

 

(*) For further detail regarding Available for sale assets, see Note 31.

 

There were no transfers between Levels during the year

 

The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by Tenaris is the current bid price. These instruments are included in Level 1 and comprise primarily corporate and sovereign debt securities.

 

The fair value of financial instruments that are not traded in an active market (such as certain debt securities, certificates of deposits with original maturity of more than three months, forward and interest rate derivative instruments) is determined by using valuation techniques which maximize the use of observable market data when available and rely as little as possible on entity specific estimates. If all significant inputs required to value an instrument are observable, the instrument is included in Level 2. Tenaris values its assets and liabilities included in this level using bid prices, interest rate curves, broker quotations, current exchange rates, forward rates and implied volatilities obtained from market contributors as of the valuation date.

 

If one or more of the significant inputs are not based on observable market data, the instruments are included in Level 3. Tenaris values its assets and liabilities in this level using observable market inputs and management assumptions which reflect the Company’s best estimate on how market participants would price the asset or liability at measurement date. Main balances included in this level correspond to Available for sale assets related to Tenaris’s interest in Venezuelan companies under process of nationalization (see Note 31).

 

  - 25 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

B. Category of Financial Instruments and Classification Within the Fair Value Hierarchy (Cont.)

 

The following table presents the changes in Level 3 assets and liabilities:

 

    Year ended December 31,  
    2017     2016  
    Assets / Liabilities  
At the beginning of the year     23,242       23,234  
Acquisition     3,681       -  
Decrease due to write down     (564 )     -  
Currency translation adjustment and others     50       8  
At the end of the year     26,409       23,242  

 

C. Fair value estimation

 

Financial assets or liabilities classified at fair value through profit or loss are measured under the framework established by the IASB accounting guidance for fair value measurements and disclosures.

 

The fair values of quoted investments are generally based on current bid prices. If the market for a financial asset is not active or no market is available, fair values are established using standard valuation techniques.

 

Some of Tenaris’s investments are designated as held to maturity and measured at amortized cost. Tenaris estimates that the fair value of these financial assets is 100.9% and 100.8% of its carrying amount including interests accrued as of December 31, 2017 and 2016 respectively.

 

The fair value of all outstanding derivatives is determined using specific pricing models that include inputs that are observable in the market or can be derived from or corroborated by observable data. The fair value of forward foreign exchange contracts is calculated as the net present value of the estimated future cash flows in each currency, based on observable yield curves, converted into U.S. dollars at the spot rate of the valuation date.

 

Borrowings are comprised primarily of fixed rate debt and variable rate debt with a short term portion where interest has already been fixed. They are classified under other financial liabilities and measured at their amortized cost. Tenaris estimates that the fair value of its main financial liabilities is approximately 99.4% of its carrying amount including interests accrued in 2017 as compared with 99.7% in 2016. Fair values were calculated using standard valuation techniques for floating rate instruments and comparable market rates for discounting flows.

 

D. Accounting for derivative financial instruments and hedging activities

 

Derivative financial instruments are initially recognized in the statement of financial position at fair value through profit and loss on each date a derivative contract is entered into and are subsequently remeasured at fair value. Specific tools are used for calculation of each instrument’s fair value and these tools are tested for consistency on a monthly basis. Market rates are used for all pricing operations. These include exchange rates, deposit rates and other discount rates matching the nature of each underlying risk.

 

As a general rule, Tenaris recognizes the full amount related to the change in fair value of derivative financial instruments in Financial Results in the Consolidated Income Statement.

 

Tenaris designates certain derivatives as hedges of particular risks associated with recognized assets or liabilities or highly probable forecast transactions. These transactions (mainly currency forward contracts on highly probable forecast transactions) are classified as cash flow hedges. The effective portion of the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. Amounts accumulated in equity are then recognized in the income statement in the same period as the offsetting losses and gains on the hedged item. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. The fair value of Tenaris’s derivative financial instruments (assets or liabilities) continues to be reflected in the statement of financial position. The full fair value of a hedging derivative is classified as a current or non-current asset or liability according to its expiry date.

 

  - 26 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

D. Accounting for derivative financial instruments and hedging activities (Cont.)

 

For transactions designated and qualifying for hedge accounting, Tenaris documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. Tenaris also documents its assessment on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flow of hedged items. At December 31, 2017 and 2016, the effective portion of designated cash flow hedges which is included in “ Other Reserves” in equity amounts to $0.2 million debit and $4.7 million credit respectively (see Note 24 Derivative financial instruments ).

 

The fair values of various derivative instruments used for hedging purposes are disclosed in Note 24. Movements in the hedging reserve included within “ Other Reserves” in equity are also shown in Note 24.

 

 

 

 

 

 

 

 

 

  - 27 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

IV. OTHER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In the notes all amounts are shown in thousands of U.S. dollars, unless otherwise stated)

 

1 Segment information

 

As mentioned in section II. AP – C, the Segment Information is disclosed as follows:

 

Reportable operating segments

 

(All amounts in million US dollar)

Year ended December 31, 2017   Tubes     Other     Continuing operations     Discontinued operations  
IFRS - Net Sales     4,966       323       5,289       12  
Management view - operating income     115       48       163       3  
Difference in cost of sales     164       1       165       (1 )
Direct cost and others     115       -       115       (1 )
Absorption     49       1       50       -  
Differences in depreciation and amortization     (3 )     -       (3 )     -  
Differences in selling, general and administrative expenses     14       (6 )     8       -  
Differences in other operating income (expenses), net     2       -       2       -  
IFRS - operating income     292       43       335       2  
Financial income (expense), net                     (23 )     -  
Income before equity in earnings of non-consolidated companies and income tax                     312       2  
Equity in earnings of non-consolidated companies                     116       -  
Income before income tax                     428       2  
Capital expenditures     550       8       558       -  
Depreciation and amortization     594       15       609       -  

 

Year Ended December 31, 2016   Tubes     Other     Continuing operations     Discontinued operations  
IFRS - Net Sales     4,015       278       4,294       235  
Management view - operating income     19       19       38       62  
Difference in cost of sales     (108 )     (8 )     (116 )     4  
Direct cost and others     (114 )     (8 )     (122 )     4  
Absorption     6       -       6       -  
Differences in Depreciation and Amortization     28       -       28       -  
Differences in Selling, general and administrative expenses     (5 )     1       (4 )     -  
Differences in Other operating income (expenses), net     (5 )     -       (5 )     -  
IFRS - operating (loss) income     (71 )     12       (59 )     66  
Financial income (expense), net                     22       -  
(Loss) income before equity in earnings of non-consolidated companies and income tax                     (37 )     66  
Equity in earnings of non-consolidated companies                     71       -  
Income before income tax                     34       66  
Capital expenditures     752       33       785       2  
Depreciation and amortization     643       14       657       5  

 

Year Ended December 31, 2015   Tubes     Other     Continuing operations     Discontinued operations  
IFRS - Net Sales     6,444       459       6,903       198  
Management view - operating income     686       27       713       39  
Difference in cost of sales     (225 )     -       (225 )     (9 )
Direct cost and others     (184 )     -       (184 )     (9 )
Absorption     (41 )     -       (41 )     -  
Differences in Depreciation and Amortization     (319 )     1       (318 )     -  
Differences in Selling, general and administrative expenses     (4 )     -       (4 )     -  
Differences in Other operating income (expenses), net     -       -       -       -  
IFRS - operating (loss) income     138       28       166       30  
Financial income (expense), net                     15       -  
Income before equity in earnings of non-consolidated companies and income tax                     181       30  
Equity in losses of non-consolidated companies                     (40 )     -  
Income before income tax                     141       30  
Capital expenditures     1,089       41       1,130       1  
Depreciation and amortization     638       15       653       5  

 

Transactions between segments, which were eliminated in consolidation, are mainly related to sales of scrap, energy, surplus raw materials and others from the Other segment to the Tubes segment for $53, $47 and $57 million in 2017, 2016 and 2015, respectively.

 

In addition to the amounts reconciled above, the main differences in net income arise from the impact of functional currencies on financial result, deferred income taxes as well as the result of investment in non-consolidated companies and changes on the valuation of inventories according to cost estimation internally defined.

 

  - 28 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

1 Segment information (Cont.)

 

Geographical information

 

 

(all amounts in thousands of U.S. dollars)   North America     South America     Europe     Middle East & Africa     Asia Pacific     Unallocated (*)     Total continuing operations     Total discontinued operations  
Year ended December 31, 2017                                                                
Net sales     2,451,357       1,142,142       545,777       937,439       211,789       -       5,288,504       11,899  
Total assets     7,925,520       2,975,599       2,002,658       391,029       441,546       661,866       14,398,218       -  
Trade receivables     582,204       234,877       214,944       135,524       46,511       -       1,214,060       -  
Property, plant and equipment, net     3,914,229       1,190,145       878,788       102,481       143,500       -       6,229,143       -  
Capital expenditures     430,143       58,949       57,285       7,562       4,153       -       558,092       145  
Depreciation and amortization     354,091       126,273       93,900       12,094       22,282       -       608,640       -  
                                                                 
Year ended December 31, 2016                                                                
Net sales     1,320,297       1,210,527       565,173       1,055,994       141,601       -       4,293,592       234,911  
Total assets     7,467,842       2,803,848       1,925,784       593,649       482,132       578,603       13,851,858       151,417  
Trade receivables     229,390       204,746       161,291       308,919       50,339       -       954,685       33,620  
Property, plant and equipment, net     3,652,032       1,237,391       847,318       106,941       158,257       -       6,001,939       41,470  
Capital expenditures     646,545       59,780       35,270       24,166       19,201       -       784,962       1,911  
Depreciation and amortization     381,811       128,458       113,875       11,053       21,912       -       657,109       5,303  
                                                                 
Year ended December 31, 2015                                                                
Net sales     2,668,724       2,132,221       728,815       1,096,688       276,675       -       6,903,123       197,630  
Total assets     8,625,806       2,931,297       1,877,429       429,317       423,479       512,217       14,799,545       87,429  
Trade receivables     339,499       396,834       181,084       137,278       52,494       -       1,107,189       27,940  
Property, plant and equipment, net     3,207,661       1,269,995       907,466       86,181       155,299       -       5,626,602       45,656  
Capital expenditures     822,396       168,140       82,344       36,867       20,566       -       1,130,313       1,206  
Depreciation and amortization     385,189       125,754       112,742       9,912       19,716       -       653,313       5,465  

 

There are no revenues from external customers attributable to the Company’s country of incorporation (Luxembourg). For geographical information purposes, “North America” comprises Canada, Mexico and the USA (31.8%); “South America” comprises principally Argentina (14.0%), Brazil and Colombia; “Europe” comprises principally Italy and Romania; “Middle East and Africa” comprises principally Kazakhstan, United Arab Emirates, Nigeria and Saudi Arabia and; “Asia Pacific” comprises principally China, Japan and Thailand.

 

(*) Includes Investments in non-consolidated companies and Available for sale assets for $21.6 million in 2017, 2016 and 2015 (see Note 12 and 31).

 

2 Cost of sales

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
             
Inventories at the beginning of the year     1,563,889       1,843,467       2,779,869  
                         
Plus: Charges of the year                        
Raw materials, energy, consumables and other     2,794,503       1,528,532       1,934,209  
Services and fees     244,035       199,210       298,470  
Labor cost     778,408       658,975       947,997  
Depreciation of property, plant and equipment     383,490       376,965       377,596  
Amortization of intangible assets     18,621       27,244       24,100  
Maintenance expenses     183,370       122,553       184,053  
Allowance for obsolescence     (12,917 )     32,765       68,669  
Taxes     18,542       16,693       21,523  
Other     88,823       89,575       92,059  
      4,496,875       3,052,512       3,948,676  
Less: Inventories at the end of the year (*)     (2,368,304 )     (1,593,708 )     (1,843,467 )
From discontinued operations     (7,403 )     (136,587 )     (137,318 )
      3,685,057       3,165,684       4,747,760  

 

(*) Inventories as of December 31, 2016 include $ 29.8 million related to discontinued operations.

