FORM 6 - K

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a - 16 or 15d - 16 of

the Securities Exchange Act of 1934

 

 

As of August 2, 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 offices)

 

 

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

 

Form 20-F Ö 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 Ö

 

 

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 Condensed Interim Financial Statements for the six-month period ended June 30, 2018.

 

 

 

SIGNATURE

 

 

 

 

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.

 

 

 

Date: August 2, 2018.

 

 

 

Tenaris, S.A.

 

 

 

 

By: /s/ Cecilia Bilesio

Cecilia Bilesio

Corporate Secretary

 

 

 

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

 

 

 

 

 

 

TENARIS S.A.

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS

 

 

June 30, 2018

 

 

 

 

 

 

 

 

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

L - 2227 Luxembourg

R.C.S. Luxembourg: B 85 203

 

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

CONSOLIDATED CONDENSED INTERIM INCOME STATEMENT

 

(all amounts in thousands of U.S. dollars, unless otherwise stated)       Three-month period
ended June 30,
  Six-month period
ended June 30,
    Notes   2018   2017   2018   2017
Continuing operations       (Unaudited)   (Unaudited)
Net sales   3     1,788,484       1,242,804       3,654,719       2,396,664  
Cost of sales   4     (1,226,557 )     (865,729 )     (2,532,063 )     (1,689,585 )
Gross profit         561,927       377,075       1,122,656       707,079  
Selling, general and administrative expenses   5     (337,574 )     (327,132 )     (687,208 )     (621,563 )
Other operating income (expense), net         (1,917 )     1,547       (815 )     1,988  
Operating income         222,436       51,490       434,633       87,504  
Finance Income   6     9,609       11,059       18,982       23,986  
Finance Cost   6     (10,422 )     (6,020 )     (20,596 )     (11,958 )
Other financial results   6     39,383       (20,667 )     32,317       (32,082 )
Income before equity in earnings of non-consolidated companies and income tax         261,006       35,862       465,336       67,450  
Equity in earnings of non-consolidated companies         40,920       30,201       86,946       65,401  
Income before income tax         301,926       66,063       552,282       132,851  
Income tax         (135,454 )     7,357       (150,576 )     54,602  
Income for continuing operations         166,472       73,420       401,706       187,453  
                                     
Discontinued operations                                    
Result for discontinued operations   