 

  - 29 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

3 Selling, general and administrative expenses

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
                   
Services and fees     132,301       123,653       158,541  
Labor cost     443,338       441,355       579,360  
Depreciation of property, plant and equipment     17,979       16,965       18,543  
Amortization of intangible assets     188,550       241,238       238,539  
Commissions, freight and other selling expenses     339,759       243,401       351,657  
Provisions for contingencies     17,664       30,841       19,672  
Allowances for doubtful accounts     (5,421 )     (12,573 )     36,788  
Taxes     56,826       67,724       129,018  
Other     81,061       76,563       92,157  
      1,272,057       1,229,167       1,624,275  
From discontinued operations     (2,041 )     (32,238 )     (30,678 )
      1,270,016       1,196,929       1,593,597  

 

4 Labor costs (included in Cost of sales and in Selling, general and administrative expenses)

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
             
Wages, salaries and social security costs     1,144,341       988,794       1,327,968  
Severance indemnities     34,497       73,741       176,950  
Defined contribution plans     12,401       10,758       13,286  
Pension benefits - defined benefit plans     15,066       10,563       14,813  
Employee retention and long term incentive program     15,441       16,474       (5,660 )
      1,221,746       1,100,330       1,527,357  
From discontinued operations     (853 )     (28,306 )     (24,665 )
      1,220,893       1,072,024       1,502,692  

 

At year-end, the number of employees was 21,605 in 2017, 19,399 in 2016 and 21,741 in 2015.

 

The following table shows the geographical distribution of the employees:

 

Country   2017     2016     2015  
Argentina     5,221       4,755       5,388  
Mexico     5,139       4,968       5,101  
Brazil     1,382       1,166       2,050  
USA     1,953       1,636       2,190  
Italy     2,088       1,979       2,030  
Romania     1,870       1,631       1,624  
Canada     919       473       546  
Indonesia     506       509       532  
Colombia     1,003       750       636  
Japan     410       458       508  
Other     1,114       1,074       1,136  
      21,605       19,399       21,741  
From discontinued operations     -       (323 )     (292 )
      21,605       19,076       21,449  

 

  - 30 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

5 Other operating income and expenses

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
             
Other operating income                        
Net income from other sales     4,395       16,275       7,480  
Net rents     4,325       4,852       6,462  
Other     1,796       -       661  
      10,516       21,127       14,603  
                         
Other operating expenses                        
Contributions to welfare projects and non-profits organizations     9,158       9,534       9,052  
Provisions for legal claims and contingencies     -       10       1  
Loss on fixed assets and material supplies disposed / scrapped     118       57       94  
Impairment charge     -       -       400,314  
Allowance for doubtful receivables     84       432       1,114  
Other     -       1,378       -  
      9,360       11,411       410,575  
From discontinued operations     (1 )     (248 )     (1 )
      9,359       11,163       410,574  

Impairment charge

 

Tenaris regularly conducts assessments of the carrying values of its assets. The value-in-use was used to determine the recoverable value. Value-in-use is calculated by discounting the estimated cash flows over a five-year period based on forecasts approved by management. For the subsequent years beyond the five-year period, a terminal value is calculated based on perpetuity considering a nominal growth rate of 2%.

 

Tenaris’s main source of revenue is the sale of products and services to the oil and gas industry and the level of such sales is sensitive to international oil and gas prices and their impact on drilling activities.

 

For purposes of assessing key assumptions, Tenaris uses external sources of information and management judgment based on past experience.

 

The main key assumptions used in estimating the value in use are discount rate, growth rate and competitive and economic factors applied to determine Tenaris’s cash flow projections, such as oil and gas prices, average number of active oil and gas drilling rigs (rig count), capital expenditure programs for Tenaris’s customers, and raw material costs.

 

Management has determined the value of each of the key assumptions as follows:

 

- Discount rate: based on the applicable weighted average cost of capital (WACC), which is considered to be a good indicator of capital cost, taking into account the industry, country and size of the business. For each CGU where assets are allocated, a specific WACC was determined taking into account the industry, country and size of the business. In 2017, the main discount rates used were in a range between 9.4% and 11.2%.

 

- Growth rate: considers the long-term average growth rate for the oil and gas industry, the higher demand to offset depletion of existing fields and the Company’s expected market penetration.

 

- Oil and gas prices and customer’s capital expenditures: based on industry analysts’ reports and management’s expectations of market development respectively.

 

- Rig count: based on information published by Baker Hughes and management’s expectations.

 

- Raw material costs: based on industry analysts’ reports and management’s expectations.

 

The main factors that could result in additional impairment charges in future periods would be an increase in the discount rate or a decrease in growth rate used in the Company’s cash flow projections, a further deterioration of the business, competitive and economic factors, such as a decrease in oil and gas prices and the evolution of the rig count.

 

As of December 31, 2017, for those CGUs carrying goodwill, a reasonably possible change in key assumptions would not cause the carrying amount to exceed recoverable amount.

 

In 2015, as a result of the deterioration of business conditions, the Company recorded impairment charges on its welded pipe assets of $400.3 million. No impairment charge was recorded in 2016 or 2017.

 

  - 31 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

6 Financial results

 

(all amounts in thousands of U.S. dollars)   Year ended December 31,  
    2017     2016     2015  
             
Interest Income     51,525       60,405       39,516  
Net result on changes in FV of financial assets at FVTPL     (3,920 )     5,799       (4,942 )
Finance income     47,605       66,204       34,574  
Finance cost     (27,072 )     (22,329 )     (23,058 )
Net foreign exchange transactions results (*)     (48,955 )     (2,146 )     (13,301 )
Foreign exchange derivatives contracts results (**)     (8,996 )     (31,310 )     30,468  
Other     14,392       11,447       (14,473 )
Other financial results     (43,559 )     (22,009 )     2,694  
Net financial results     (23,026 )     21,866       14,210  
From discontinued operations     9       88       382  
      (23,017 )     21,954       14,592  

 

During 2015 Tenaris has derecognized all its fixed income financial instruments categorized as available for sale.

 

(*)In 2017 and 2016 includes the negative impact from Euro appreciation against the U.S. dollar on Euro denominated intercompany liabilities in subsidiaries with functional currency U.S. Dollar, largely offset by an increase in currency translation adjustment reserve from an Italian subsidiary.

 

(**) In 2016 includes the negative impact from Brazilian Real appreciation against the U.S. dollar on hedging instruments and of Cash and cash equivalent and Other investments denominated in U.S. dollar in subsidiaries which functional currency is the Brazilian real, partially offset by an increase in currency translation adjustment reserve from the Brazilian subsidiaries.

 

7 Equity in earnings (losses) of non-consolidated companies

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
                   
 From non-consolidated companies     116,140       71,533       (10,674 )
 Impairment loss on non-consolidated companies (see Note 12)     -       -       (28,884 )
      116,140       71,533       (39,558 )

 

8 Income tax

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
                   
Current tax     184,016       174,410       164,562  
Deferred tax     (100,432 )     (132,969 )     79,943  
      83,584       41,441       244,505  
From discontinued operations     (100,720 )     (24,339 )     (10,121 )
      (17,136 )     17,102       234,384  

 

The tax on Tenaris’s income before tax differs from the theoretical amount that would arise using the tax rate in each country as follows:

 

    Year ended December 31,  
(all amounts in thousands of U.S. dollars)   2017     2016     2015  
                   
Income before income tax     427,711       34,430       140,829  
                         
Tax calculated at the tax rate in each country (*)     6,456       (91,628 )     (71,588 )
Non taxable income / Non deductible expenses, net (*)     40,298       51,062       149,632  
Changes in the tax rates     (62,968 )     4,720       6,436  
Effect of currency translation on tax base (**)     (922 )     105,758       151,615  
Accrual / Utilization of previously unrecognized tax losses (***)     -       (52,810 )     (1,711 )
Tax charge     (17,136 )     17,102       234,384  

 

  - 32 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

8 Income tax (Cont.)

 

(*) Include the effect of the impairment charges of approximately $400.3 million in 2015.

 

(**) Tenaris applies the liability method to recognize deferred income tax on temporary differences between the tax basis of assets and their carrying amounts in the financial statements. By application of this method, Tenaris recognizes gains and losses on deferred income tax due to the effect of the change in the value on the tax basis in subsidiaries (mainly Mexico, Argentina and Colombia), which have a functional currency different than their local currency. These gains and losses are required by IFRS even though the revalued / devalued tax basis of the relevant assets will not result in any deduction / obligation for tax purposes in future periods.

 

(***)  It includes a deferred tax income of approximately $45 million booked in the last quarter of 2016 related to a capital loss. Amount was carried forward in line with US Regulation in force, and offset in 2017 Capital Gains.

 

Changes in the tax rates: On December 29, 2017 Argentina enacted amendments to several tax laws, including among others a reduction in the corporate income tax rate from 35% to 30% for fiscal years starting 1 January 2018 to 31 December 2019 and to 25% going forward. The impact booked in the Company income tax charge of the year was a gain of approximately $46 million of deferred tax income.

 

On December 22, 2017 the U.S. enacted significant changes to U.S. tax law. The reform is complex and considers significant changes to the U.S. corporate income tax system by, among others, reducing the Federal corporate income tax rate from 35% to 21%. The Company has made a reasonable estimate of the financial impacts of the reform. However, given its significant changes and complexities, and considering that more accurate information on the impact and the modalities of its application will be obtained in subsequent reporting periods, certain measurement adjustments could be needed.

 

The impact booked in the Company income tax charge of the year was a gain of approximately $15.2 million of deferred tax income.

 

Tax charge of the year has been affected by an extraordinary charge related to the settlement agreement with the Italian tax authorities (see Note 25).

 

9 Dividends distribution

 

On November 1, 2017, the Company’s Board of Directors approved the payment of an interim dividend of $0.13 per share ($0.26 per ADS), or approximately $153 million, paid on November 22, 2017, with an ex-dividend date of November 20, 2017.

 

On May 3, 2017, the Company’s Shareholders approved an annual dividend in the amount of $0.41 per share ($0.82 per ADS). The amount approved included the interim dividend previously paid in November 23, 2016 in the amount of $0.13 per share ($0.26 per ADS). The balance, amounting to $0.28 per share ($0.56 per ADS), was paid on May 24, 2017. In the aggregate, the interim dividend paid in November 2016 and the balance paid in May 2017 amounted to approximately $484.0 million

 

On May 4, 2016 the Company’s Shareholders approved an annual dividend in the amount of $0.45 per share ($0.90 per ADS). The amount approved included the interim dividend previously paid in November 25, 2015 in the amount of $0.15 per share ($0.30 per ADS). The balance, amounting to $0.30 per share ($0.60 per ADS), was paid on May 25, 2016. In the aggregate, the interim dividend paid in November 2015 and the balance paid in May 2016 amounted to approximately $531.2 million.

 

On May 6, 2015 the Company’s Shareholders approved an annual dividend in the amount of $0.45 per share ($0.90 per ADS). The amount approved included the interim dividend previously paid in November 27, 2014 in the amount of $0.15 per share ($0.30 per ADS). The balance, amounting to $0.30 per share ($0.60 per ADS), was paid on May 20, 2015. In the aggregate, the interim dividend paid in November 2014 and the balance paid in May 2015 amounted to approximately $531.2 million.

 

  - 33 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

10 Property, plant and equipment, net

 

Year ended December 31, 2017   Land and civil buildings     Industrial buildings, plant and production equipment     Vehicles, furniture and fixtures     Work in progress     Spare parts and equipment     Total  
                                     
Cost                                                
Values at the beginning of the year     599,710       10,034,500       346,486       1,492,572       25,404       12,498,672  
Translation differences     5,493       178,598       5,518       284       331       190,224  
Additions     63       7,423       1,252       497,423       18,490       524,651  
Disposals / Consumptions     (1,293 )     (3,966 )     (7,319 )     (94 )     (1,812 )     (14,484 )
Increase due to business combinations (*)     2,187       5,654       2,444       -       -       10,285  
Transfers / Reclassifications     105,901       1,732,376       22,161       (1,823,106 )     -       37,332  
Values at the end of the year     712,061       11,954,585       370,542       167,079       42,413       13,246,680  
                                                 
Depreciation                                                
Accumulated at the beginning of the year     89,274       6,125,552       281,907       -       -       6,496,733  
Translation differences     1,204       114,675       4,959       -       -       120,838  
Depreciation charge     9,406       368,850       23,213       -       -       401,469  
Transfers / Reclassifications     1,699       7,575       (405 )     -       -       8,869  
Disposals / Consumptions     (386 )     (3,781 )     (6,205 )     -       -       (10,372 )
Accumulated at the end of the year     101,197       6,612,871       303,469       -       -       7,017,537  
At December 31, 2017     610,864       5,341,714       67,073       167,079       42,413       6,229,143  

 

Year ended December 31, 2016   Land and civil buildings     Industrial buildings, plant and production equipment     Vehicles, furniture and fixtures     Work in progress     Spare parts and equipment     Total  
                                     
Cost                                                
Values at the beginning of the year     609,190       9,683,181       340,835       1,219,369       18,330       11,870,905  
Translation differences     2,601       6,737       2,445       2,644       53       14,480  
Additions     639       1,384       784       750,038       4,650       757,495  
Disposals / Consumptions     (2,296 )     (26,073 )     (10,751 )     (4,850 )     (2,494 )     (46,464 )
Transfer to assets held for sale     (34,849 )     (61,380 )     (1,103 )     (1,407 )     (177 )     (98,916 )
Transfers / Reclassifications     24,425       430,651       14,276       (473,222 )     5,042       1,172  
Values at the end of the year     599,710       10,034,500       346,486       1,492,572       25,404       12,498,672  
                                                 
Depreciation                                                
Accumulated at the beginning of the year     88,270       5,844,657       265,487       -       231       6,198,645  
Translation differences     508       (3,318 )     1,831       -       (20 )     (999 )
Depreciation charge     9,621       359,516       24,260       -       533       393,930  
Transfers / Reclassifications     (160 )     (3,328 )     -       -       (744 )     (4,232 )
Transfer to assets held for sale     (8,552 )     (47,928 )     (966 )     -       -       (57,446 )
Disposals / Consumptions     (413 )     (24,047 )     (8,705 )     -       -       (33,165 )
Accumulated at the end of the year     89,274       6,125,552       281,907       -       -       6,496,733  
At December 31, 2016     510,436       3,908,948       64,579       1,492,572       25,404       6,001,939  

 

 

Property, plant and equipment include capitalized interests for net amounts at December 31, 2017 and 2016 of $39.5 million and $25.4 million, respectively. The average capitalization interest rates applied were 1.97% during 2017 and 1.28% during 2016.

 

(*) Related to Garrett LLC acquisition, see Note 26.

 

  - 34 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

11 Intangible assets, net

 

Year ended December 31, 2017   Information system projects     Licenses,  patents and trademarks (*)     Goodwill     Customer relationships     Total  
                               
Cost                                        
Values at the beginning of the year     554,330       461,619       2,090,257       2,058,946       5,165,152  
Translation differences     6,265       483       (184 )     (87 )     6,477  
Additions     28,335       5,105       -       -       33,440  
Transfers / Reclassifications     (28,371 )     (92 )     -       -       (28,463 )
Increase due to business combinations (**)     133       -       -       -       133  
Disposals     -       (1,152 )     -       -       (1,152 )
Values at the end of the year     560,692       465,963       2,090,073       2,058,859       5,175,587  
                                         
Amortization                                        
Accumulated at the beginning of the year     408,373       362,292       797,592       1,734,068       3,302,325  
Translation differences     5,232       -       -       -       5,232  
Amortization charge     65,249       10,546       -       131,376       207,171  
Transfers / Reclassifications     92       (92 )     -       -       -  
Accumulated at the end of the year     478,946       372,746       797,592       1,865,444       3,514,728  
At December 31, 2017     81,746       93,217       1,292,481       193,415       1,660,859  

 

Year ended December 31, 2016   Information system projects     Licenses,  patents and trademarks (*)     Goodwill     Customer relationships     Total  
Cost                                        
Values at the beginning of the year     524,869       494,662       2,170,709       2,059,946       5,250,186  
Translation differences     2,264       (29 )     4,671       -       6,906  
Additions     28,730       648       -       -       29,378  
Transfers / Reclassifications     (546 )     (222 )     -       -       (768 )
Transfer to assets held for sale     (836 )     (32,600 )     (85,123 )     (1,000 )     (119,559 )
Disposals     (151 )     (840 )     -       -       (991 )
Values at the end of the year     554,330       461,619       2,090,257       2,058,946       5,165,152  
                                         
Amortization                                        
Accumulated at the beginning of the year     335,532       364,412       836,939       1,569,851       3,106,734  
Translation differences     1,325       -       -       -       1,325  
Amortization charge     72,632       30,633       -       165,217       268,482  
Transfers / Reclassifications     (245 )     (153 )     -       -       (398 )
Transfer to assets held for sale     (718 )     (32,600 )     (39,347 )     (1,000 )     (73,665 )
Disposals     (153 )     -       -       -       (153 )
Accumulated at the end of the year     408,373       362,292       797,592       1,734,068       3,302,325  
At December 31, 2016     145,957       99,327       1,292,665       324,878       1,862,827  

 

(*) Includes Proprietary Technology.

 

(**) Related to Garrett LLC acquisition.

 

The geographical allocation of goodwill for the year ended December 31, 2017 was $1,168.5 million for North America, $121.2 million for South America, $2.0 million for Europe and $0.7 million for Middle East & Africa.

 

The carrying amount of goodwill allocated by CGU, as of December 31, 2017, was as follows:

 

(All amounts in million US dollar)  
As of December 31, 2017   Tubes Segment     Other Segment  
CGU   Maverick Acquisition     Hydril Acquisition     Other     Maverick Acquisition     Total  
OCTG (USA)     225       -       -       -       225  
Tamsa (Hydril and other)     -       346       19       -       365  
Siderca (Hydril and other)     -       265       93       -       358  
Hydril     -       309       -       -       309  
Coiled Tubing     -       -       -       4       4  
Confab     -       -       28       -       28  
Other     -       -       3       -       3  
Total     225       920       143       4       1,292  

 

  - 35 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

12 Investments in non-consolidated companies
    Year ended December 31,  
    2017     2016  
             
At the beginning of the year     557,031       490,645  
Translation differences     (9,548 )     3,473  
Equity in earnings of non-consolidated companies     116,140       71,533  
Dividends and distributions received (*)     (22,971 )     (20,674 )
Additions     -       17,108  
Decrease / increase in equity reserves and others     (358 )     (5,054 )
At the end of the year     640,294       557,031  

 

(*)Related to Ternium

 

The principal non-consolidated companies are:

        % ownership at December 31,     Value at December 31,  
Company   Country of incorporation   2017     2016     2017     2016  
a) Ternium (*)   Luxembourg     11.46 %     11.46 %     563,735       491,285  
b) Usiminas (**)   Brazil     3.08 %     3.08 %     70,642       61,904  
Others   -     -       -       5,917       3,842  
                          640,294       557,031  

 

(*) Including treasury shares.

(**)At December 31, 2017 and 2016 the voting rights were 5.2%.

 

a) Ternium S.A.

 

Ternium S.A. (“Ternium”), is a steel producer with production facilities in Mexico, Argentina, Brazil, Colombia, United States and Guatemala and is one of Tenaris’s main suppliers of round steel bars and flat steel products for its pipes business.

 

At December 31, 2017, the closing price of Ternium’s ADSs as quoted on the New York Stock Exchange was $31.59 per ADS, giving Tenaris’s ownership stake a market value of approximately $725.7 million. At December 31, 2017, the carrying value of Tenaris’s ownership stake in Ternium, based on Ternium’s IFRS financial statements, was approximately $563.7 million. See Section II.B.2.

 

The Company reviews periodically the recoverability of its investment in Ternium. To determine the recoverable value, the Company estimates the value in use of the investment by calculating the present value of the expected cash flows. The key assumptions used by the Company are based on external and internal sources of information, and on management’s judgment based on past experience and expectations of future changes in the market.

 

Value-in-use was calculated by discounting the estimated cash flows over a five year period based on forecasts approved by management. For the subsequent years beyond the five-year period, a terminal value was calculated based on perpetuity. The discount rates used are based on the respective weighted average cost of capital (WACC), which is considered to be a good indicator of capital cost. The discount rate used to test the investment in Ternium for impairment was 11.5%

 

Summarized selected financial information of Ternium, including the aggregated amounts of assets, liabilities, revenues and profit or loss is as follows:

 

    Ternium  
    2017     2016  
Non-current assets     7,727,283       5,622,556  
Current assets     4,395,283       2,700,314  
Total assets     12,122,566       8,322,870  
Non-current liabilities     3,442,521       1,324,785  
Current liabilities     2,827,275       1,831,492  
Total liabilities     6,269,796       3,156,277  
                 
Non-controlling interests     842,347       775,295  
                 
Revenues     9,700,296       7,223,975  
Gross profit     2,297,271       1,839,585  
Net income for the year attributable to owners of the parent     886,219       595,644  
Total comprehensive income for the year, net of tax, attributable to owners of the parent     815,434       534,827  

 

  - 36 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

12 Investments in non-consolidated companies (Cont.)

 

b) Usiminas S.A.

 

Usiminas is a Brazilian producer of high quality flat steel products used in the energy, automotive and other industries and it is Tenaris’s principal supplier of flat steel in Brazil for its pipes and industrial equipment businesses.

 

As of December 31, 2017 the closing price of the Usiminas’ ordinary and preferred shares, as quoted on the BM&FBovespa Stock Exchange, was BRL10.83 ($3.27) and BRL9.1 ($2.75), respectively, giving Tenaris’s ownership stake a market value of approximately $123.0 million. As of that date, the carrying value of Tenaris’s ownership stake in Usiminas was approximately $70.6 million.

 

The Company reviews periodically the recoverability of its investment in Usiminas. To determine the recoverable value, the Company estimates the value in use of the investment by calculating the present value of the expected cash flows or its fair value less costs of disposal.

 

Usiminas financial restructuring process (that started in April 2016 with the capital increase) was completed by the end of August 2017. The completion of this process together with the increase in the share price since June 2016 and the improvement in business conditions may lead to an increase in the value of the investment in Usiminas in future periods.

 

During 2015 the Company recorded an impairment charge of $28.9 million.

 

Summarized selected financial information of Usiminas, including the aggregated amounts of assets, liabilities, revenues and profit or loss is as follows:

    Usiminas  
    2017     2016  
Non-current assets     5,661,947       6,085,811  
Current assets     2,193,096       1,970,015  
Total assets     7,855,043       8,055,826  
Non-current liabilities     2,344,042       2,856,883  
Current liabilities     920,924       537,646  
Total liabilities     3,264,966       3,394,529  
                 
Non-controlling interests     425,988       508,083  
                 
Revenues     3,367,937       2,442,596  
Gross profit     513,712       150,999  
Net income (loss) for the year attributable to owners of the parent     99,853       (166,153 )

 

c) Techgen, S.A. de C.V. (“Techgen”)

 

Techgen is a Mexican natural gas-fired combined cycle electric power plant in the Pesquería area of the State of Nuevo León, Mexico. The company started producing energy on December 1, 2016 and is fully operational, power capacity of 900 megawatts. As of December 31, 2017, Tenaris held 22% of Techgen’s share capital, and its affiliates, Ternium and Tecpetrol International S.A. (a wholly-owned subsidiary of San Faustin S.A., the controlling shareholder of both Tenaris and Ternium), held 48% and 30% respectively.

 

Techgen is a party to transportation capacity agreements for a purchasing capacity of 150,000 MMBtu/Gas per day starting on August 1, 2016 and ending on July 31, 2036, and a party to a contract for the purchase of power generation equipment and other services related to the equipment. As of December 31, 2017, Tenaris’s exposure under these agreements amounted to $58.2 million and $3.9 million respectively.

 

Tenaris issued a corporate guarantee covering 22% of the obligations of Techgen under a syndicated loan agreement between Techgen and several banks. The loan agreement amounted to $720 million and has been used in the construction of the facility. The main covenants under the corporate guarantee are Tenaris’s commitment to maintain its participation in Techgen or the right to purchase at least 22% of Techgen’s firm energy, and compliance with a maximum permitted leverage ratio. As of December 31, 2017, the loan agreement had been fully disbursed and, as a result, the amount guaranteed by Tenaris was approximately $158.4 million. During 2017 the shareholders of Techgen made additional investments in Techgen, in form of subordinated loans, which in case of Tenaris amounted to $7 million. As of December 31, 2017, the aggregate outstanding principal amount under these loans was $93.2 million.

 

  - 37 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

13 Receivables – non current
    Year ended December 31,  
    2017     2016  
Government entities     641       913  
Employee advances and loans     5,891       7,202  
Tax credits     29,404       32,769  
Receivables from related parties     88,595       91,419  
Legal deposits     13,568       13,876  
Advances to suppliers and other advances     12,443       19,520  
Others     33,428       32,217  
      183,970       197,916  
Allowances for doubtful accounts (see Note 22 (i))     (641 )     (913 )
      183,329       197,003  
14 Inventories

 

    Year ended December 31,  
    2017     2016  
Finished goods     923,316       653,482  
Goods in process     619,796       375,822  
Raw materials     281,083       160,284  
Supplies     486,002       451,777  
Goods in transit     274,175       162,766  
      2,584,372       1,804,131  
Allowance for obsolescence (see Note 23 (i))     (216,068 )     (240,242 )
      2,368,304       1,563,889  

 

15 Receivables and prepayments

 

    Year ended December 31,  
    2017     2016  
Prepaid expenses and other receivables     36,587       28,278  
Government entities     2,085       3,052  
Employee advances and loans     12,205       10,458  
Advances to suppliers and other advances     25,205       16,088  
Government tax refunds on exports     17,353       9,350  
Receivables from related parties     28,397       24,742  
Derivative financial instruments     8,230       2,759  
Miscellaneous     20,122       36,320  
      150,184       131,047  
Allowance for other doubtful accounts (see Note 23 (i))     (6,255 )     (6,332 )
      143,929       124,715  

 

16 Current tax assets and liabilities

 

    Year ended December 31,  
Current tax assets   2017     2016  
V.A.T. credits     76,714       61,552  
Prepaid taxes     55,620       79,434  
      132,334       140,986  

 

    Year ended December 31,  
Current tax liabilities   2017     2016  
Income tax liabilities     35,210       55,841  
V.A.T. liabilities     14,313       11,065  
Other taxes     52,882       34,291  
      102,405       101,197  

 

  - 38 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

17 Trade receivables
    Year ended December 31,  
    2017     2016  
Current accounts     1,240,769       1,026,026  
Receivables from related parties     51,676       14,383  
      1,292,445       1,040,409  
Allowance for doubtful accounts (see Note 23 (i))     (78,385 )     (85,724 )
      1,214,060       954,685  

  

The following table sets forth details of the aging of trade receivables:

 

                Past due  
    Trade Receivables     Not Due     1 - 180 days     > 180 days  
At December 31, 2017                                
Guaranteed     247,079       219,764       22,978       4,337  
Not guaranteed     1,045,366       841,737       115,245       88,384  
Guaranteed and not guaranteed     1,292,445       1,061,501       138,223       92,721  
Allowance for doubtful accounts     (78,385 )     -       -       (78,385 )
Net Value     1,214,060       1,061,501       138,223       14,336  
                                 
At December 31, 2016                                
Guaranteed     355,508       272,393       32,241       50,874  
Not guaranteed     684,901       518,984       87,379       78,538  
Guaranteed and not guaranteed     1,040,409       791,377       119,620       129,412  
Allowance for doubtful accounts     (85,724 )     (62 )     (67 )     (85,595 )
Net Value     954,685       791,315       119,553       43,817  

 

Trade receivables are mainly denominated in U.S. dollars.

 

18 Cash and cash equivalents and Other investments

 

    Year ended December 31,  
    2017     2016  
Cash and cash equivalents                
Cash at banks     150,948       92,730  
Liquidity funds     66,033       215,807  
Short – term investments     113,240       91,200  
      330,221       399,737  
Other investments - current                
Fixed Income (time-deposit, zero coupon bonds, commercial papers)     437,406       782,029  
Bonds and other fixed Income     754,800       841,638  
Fund Investments     -       9,475  
Others     100       -  
      1,192,306       1,633,142  
Other investments - Non-current                
Bonds and other fixed Income     123,498       248,049  
Others     4,837       1,670  
      128,335       249,719  

 

  - 39 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

19 Borrowings

 

    Year ended December 31,  
    2017     2016  
Non-current            
Bank borrowings     34,626       31,544  
Finance lease liabilities     59       35  
Costs of issue of debt     (40 )     (37 )
      34,645       31,542  
Current                
Bank borrowings     930,957       807,252  
Bank overdrafts     131       1,320  
Finance lease liabilities     138       130  
Costs of issue of debt     (12 )     (8 )
      931,214       808,694  
Total Borrowings     965,859       840,236  

 

The maturity of borrowings is as follows:

 

    1 year or less     1 - 2 years     2 – 3 years     3 - 4 years     4 - 5 years     Over 5 years     Total  
At December 31, 2017                                                        
Financial lease     138       59       -       -       -       -       197  
Other borrowings     931,076       4,876       4,484       4,978       20,248       -       965,662  
Total borrowings     931,214       4,935       4,484       4,978       20,248       -       965,859  
                                                         
Interest to be accrued (*)     14,512       1,212       1,203       1,190       174       -       18,290  
Total     945,726       6,147       5,687       6,168       20,422       -       984,149  

 

 

    1 year or less     1 - 2 years     2 – 3 years     3 - 4 years     4 - 5 years     Over 5 years     Total  
At December 31, 2016                                                        
Financial lease     130       35       -       -       -       -       165  
Other borrowings     808,564       1,198       3,739       3,360       3,632       19,578       840,071  
Total borrowings     808,694       1,233       3,739       3,360       3,632       19,578       840,236  
                                                         
Interest to be accrued (*)     6,461       1,172       1,161       1,142       1,116       237       11,289  
Total     815,155       2,405       4,900       4,502       4,748       19,815       851,525  

 

(*) Includes the effect of hedge accounting.

 

Significant borrowings include:

            In million of USD
Disbursement date   Borrower   Type   Original & Outstanding   Final maturity
2017   Tamsa   Bank loans   404   2018
2017   Siderca   Bank loans   311   2018
Dec-17   TuboCaribe   Bank loan   150   Dec-18

 

As of December 31, 2017, Tenaris was in compliance with all of its covenants.

 

The weighted average interest rates before tax shown below were calculated using the rates set for each instrument in its corresponding currency as of December 31, 2017 and 2016 (considering hedge accounting where applicable).

 

    2017     2016  
Total borrowings     3.73 %     1.97 %

 

  - 40 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

19 Borrowings (Cont.)

 

Breakdown of long-term borrowings by currency and rate is as follows:

 

Non-current borrowings

        Year ended December 31,  
Currency   Interest rates   2017     2016  
USD   Fixed     19,120       19,461  
EUR   Fixed     13,828       10,701  
Others   Variable     1,697       1,380  
Total non-current borrowings         34,645       31,542  

 

Breakdown of short-term borrowings by currency and rate is as follows:

 

Current borrowings

 

        Year ended December 31,  
Currency   Interest rates   2017     2016  
USD   Variable     17,640       17,081  
USD   Fixed     187,872       200,448  
EUR   Variable     169       99  
EUR   Fixed     839       841  
MXN   Fixed     412,719       391,318  
ARS   Fixed     311,829       197,637  
ARS   Variable     -       1,041  
Others   Variable     138       35  
Others   Fixed     8       194  
Total current borrowings         931,214       808,694  

 

 

Borrowings evolution

 

    Year ended December 31, 2017  
    Non current     Current  
At the beginning of the year     31,542       808,694  
Translation differences     1,649       (3,622 )
Proceeds and repayments, net     1,510       105,142  
Interests  Accrued less payments     (19 )     21,880  
Reclassifications     (309 )     309  
Other Movements     272       -  
Overdrafts variation     -       (1,189 )
At the end of the year     34,645       931,214  

 

  - 41 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

20 Deferred income tax

 

Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rate of each country.

 

The evolution of deferred tax assets and liabilities during the year are as follows:

 

Deferred tax liabilities

 

    Fixed assets     Inventories     Intangible and Other (*)     Total  
At the beginning of the year     263,056       36,891       514,713       814,660  
Translation differences     2,243       (2 )     21       2,262  
Charged directly to other comprehensive income     -       -       (583 )     (583 )
Income statement credit (charge)     207,605       (1,955 )     (186,544 )     19,106  
At December 31, 2017     472,904       34,934       327,607       835,445  

 

 

    Fixed assets     Inventories     Intangible and Other (*)     Total  
At the beginning of the year     299,139       42,516       549,557       891,212  
Translation differences     (540 )     -       44       (496 )
Charged directly to other comprehensive income     -       -       (40 )     (40 )
Transfer to assets held for sale     (5,724 )     -       -       (5,724 )
Income statement charge     (29,819 )     (5,625 )     (34,848 )     (70,292 )
At December 31, 2016     263,056       36,891       514,713       814,660  

 

(*) Includes the effect of currency translation on tax base (see Note 8).

 

Deferred tax assets

    Provisions and allowances     Inventories     Tax losses (*)     Other     Total  
At the beginning of the year     (33,276 )     (94,176 )     (199,326 )     (81,838 )     (408,616 )
Translation differences     (223 )     (972 )     322       (606 )     (1,479 )
Charged directly to other comprehensive income     -       -       -       (778 )     (778 )
Income statement charge / (credit)     7,024       5,593       (155,940 )     23,189       (120,134 )
At December 31, 2017     (26,475 )     (89,555 )     (354,944 )     (60,033 )     (531,007 )

 

(*) As of December 31, 2017, the net unrecognized deferred tax assets amount to $98.8 million.

 

    Provisions and allowances     Inventories     Tax losses     Other     Total  
At the beginning of the year     (32,425 )     (107,378 )     (99,394 )     (102,396 )     (341,593 )
Translation differences     (3,123 )     (1,347 )     (2,741 )     14       (7,197 )
Transfer to assets held for sale     -       275       -       753       1,028  
Charged directly to other comprehensive income     -       -       -       1,823       1,823  
Income statement charge / (credit)     2,272       14,274       (97,191 )     17,968       (62,677 )
At December 31, 2016     (33,276 )     (94,176 )     (199,326 )     (81,838 )     (408,616 )

 

The recovery analysis of deferred tax assets and deferred tax liabilities is as follows:

 

    Year ended December 31,  
    2017     2016  
Deferred tax assets to be recovered after 12 months     (405,416 )     (226,431 )
Deferred tax liabilities to be recovered after 12 months     808,108       761,039  

 

  - 42 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

20 Deferred income tax (Cont.)

 

Deferred income tax assets and liabilities are offset when (1) there is a legally enforceable right to set-off current tax assets against current tax liabilities and (2) when the deferred income taxes relate to the same fiscal authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The following amounts, determined after appropriate set-off, are shown in the Consolidated Statement of Financial Position:

 

    Year ended December 31,  
    2017     2016  
Deferred tax assets     (153,532 )     (144,613 )
Deferred tax liabilities     457,970       550,657  
      304,438       406,044  

 

The movement in the net deferred income tax liability account is as follows:

 

    Year ended December 31,  
    2017     2016  
       
At the beginning of the year     406,044       549,619  
Translation differences     783       (7,693 )
Charged directly to Other Comprehensive Income     (1,361 )     1,783  
Income statement credit (debit)     (101,028 )     (132,969 )
Transfer to assets held for sale     -       (4,696 )
At the end of the year     304,438       406,044  

 

21 Other liabilities

 

(i) Other liabilities – Non-current
    Year ended December 31,  
    2017     2016  
Post-employment benefits     125,012       125,161  
Other-long term benefits     68,244       66,714  
Miscellaneous     24,040       21,742  
      217,296       213,617  

 

Post-employment benefits

 

§ Unfunded

 

    Year ended December 31,  
    2017     2016  
Values at the beginning of the year     96,229       107,601  
Translation differences     2,893       (2,204 )
Current service cost     7,851       4,625  
Interest cost     5,462       6,371  
Curtailments and settlements     21       24  
Remeasurements (*)     10,907       (4,501 )
Benefits paid from the plan     (22,107 )     (13,921 )
Other     633       (1,766 )
At the end of the year     101,889       96,229  

 

(*) For 2017 a loss of $0.08 million is attributable to demographic assumptions and a loss of $10.6 million to financial assumptions. For 2016 a loss of $0.6 and a gain of $5.1 million is attributable to demographic and financial assumptions, respectively.

 

  - 43 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

21 Other liabilities (Cont.)

 

(i) Other liabilities – Non-current (Cont.)

 

The principal actuarial assumptions used were as follows:

  Year ended December 31,
  2017 2016
Discount rate 1% - 7% 1% - 7%
Rate of compensation increase 0% - 3% 0% - 3%

 

As of December 31, 2017, an increase / (decrease) of 1% in the discount rate assumption of the main plans would have generated a (decrease) / increase on the defined benefit obligation of $8.2 million and $7.2 million respectively, and an increase / (decrease) of 1% in the rate of compensation assumption of the main plans would have generated an increase / (decrease) impact on the defined benefit obligation of $4.0 million and $4.2 million respectively. The above sensitivity analyses are based on a change in discount rate and rate of compensation while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated.

 

§ Funded

 

The amounts recognized in the statement of financial position for the current annual period and the previous annual period are as follows:

 

    Year ended December 31,  
    2017     2016  
Present value of funded obligations     165,486       159,612  
Fair value of plan assets     (145,692 )     (132,913 )
Liability (*)     19,794       26,699  

 

(*) In 2017 and 2016, $3.3 million and $2.2 million corresponding to an overfunded plan were reclassified within other non-current assets, respectively.

 

The movement in the present value of funded obligations is as follows:

 

    Year ended December 31,  
    2017     2016  
At the beginning of the year     159,612       153,974  
Translation differences     7,300       384  
Current service cost     592       162  
Interest cost     6,034       6,403  
Remeasurements (*)     3,602       7,753  
Benefits paid     (11,654 )     (9,064 )
At the end of the year     165,486       159,612  

 

(*) For 2017 a gain of $0.4 million is attributable to demographic assumptions and a loss of $4.1 million to financial assumptions. For 2016 a gain of $0.9 and a loss of $8.7 million is attributable to demographic and financial assumptions, respectively.

 

The movement in the fair value of plan assets is as follows:

 

    Year ended December 31,  
    2017     2016  
At the beginning of the year     (132,913 )     (128,321 )
Translation differences     (6,802 )     365  
Return on plan assets     (5,849 )     (7,022 )
Remeasurements     (5,874 )     (3,022 )
Contributions paid to the plan     (6,230 )     (4,374 )
Benefits paid from the plan     11,654       9,064  
Other     323       397  
At the end of the year     (145,692 )     (132,913 )

 

  - 44 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

21 Other liabilities (Cont.)

 

(i) Other liabilities – Non-current (Cont.)

 

The major categories of plan assets as a percentage of total plan assets are as follows:

 

    Year ended December 31,  
    2017     2016  
Equity instruments     53.4 %     52.4 %
Debt instruments     42.9 %     43.9 %
Others     3.7 %     3.7 %

 

The principal actuarial assumptions used were as follows:

 

    Year ended December 31,  
    2017     2016  
Discount rate     4 %     4 %
Rate of compensation increase     0 % - 3 %       0 % - 3 %  

 

 

The expected return on plan assets is determined by considering the expected returns available on the assets underlying the current investment policy. Expected return on plan assets is determined based on long-term, prospective rates of return as of the end of the reporting period.

 

As of December 31, 2017, an increase / (decrease) of 1% in the discount rate assumption of the main plans would have generated a (decrease) / increase on the defined benefit obligation of $17.0 million and $20.9 million respectively, and an increase / (decrease) of 1% in the compensation rate assumption of the main plans would have generated an increase / (decrease) on the defined benefit obligation of $2.2 million and $1.8 million respectively. The above sensitivity analyses are based on a change in discount rate and rate of compensation while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated.

 

The employer contributions expected to be paid for the year 2018 amount approximately to $3.5 million.

 

The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period.

 

(ii) Other liabilities – current

 

    Year ended December 31,  
    2017     2016  
Payroll and social security payable     141,886       125,991  
Liabilities with related parties     51       135  
Derivative financial instruments     39,799       42,635  
Miscellaneous     15,768       15,126  
      197,504       183,887  

 

  - 45 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

22 Non-current allowances and provisions

 

Deducted from non-current receivables

 

    Year ended December 31,  
    2017     2016  
       
Values at the beginning of the year     (913 )     (1,112 )
Translation differences     106       199  
Used     166       -  
Values at the end of the year     (641 )     (913 )

 

Liabilities

 

    Year ended December 31,  
    2017     2016  
Values at the beginning of the year     63,257       61,421  
Translation differences     366       3,296  
Additional provisions     3,994       6,794  
Reclassifications     (7,591 )     (1,932 )
Used     (23,588 )     (6,322 )
Values at the end of the year     36,438       63,257  

 

23 Current allowances and provisions

 

(i) Deducted from assets

 

Year ended December 31, 2017   Allowance for doubtful accounts - Trade receivables     Allowance for other doubtful accounts - Other receivables     Allowance for inventory obsolescence  
                   
Values at the beginning of the year     (85,724 )     (6,332 )     (240,242 )
Translation differences     (345 )     (220 )     (3,575 )
Reversals / (additional) allowances     5,421       (84 )     12,917  
Used     2,263       381       14,832  
At December 31, 2017     (78,385 )     (6,255 )     (216,068 )

 

 

Year ended December 31, 2016   Allowance for doubtful accounts - Trade receivables     Allowance for other doubtful accounts - Other receivables     Allowance for inventory obsolescence  
                   
Values at the beginning of the year     (101,480 )     (7,082 )     (229,200 )
Translation differences     (841 )     75       (2,715 )
Reversals / (additional) allowances     12,573       (432 )     (32,765 )
Transfer to held for sale     20       -       896  
Used     4,004       1,107       23,542  
At December 31, 2016     (85,724 )     (6,332 )     (240,242 )

 

(ii) Liabilities

 

Year ended December 31, 2017   Sales risks     Other claims and contingencies     Total  
                   
Values at the beginning of the year     13,885       8,871       22,756  
Translation differences     247       227       474  
Additional provisions     4,238       9,432       13,670  
Reclassifications     -       7,591       7,591  
Used     (6,974 )     (5,187 )     (12,161 )
At December 31, 2017     11,396       20,934       32,330  

 

  - 46 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

23 Current allowances and provisions (Cont.)

 

(ii) Liabilities (Cont.)
Year ended December 31, 2016   Sales risks     Other claims and contingencies     Total  
                   
Values at the beginning of the year     6,290       2,705       8,995  
Translation differences     189       (86 )     103  
Additional provisions     16,266       7,791       24,057  
Reclassifications     (22 )     1,954       1,932  
Used     (8,838 )     (3,493 )     (12,331 )
At December 31, 2016     13,885       8,871       22,756  

 

24 Derivative financial instruments

 

Net fair values of derivative financial instruments

 

The net fair values of derivative financial instruments disclosed within Other Receivables and Other Liabilities at the reporting date, in accordance with IAS 39, are:

    Year ended December 31,  
    2017     2016  
Foreign exchange derivatives contracts     8,230       2,759  
Contracts with positive fair values     8,230       2,759  
                 
Foreign exchange derivatives contracts     (39,799 )     (42,635 )
Contracts with negative fair values     (39,799 )     (42,635 )
Total     (31,569 )     (39,876 )

 

Foreign exchange derivative contracts and hedge accounting

 

Tenaris applies hedge accounting to certain cash flow hedges of highly probable forecast transactions. The net fair values of exchange rate derivatives and those derivatives that were designated for hedge accounting as of December 2017 and 2016, were as follows:

 

              Fair Value     Hedge Accounting Reserve  
Purchase currency   Sell currency   Term     2017     2016     2017     2016  
MXN   USD     2018       (20,447 )     (35,165 )     (534 )     9  
USD   MXN     2018       490       694       -       (2,280 )
EUR   USD     2018       5,660       (360 )     1,881       -  
USD   EUR     2018       (367 )     (33 )     -       (1,435 )
JPY   USD     2018       (101 )     (179 )     -       73  
USD   KWD     2018       (630 )     (2,447 )     (520 )     (1,016 )
USD   ARS     2018       22       (748 )     -       -  
ARS   USD     2018       (13,715 )     318       (1,067 )     (93 )
USD   BRL     2018       (17 )     (1,581 )     -       -  
USD   CAD     2018       (2,072 )     (225 )     -       -  
Others                 (392 )     (150 )     -       -  
Total                 (31,569 )     (39,876 )     (240 )     (4,742 )

 

Following is a summary of the hedge reserve evolution:

 

    Equity Reserve Dec-15     Movements 2016     Equity Reserve Dec-16     Movements 2017     Equity Reserve Dec-17  
Foreign Exchange     2,783       (7,525 )     (4,742 )     4,502       (240 )
Total Cash flow Hedge     2,783       (7,525 )     (4,742 )     4,502       (240 )

 

Tenaris estimates that the cash flow hedge reserve at December 31, 2017 will be recycled to the Consolidated Income Statement during 2018.

 

  - 47 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

25 Contingencies, commitments and restrictions on the distribution of profits

 

(i) Contingencies

 

Tenaris is from time to time subject to various claims, lawsuits and other legal proceedings, including customer claims, in which third parties are seeking payment for alleged damages, reimbursement for losses, or indemnity. Management with the assistance of legal counsel periodically reviews the status of each significant matter and assesses potential financial exposure.

 

Some of these claims, lawsuits and other legal proceedings involve highly complex issues, and often these issues are subject to substantial uncertainties and, therefore, the probability of loss and an estimation of damages are difficult to ascertain. Accordingly, with respect to a large portion of such claims, lawsuits and other legal proceedings, Tenaris is unable to make a reliable estimate of the expected financial effect that will result from ultimate resolution of the proceeding. In those cases, Tenaris has not accrued a provision for the potential outcome of these cases.

 

If a potential loss from a claim, lawsuit or other proceeding is considered probable and the amount can be reasonably estimated, a provision is recorded. Accruals for loss contingencies reflect a reasonable estimate of the losses to be incurred based on information available to management as of the date of preparation of the financial statements, and take into consideration litigation and settlement strategies. In a limited number of ongoing cases, Tenaris was able to make a reliable estimate of the expected loss or range of probable loss and has accrued a provision for such loss, but believes that publication of this information on a case-by-case basis would seriously prejudice Tenaris’s position in the ongoing legal proceedings or in any related settlement discussions. Accordingly, in these cases, the Company has disclosed information with respect to the nature of the contingency, but has not disclosed its estimate of the range of potential loss.   

 

The Company believes that the aggregate provisions recorded for potential losses in these consolidated financial statements (Notes 22 and 23) are adequate based upon currently available information. However, if management’s estimates prove incorrect, current reserves could be inadequate and Tenaris could incur a charge to earnings which could have a material adverse effect on Tenaris’s results of operations, financial condition, net worth and cash flows.

 

Below is a summary description of Tenaris’s material legal proceedings for the year ended December 31, 2017. In addition, Tenaris is subject to other legal proceedings, none of which is believed to be material.

 

§ Tax assessment in Italy

 

Dalmine S.p.A. (“Dalmine”), an Italian subsidiary of the Company, received on December 24, 2012, a tax assessment from the Italian tax authorities related to allegedly omitted withholding tax on dividend payments made in 2007. The assessment, which was for an estimated amount of EUR298 million (approximately $357 million), comprising principal, interest and penalties, was appealed with the first-instance tax court in Milan. In February 2014, the first-instance tax court issued its decision on this tax assessment, partially reversing the assessment and lowering the claimed amount to approximately EUR9 million (approximately $11 million), including principal, interest and penalties. On October 2, 2014, the Italian tax authorities appealed against the second-instance tax court decision on the 2007 assessment. On June 12, 2015, the second-instance tax court accepted Dalmine’s defense arguments and rejected the appeal by the Italian tax authorities, thus reversing the entire 2007 assessment and recognizing that the dividend payment was exempt from withholding tax. The Italian tax authorities have appealed the second-instance tax court decision before the Supreme Court.

 

On December 24, 2013, Dalmine received a second tax assessment from the Italian tax authorities, based on the same arguments as those in the first assessment, relating to allegedly omitted withholding tax on dividend payments made in 2008 – the last such distribution made by Dalmine. Dalmine appealed the assessment with the first-instance tax court in Milan. On January 27, 2016, the first-instance tax court rejected Dalmine’s appeal. This first-instance ruling, which held that Dalmine is required to pay an amount of EUR226 million (approximately $271 million), including principal, interest and penalties, contradicts the first and second-instance tax court rulings in connection with the 2007 assessment. Dalmine obtained the suspension of the interim payment that would have been due, based on the first-instance decision, through the filing with the tax authorities of a bank guarantee of EUR175 million (approximately $210 million), and appealed the January 2016 ruling with the second-instance tax court.

 

  - 48 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

25 Contingencies, commitments and restrictions on the distribution of profits (Cont.)

 

(i) Contingencies (Cont.)

 

§ Tax assessment in Italy (Cont.)

 

On December 21, 2017, Dalmine and the Italian tax authorities entered into a settlement agreement in connection with all withholding tax claims on 2007 and 2008 dividend payments. Under the settlement agreement, Dalmine paid to the Italian tax administration an aggregate amount of EUR42.9 million (approximately $51 million), net of EUR3.2 million (approximately $4 million) corresponding to the amount previously paid during the litigation proceeding. As a result of the settlement, during the year Tenaris recorded an additional charge to results, in excess of amounts already provisioned, of approximately $29 million.

 

In addition, the Italian tax authorities formally notified Dalmine that, based on applicable laws and regulations, any future distributions from Dalmine out of past or future profits will not be subject to Italian withholding tax.

 

§ CSN claims relating to the January 2012 acquisition of Usiminas shares

 

In 2013, Confab Industrial S.A. (“Confab”), a Brazilian subsidiary of the Company was notified of a lawsuit filed in Brazil by Companhia Siderúrgica Nacional (CSN) and various entities affiliated with CSN against Confab and the other entities that acquired a participation in Usiminas’ control group in January 2012.

 

The CSN lawsuit alleges that, under applicable Brazilian laws and rules, the acquirers were required to launch a tag-along tender offer to all non-controlling holders of Usiminas’ ordinary shares for a price per share equal to 80% of the price per share paid in such acquisition, or BRL28.8, and seeks an order to compel the acquirers to launch an offer at that price plus interest. If so ordered, the offer would need to be made to 182,609,851 ordinary shares of Usiminas not belonging to Usiminas’ control group, and Confab would have a 17.9% share in that offer.

 

On September 23, 2013, the first instance court dismissed the CSN lawsuit, and on February 8, 2017, the court of appeals maintained the understanding of the first instance court. On March 6, 2017, CSN filed a motion for clarification against the decision of the Court of Appeals of São Paulo, which was rejected on July 19, 2017. On August 18, 2017, CSN filed an appeal to the Superior Court of Justice seeking the review and reversal of the decision issued by the Court of Appeals. The Superior Court of Justice is restricted to the analysis of alleged violations to federal laws and cannot assess matters of fact. Accordingly, the Court of Appeals must decide whether CSN’s appeal meets the requirements for submission to the Superior Court of Justice. If declared admissible, the Superior Court of Justice will also review admissibility, and, if also declared admissible, will then render a decision on the merits.

 

Tenaris continues to believe that all of CSN’s claims and allegations are groundless and without merit, as confirmed by several opinions of Brazilian legal counsel, two decisions issued by the Brazilian securities regulator (CVM) in February 2012 and December 2016, and the first and second instance court decisions referred to above. Accordingly, no provision was recorded in these Consolidated Financial Statements.

 

§ Veracel celulose accident litigation

 

On September 21, 2007, an accident occurred in the premises of Veracel Celulose S.A. (“Veracel”) in connection with a rupture in one of the tanks used in an evaporation system manufactured by Confab. The Veracel accident allegedly resulted in material damages to Veracel. Itaú Seguros S.A. (“Itaú”), Veracel’s insurer at the time of the Veracel accident, initiated a lawsuit against Confab seeking reimbursement of damages paid to Veracel in connection with the Veracel accident. Veracel initiated a second lawsuit against Confab seeking reimbursement of the amount paid as insurance deductible with respect to the Veracel accident and other amounts not covered by insurance. Itaú and Veracel claim that the Veracel accident was caused by failures and defects attributable to the evaporation system manufactured by Confab. Confab believes that the Veracel accident was caused by the improper handling by Veracel’s personnel of the equipment supplied by Confab in violation of Confab’s instructions. The two lawsuits have been consolidated, and are now being considered by the 6th Civil Court of São Caetano do Sul; however, each lawsuit will be adjudicated through a separate ruling. Both proceedings are currently at evidentiary stage.

 

  - 49 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

25 Contingencies, commitments and restrictions on the distribution of profits (Cont.)

 

(i) Contingencies (Cont.)

 

§ Veracel celulose accident litigation (Cont.)

 

On March 10, 2016, a court-appointed expert issued its report on certain technical matters concerning the Veracel accident. Based upon a technical opinion received from a third-party expert, in August 2016, Confab filed its objections to the expert’s report. In November 2017, the court appointed expert filed a second report reaffirming its opinion and stating that the opinion of Confab’s appointed expert was incorrect. The parties have a 90-day period to file their observations and/or opinions concerning the expert’s second report. Approximately 54% of the amounts claimed by Itaú and Veracel is attributable to alleged lost profits, and the contract between Confab and Veracel expressly provided that Confab would not be liable for damages arising from loss profits. As of December 31, 2017, the estimated amount of Itaú’s claim was approximately BRL81.9 million (approximately $24.8 million), and the estimated amount of Veracel’s claim is approximately BRL52 million (approximately $15.7 million), for an aggregate amount BRL133.9 million ($40.5 million). The final result of this claim depends largely on the court’s evaluation of technical matters arising from the expert’s opinion and the objections presented by Confab.

 

§ Ongoing investigation

 

The Company has learned that Italian and Swiss authorities are investigating whether certain payments were made from accounts of entities presumably associated with affiliates of the Company to accounts controlled by an individual allegedly related with officers of Petróleo Brasileiro S.A. and whether any such payments were intended to benefit Confab. Any such payments could violate certain applicable laws, including the U.S. Foreign Corrupt Practices Act. The Company had previously reviewed certain of these matters in connection with an investigation by the Brazilian authorities related to “Operation Lava Jato” and the Audit Committee of the Company’s Board of Directors has engaged external counsel in connection with a review of the alleged payments and related matters. In addition, the Company has voluntarily notified the U.S. Securities and Exchange Commission and the U.S. Department of Justice. The Company intends to share the results of this review with the appropriate authorities, and to cooperate with any investigations that may be conducted by such authorities. At this time, the Company cannot predict the outcome of these matters or estimate the range of potential loss or extent of risk, if any, to the Company’s business that may result from resolution of these matters.

 

§ Petroamazonas penalties

 

On January 22, 2016, Petroamazonas (“PAM”), an Ecuadorian state-owned oil company, imposed penalties to the Company’s Uruguayan subsidiary, Tenaris Global Services S.A. (“TGS”), for its alleged failure to comply with delivery terms under a pipe supply agreement. The penalties amount to approximately $ 22.5 million as of the date hereof. Tenaris believes, based on the advice of counsel, that PAM has no legal basis to impose the penalties and that TGS has meritorious defenses against PAM. However, in light of the prevailing political circumstances in Ecuador, the Company cannot predict the outcome of a claim against a state-owned company and it is not possible to estimate the amount or range of loss in case of an unfavorable outcome.

 

§ Contractor claim for additional costs

 

Tenaris Bay City Inc. (“Tenaris Bay City”), a U.S. subsidiary of the Company, has received claims from a contractor for alleged additional costs in the construction of a project located in the Bay City area for a total amount in excess of $77 million. On June 30, 2017, the contractor filed a demand for arbitration of these claims. An arbitral panel has been selected and a scheduling order issued. The parties are expected to submit statements of claim in February and March of 2018. Final trial hearing on this matter is scheduled for February 2019. At this stage the Company cannot predict the outcome of the claim or the amount or range of loss in case of an unfavorable outcome.

 

  - 50 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

25 Contingencies, commitments and restrictions on the distribution of profits (Cont.)

 

(i) Contingencies (Cont.)

 

§ Investigation concerning currency exchange declarations.

 

Siderca S.A.I.C, an Argentine subsidiary of the Company (“Siderca”), and some of its directors, employees, former directors and employees are subject to an administrative criminal proceeding concerning alleged inaccurate information included in 15 currency exchange declarations related to the trading of foreign currency between August and October 2008 in connection with exports of goods for a total amount of $268 million. The case is now under consideration of a criminal court. Although theoretically this proceeding may give rise to the application of fines in an amount up to ten times the value of the involved operations, Tenaris believes that it has meritorious defenses and that it is unlikely that the ultimate resolution of this matter will result in a material obligation.

 

§ Claim for differences on gas supply prices

 

On July 7, 2016, Siderca was notified of a claim initiated by an Argentine state-owned company for an amount of $25.4 million, allegedly owed as a result in differences in the price paid for gas supplied to Siderca during three months in 2013. Tenaris believes, based on the advice of counsel, that it has meritorious defenses against a substantial part of this claim, although Siderca may be required to pay part of the claimed amount.

 

§ Tax assessment in Mexico

 

In August 2017, Tubos de Acero de México S.A (“Tamsa”) and Servicios Generales Tenaris Tamsa S.A (“Segeta”), two Mexican subsidiaries of the Company, were informed that the Mexican tax authorities had determined that the tax deductions associated with purchases of scrap made by the companies during 2013, amounting to MXN1,800 million (approximately $91.2 million) in the aggregate, failed to comply with applicable requirements and, accordingly, should be rejected. Tamsa and Segeta filed their respective responses and complaints against the determination, and provided additional information evidencing compliance with applicable requirements for the tax deductions that are being challenged. No final decision has yet been issued on this matter. Based on the opinion of legal counsel, Tenaris believes that it is unlikely that the ultimate resolution of this tax assessment will result in a material obligation.

 

(ii) Commitments and other purchase orders

 

Set forth is a description of Tenaris’s material outstanding purchase commitments:

 

§ A Tenaris company entered into a contract with the supplier Voest Alpine Grobblech Gmb to which it committed to purchase carbon steel for a total amount of approximately $137 million to use for manufacturing pipes related to the Zhor gas field project.

 

§ A Tenaris company entered into a contract with Transportadora de Gas del Norte S.A. for the service of natural gas transportation to the facilities of Siderca S.A.I.C., an Argentine subsidiary of Tenaris. As of December 31, 2017, the aggregate commitment to take or pay the committed volumes for a 10-year term totalled approximately $77.5 million.

 

§ A Tenaris company entered into a contract with Praxair S.A. for the service of oxygen and nitrogen supply. As of December 31, 2017, the aggregate commitment to take or pay the committed volumes for a 14-year term totalled approximately $43.9 million.

 

§ Several Tenaris companies entered into a contract with Graftech for the supply of graphite electrodes. As of December 31, 2017, the aggregate commitment to take or pay the committed volumes totalled approximately $78.3 million.

 

§ A Tenaris company entered into a 25-year contract (effective as of December 1, 2016, through December 1, 2041) with Techgen for the supply of 197 MW (which represents 22% of Techgen’s capacity). Monthly payments are determined on the basis of capacity charges, operation costs, back-up power charges, and transmission charges. As of the seventh contract year (as long as Techgen’s existing or replacing bank facility has been repaid in full), the Tenaris company has the right to suspend or early terminate the contract if the rate payable under the agreement is higher than the rate charged by the Comisión Federal de Electricidad (“CFE”) or its successors. The Tenaris company may instruct Techgen to sell to any affiliate, to CFE, or to any other third party all or any part of unused contracted energy under the agreement and the Tenaris company will benefit from the proceeds of such sale.

 

  - 51 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

25 Contingencies, commitments and restrictions on the distribution of profits (Cont.)

 

(iii) Restrictions to the distribution of profits and payment of dividends

 

As of December 31, 2017, equity as defined under Luxembourg law and regulations consisted of:

 

(all amounts in thousands of U.S. dollars)      
Share capital     1,180,537  
Legal reserve     118,054  
Share premium     609,733  
Retained earnings including net income for the year ended December 31, 2017     16,956,761  
Total equity in accordance with Luxembourg law     18,865,085  

 

At least 5% of the Company’s net income per year, as calculated in accordance with Luxembourg law and regulations, must be allocated to the creation of a legal reserve equivalent to 10% of the Company’s share capital. As of December 31, 2017, this reserve is fully allocated and additional allocations to the reserve are not required under Luxembourg law. Dividends may not be paid out of the legal reserve.

 

The Company may pay dividends to the extent, among other conditions, that it has distributable retained earnings calculated in accordance with Luxembourg law and regulations.

 

At December 31, 2017, distributable amount under Luxembourg law totals $17.6 billion, as detailed below:

 

(all amounts in thousands of U.S. dollars)      
Retained earnings at December 31, 2016 under Luxembourg law     17,493,013  
Other income and expenses for the year ended December 31, 2017     (52,232 )
Dividends approved     (484,020 )
Retained earnings at December 31, 2017 under Luxembourg law     16,956,761  
Share premium     609,733  
Distributable amount at December 31, 2017 under Luxembourg law     17,566,494  

 

26 Acquisition of subsidiaries

 

In September 2017, Tenaris acquired 100% of Garrett (a pipe services and trucking business) through the payment of a price of $10.4 million.


If the acquisition had occurred on January 1, 2017, Tenaris’s unaudited pro forma net sales and net income from continuing operations would not have changed materially.

 

27 Cash flow disclosures

 

          Year ended December 31,  
(i)     Changes in working capital   2017     2016     2015  
        Inventories     (804,415 )     244,720       936,402  
        Receivables and prepayments and Current tax assets     (6,662 )     70,874       60,009  
        Trade receivables     (259,375 )     146,824       828,265  
        Other liabilities     4,226       (79,046 )     (123,904 )
        Customer advances     17,039       (95,112 )     1,171  
        Trade payables     193,905       59,939       (327,958 )
              (855,282 )     348,199       1,373,985  
  (ii)     Income tax accruals less payments                        
        Tax accrued     (17,136 )     41,441       244,505  
        Taxes paid     (176,853 )     (169,520 )     (335,585 )
              (193,989 )     (128,079 )     (91,080 )
  (iii)     Interest accruals less payments, net                        
        Interest accrued     (20,534 )     (43,872 )     (11,517 )
        Interest received     50,001       60,163       56,835  
        Interest paid     (17,917 )     (18,858 )     (18,696 )
              11,550       (2,567 )     26,622  
  (iv)     Cash and cash equivalents                        
        Cash at banks, liquidity funds and short - term investments     330,221       399,900       286,547  
        Bank overdrafts     (131 )     (1,320 )     (349 )
              330,090       398,580       286,198  

 

  - 52 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

28 Net assets of disposal group classified as held for sale

 

On December 15, 2016, Tenaris entered into an agreement with Nucor Corporation (NC) pursuant to which it has sold to NC the steel electric conduit business in North America, known as Republic Conduit for an amount of $328 million (net of transaction costs). The sale was completed on January 19, 2017, with effect from January 20, 2017. The result of this transaction was an after-tax gain of $89.7 million, calculated as the net proceeds of the sale less the book value of net assets held for sale, the corresponding tax effect and related expenses.

 

    Year ended December 31,  
    2017     2016  
 Income from discontinued operations     1,848       41,411  
 After tax gain on the sale of Conduit     89,694       -  
 Net Income for discontinued operations     91,542       41,411  

 

Details of Conduit sale

 

Cash received     331,295  
Transaction and other costs     (3,663 )
Carrying amount of net assets sold     (137,814 )
Gain on sale before income tax     189,817  
Income tax expense on gain     (100,123 )
Gain on sale after income tax     89,694  

 

The financial performances presented are relative to the 19 days of January 2017 and for the years ended December 31, 2016 and 2015.

 

Analysis of the result of discontinued operations:

 

(all amounts in thousands of US dollars, unless otherwise stated)   2017     2016     2015  
Net sales     11,899       234,911       197,630  
Cost of sales     (7,403 )     (136,587 )     (137,318 )
Gross profit     4,496       98,324       60,312  
Selling, general and administrative expenses     (2,041 )     (32,238 )     (30,678 )
Other operating income & expenses     (1 )     (248 )     (1 )
Operating income     2,454       65,838       29,633  
Finance Income (expenses), net     (9 )     (88 )     (382 )
Income before income tax     2,445       65,750       29,251  
Income tax     (597 )     (24,339 )     (10,121 )
Net income     1,848       41,411       19,130  
                         
Earnings per share attributable to discontinued operations:                        
Weighted average number of ordinary shares (thousands)     1,180,537       1,180,537       1,180,537  
Discontinued operations:                        
Basic and diluted earnings per share (U.S. dollars per share)     0.00       0.04       0.02  
Basic and diluted earnings per ADS (U.S. dollars per ADS)     0.00       0.07       0.03  

 

Summarized cash flow information is as follows :

    2017     2016     2015  
Cash at the beginning     18,820       15,343       13,848  
Cash at the end     206       18,820       15,343  
(Decrease) Increase in cash     (18,614 )     3,477       1,495  
                         
(Used in) provided by operating activities     (3,046 )     24,535       42,701  
Provided by (used in) investing activities     32       (1,058 )     (1,206 )
Used in financing activities     (15,600 )     (20,000 )     (40,000 )

 

These amounts were estimated only for disclosure purposes, as cash flows from discontinued operations were not managed separately from other cash flows.

 

The following table shows the current and non-current assets and liabilities of disposal group as at 31 December 2016, and the carrying amounts of assets and liabilities as at the date of sale.

 

  - 53 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

28       Net assets of disposal group classified as held for sale (Cont.)

 

Current and non-current assets and liabilities of disposal group

 

ASSETS   At January 19, 2017     At December 31, 2016  
Non-current assets                                
Property, plant and equipment, net     41,438               41,470          
Intangible assets, net (*)     45,894       87,332       45,894       87,364  
Current assets                                
Inventories, net     29,349               29,819          
Receivables and prepayments, net     1,157               451          
Trade receivables, net     38,620               33,620          
Cash and cash equivalents     206       69,332       163       64,053  
Total assets of disposal group classified as held for sale             156,664               151,417  
LIABILITIES                                
Non-current liabilities                                
Deferred tax liabilities     5,294               4,696          
Other liabilities     -       5,294       680       5,376  
Current liabilities                                
Current tax liabilities     65               4,100          
Other liabilities     2,913               1,668          
Trade payables     10,578       13,556       6,950       12,718  
Total liabilities of disposal group classified as held for sale             18,850               18,094  

 

(*) Includes $45.8 million of goodwill

 

29 Related party transactions

 

As of December 31, 2017:

 

§ San Faustin S.A., a Luxembourg société anonyme (“San Faustin”), owned 713,605,187 shares in the Company, representing 60.45% of the Company’s capital and voting rights.

 

§ San Faustin owned all of its shares in the Company through its wholly-owned subsidiary Techint Holdings S.à r.l., a Luxembourg société à responsabilité limitée (“Techint”), who is the holder of record of the above-mentioned Tenaris shares.

 

§ Rocca & Partners Stichting Administratiekantoor Aandelen San Faustin, a Dutch private foundation (Stichting) (“RP STAK”) held voting shares in San Faustin sufficient in number to control San Faustin.

 

§ No person or group of persons controls RP STAK.

 

Based on the information most recently available to the Company, Tenaris’s directors and senior management as a group owned 0.08% of the Company’s outstanding shares.

 

Transactions and balances disclosed as with “non-consolidated parties” are those with companies over which Tenaris exerts significant influence or joint control in accordance with IFRS, but does not have control. All other transactions and balances with related parties which are not non-consolidated parties and which are not consolidated are disclosed as “Other”. The following transactions were carried out with related parties:

 

(all amounts in thousands of U.S. dollars)   Year ended December 31,
    2017   2016   2015
(i) Transactions                        
(a) Sales of goods and services                        
Sales of goods to non-consolidated parties     32,362       21,174       24,019  
Sales of goods to other related parties     94,624       32,613       87,663  
Sales of services to non-consolidated parties     11,637       9,542       10,154  
Sales of services to other related parties     3,751       2,948       4,010  
      142,374       66,277       125,846  
(b) Purchases of goods and services                        
Purchases of goods to non-consolidated parties     234,361       67,048       260,280  
Purchases of goods to other related parties     17,711       20,150       35,153  
Purchases of services to non-consolidated parties     12,077       11,528       16,153  
Purchases of services to other related parties     50,794       53,530       78,805  
      314,943       152,256       390,391  

 

  - 54 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

29 Related party transactions (Cont.)

 

(all amounts in thousands of U.S. dollars)   At December 31,
    2017   2016
(ii) Period-end balances                
(a) Arising from sales / purchases of goods / services                
Receivables from non-consolidated parties     117,853       117,187  
Receivables from other related parties     50,815       13,357  
Payables to non-consolidated parties     (49,354 )     (21,314 )
Payables to other related parties     (14,475 )     (12,708 )
      104,839       96,522  

 

Directors’ and senior management compensation

 

During the years ended December 31, 2017, 2016 and 2015, the cash compensation of Directors and Senior managers amounted to $45.8 million, $38.6 million and $28.8 million respectively. These amounts include cash benefits paid to certain senior managers in connection with the vesting of pre-existing retirement plans. In addition, Directors and Senior managers received 484, 500 and 540 thousand units for a total amount of $4.7 million, $4.8 million and $5.4 million respectively in connection with the Employee retention and long term incentive program mentioned in Note O Employee benefits –Other long term benefits .

 

30 Principal subsidiaries

 

The following is a list of Tenaris’s principal subsidiaries and its direct and indirect percentage of ownership of each controlled company at December 31, 2017.

 

Company Country of Incorporation Main activity Percentage of ownership at December 31, (*)
      2017 2016 2015
ALGOMA TUBES INC. Canada Manufacturing of seamless steel pipes 100% 100% 100%
CONFAB INDUSTRIAL S.A. and subsidiaries Brazil Manufacturing of welded steel pipes and capital goods 100% 100% 100%
DALMINE S.p.A. Italy Manufacturing of seamless steel pipes 100% 100% 99%
HYDRIL COMPANY and subsidiaries (except detailed) (a) USA Manufacture and marketing of premium connections 100% 100% 100%
MAVERICK TUBE CORPORATION and subsidiaries USA Manufacturing of welded steel pipes 100% 100% 100%
NKKTUBES Japan Manufacturing of seamless steel pipes 51% 51% 51%
P.T. SEAMLESS PIPE INDONESIA JAYA Indonesia Manufacturing of seamless steel products 89% 77% 77%
PRUDENTIAL STEEL LTD. Canada Manufacturing of welded steel pipes 100% 100% 100%
S.C. SILCOTUB S.A. Romania Manufacturing of seamless steel pipes 100% 100% 100%
SIAT SOCIEDAD ANONIMA Argentina Manufacturing of welded and seamless steel pipes 100% 100% 100%
SIDERCA SOCIEDAD ANONIMA INDUSTRIAL Y COMERCIAL and subsidiaries Argentina Manufacturing of seamless steel pipes 100% 100% 100%
TALTA - TRADING E MARKETING SOCIEDADE UNIPESSOAL LDA. Portugal Holding Company 100% 100% 100%
TENARIS BAY CITY, INC. USA Manufacturing of seamless steel pipes 100% 100% 100%
TENARIS FINANCIAL SERVICES S.A. Uruguay Financial company 100% 100% 100%
TENARIS GLOBAL SERVICES (CANADA) INC. Canada Marketing of steel products 100% 100% 100%
TENARIS GLOBAL SERVICES (U.S.A.) CORPORATION USA Marketing of steel products 100% 100% 100%
TENARIS GLOBAL SERVICES (UK) LTD United Kingdom Holding company and marketing of steel products 100% 100% 100%
TENARIS GLOBAL SERVICES S.A. and subsidiaries (except detailed) (b) Uruguay Holding company and marketing of steel products 100% 100% 100%
TENARIS INVESTMENTS S.àr.l. Luxembourg Holding company 100% 100% 100%
TENARIS INVESTMENTS SWITZERLAND AG and subsidiaries Switzerland Holding company 100% 100% 100%
TENARIS CONNECTIONS BV Netherlands Development, management and licensing of intellectual property 100% 100% 100%
TENARIS TUBOCARIBE LTDA. Colombia Manufacturing of welded and seamless steel pipes 100% 100% 100%
TUBOS DE ACERO DE MEXICO, S.A. Mexico Manufacturing of seamless steel pipes 100% 100% 100%

 

(*) All percentages rounded.

 

(a) Tenaris Investments S.a.r.l. holds 100% of Hydril's subsidiaries shares except for Technical Drilling & Production Services Nigeria. Ltd where it holds 80% for 2017, 2016 and 2015.

(b) Tenaris holds 97,5% of Tenaris Supply Chain S.A, 60% of Gepnaris S.A. and 40% of Tubular Technical Services and Pipe Coaters, and 49% of Amaja Tubular Services Limited.

 

  - 55 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

31 Nationalization of Venezuelan Subsidiaries

 

In May 2009, within the framework of Decree Law 6058, Venezuela’s President announced the nationalization of, among other companies, the Company's majority-owned subsidiaries TAVSA - Tubos de Acero de Venezuela S.A. (“Tavsa”) and, Matesi Materiales Siderúrgicos S.A (“Matesi”), and Complejo Siderúrgico de Guayana, C.A (“Comsigua”), in which the Company has a non-controlling interest (collectively, the “Venezuelan Companies”). Tenaris and its wholly-owned subsidiary, Talta - Trading e Marketing Sociedad Unipessoal Lda (“Talta”), initiated arbitration proceedings against Venezuela before the ICSID in Washington D.C. in connection with these nationalizations.

 

Matesi

 

On January 29, 2016, the tribunal released its award on the arbitration proceeding concerning the nationalization of Matesi. The award upheld Tenaris’s and Talta’s claim that Venezuela had expropriated their investments in Matesi in violation of Venezuelan law as well as the bilateral investment treaties entered into by Venezuela with the Belgium-Luxembourg Economic Union and Portugal. The award granted compensation in the amount of $87.3 million for the breaches and ordered Venezuela to pay an additional amount of $85.5 million in pre-award interest, aggregating to a total award of $172.8 million, payable in full and net of any applicable Venezuelan tax, duty or charge. The tribunal granted Venezuela a grace period of six months from the date of the award to make payment in full of the amount due without incurring post-award interest, and resolved that if no, or no full, payment is made by then, post-award interest will apply at the rate of 9% per annum. As of December 31, 2017, post-award interest amounted to $31.9 million.

 

On March 14, 2016, Venezuela requested the rectification of the award pursuant to article 49(2) of the ICSID Convention and ICSID Arbitration Rule 49. The tribunal denied Venezuela’s request on June 24, 2016, ordering Venezuela to reimburse Tenaris and Talta for their costs. On September 21, 2016, Venezuela submitted a request for annulment of the award as well as the stay of enforcement of the award in accordance with the ICSID Convention and Arbitration Rules, and the ad hoc committee that will hear Venezuela’s request was constituted on December 27, 2016. On March 24, 2017, the ad hoc committee rendered its decision to lift the stay of enforcement of the award. The ad hoc committee has not reserved its right to reopen that decision and no appeal against such decision is provided under ICSID’s Arbitration Rules.

 

The parties exchanged two rounds of written submissions on Venezuela’s request for annulment. Following the resignation of one of the ad hoc committee members, the committee was reconstituted on November 3, 2017, and the final hearing on Venezuela’s annulment request was rescheduled for March 22-23, 2018. Following the hearing, the ad hoc committee will deliberate and issue a decision on Venezuela’s annulment application. While there is no deadline by which the ad hoc committee must render its decision, it is presently expected that the ad hoc committee will render a decision between June and September 2018.

 

Tavsa and Comsigua

 

On December 12, 2016, the tribunal issued its award upholding Tenaris’s and Talta’s claim that Venezuela had expropriated their investments in Tavsa and Comsigua in violation of the bilateral investment treaties entered into by Venezuela with the Belgium-Luxembourg Economic Union and Portugal. The award granted compensation in the amount of $137 million and ordered Venezuela to reimburse Tenaris and Talta $3.3 million in legal fees and ICSID administrative costs. In addition, Venezuela was ordered to pay interest from April 30, 2008 until the day of effective payment at a rate equivalent to LIBOR + 4% per annum, which as of December 31, 2017 amounted to $88 million.

 

On April 11, 2017, Venezuela submitted a request for annulment of the award as well as the stay of enforcement of the award in accordance with the ICSID Convention and Arbitration Rules. Venezuela’s annulment request was registered on April 14, 2017. The ad hoc committee that will hear Venezuela’s request was constituted on October 17, 2017. On October 19, 2017, Tenaris and Talta filed an opposition to Venezuela’s request to continue the stay of enforcement of the award, which was followed by the exchange of additional written submissions between the parties. The ad hoc committee has extended the provisional stay of enforcement of the award until it rules on Venezuela’s request. A hearing on Venezuela’s request to continue the stay of enforcement of the award was held on February 1, 2018, and will be followed by a decision from the ad hoc committee. The final hearing for Venezuela’s annulment request is scheduled for August 27-28, 2018. Following the hearing, the ad hoc committee will deliberate and issue a decision on Venezuela’s annulment application. While there is no deadline by which the ad hoc committee must render its decision, it is presently expected that the ad hoc committee will render a decision between November 2018 and February 2019.

 

  - 56 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

31 Nationalization of Venezuelan Subsidiaries (Cont.)

 

Based on the facts and circumstances described above and following the guidance set forth by IAS 27R, the Company ceased consolidating the results of operations and cash flows of the Venezuelan Companies as from June 30, 2009, and classified its investments in the Venezuelan Companies as financial assets based on the definitions contained in paragraphs 11(c)(i) and 13 of IAS 32.

 

The Company classified its interests in the Venezuelan Companies as available-for-sale investments since management believes they do not fulfil the requirements for classification within any of the remaining categories provided by IAS 39 and such classification is the most appropriate accounting treatment applicable to non-voluntary dispositions of assets.

 

Tenaris or its subsidiaries have net receivables with the Venezuelan Companies as of December 31, 2017, for a total amount of approximately $27 million.

 

The Company records its interest in the Venezuelan Companies at its carrying amount at June 30, 2009, and not at fair value, following the guidance set forth by paragraphs 46(c), AG80 and AG81 of IAS 39.

 

32 Fees paid to the Company's principal accountant

 

Total fees accrued for professional services rendered by PwC Network firms to Tenaris S.A. and its subsidiaries are detailed as follows:

 

(all amounts in thousands of U.S. dollars)   Year ended December 31,
    2017   2016   2015
Audit fees     3,995       3,588       4,372  
Audit-related fees     88       64       78  
Tax fees     23       14       25  
All other fees     30       3       15  
Total     4,136       3,669       4,490  

 

33 Subsequent event

 

Agreement regarding governance of Usiminas

 

On February 8, 2018, the Company’s affiliate Ternium announced that its subsidiary Ternium Investments S.à r.l. had entered into a binding and immediately effective agreement (the “Agreement”) with Nippon Steel & Sumitomo Metal Corporation (“NSSMC”), establishing certain new governance rules for Usiminas as well as certain undertakings for the settlement of legal disputes. The new governance rules for Usiminas include, among others, an alternation mechanism for the nomination of each of the CEO and the Chairman of the Usiminas board of directors, as well as a new mechanism for the nomination of other members of Usiminas’ executive board. In addition, the Agreement incorporates an exit mechanism.

 

Under the Agreement, the right to nominate the CEO and the Chairman will alternate between Ternium and NSSMC at a 4-year interval, comprising two consecutive 2-year terms. For the initial four years, Ternium will be entitled to nominate the CEO and NSSMC will be entitled to nominate the Chairman. Initially, Ternium and NSSMC intend to nominate Sergio Leite as Usiminas’ CEO and Ruy Hirschheimer as Usiminas’ Chairman of the Board, respectively. The executive board will be composed of six members, including the CEO and five Vice-Presidents, with Ternium and NSSMC nominating three members each. The Agreement includes an exit mechanism consisting of a buy-and-sell procedure, exercisable at any time during the term of the existing Usiminas shareholders' agreement after the fourth-and-a-half-year anniversary from the coming election of Usiminas’ executive board in May 2018. Such buy-and-sell procedure would allow either Ternium or NSSMC to purchase all or a majority of the Usiminas shares held by the other party.

 

  - 57 -  

Tenaris S.A. Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015

33 Subsequent event (Cont.)

 

Agreement regarding governance of Usiminas (Cont.)

 

The Company’s subsidiary Confab Industrial, together with Ternium Investments S.à r.l. and its subsidiaries Siderar S.A.I.C. and Prosid Investments, is a party to the T/T Group within the Usiminas controlling group. Pursuant to the Agreement, the T/T Group members, including Confab, will use their reasonable best efforts to negotiate and execute an amended and restated Usiminas’ shareholders’ agreement together with the other minority shareholders of the control group, Previdência Usiminas, Metal One Corporation and Mitsubishi Corporation do Brasil S.A., having the same termination date as the existing Usiminas shareholders’ agreement. If any non-affiliated controlling group shareholder for any reason does not enter into the new shareholders agreement on or before April 10, 2018, the T/T Group members, including Confab, will enter into a separate Usiminas’ shareholders’ agreement only among themselves and their affiliates that are shareholders of Usiminas, which will operate as an upper-level agreement in respect of the existing shareholders agreement and will more fully reflect and implement the new governance rules as between them and their affiliates.

 

Annual Dividend Proposal

 

On February 21, 2018 the Company’s Board of Directors proposed, for the approval of the Annual General Shareholders' meeting to be held on May 2, 2018, the payment of an annual dividend of $0.41 per share ($0.82 per ADS), or approximately $484 million, which includes the interim dividend of $0.13 per share ($0.26 per ADS) or approximately $153 million, paid on November 22, 2017. If the annual dividend is approved by the shareholders, a dividend of $0.28 per share ($0.56 per ADS), or approximately $331 million will be paid on May 23, 2018, with an ex-dividend date of May 21, 2018. These Consolidated Financial Statements do not reflect this dividend payable.

 

 

 

 

 

 

 

 

  Edgardo Carlos  
  Chief Financial Officer  

 

 

 

 

-58-

 

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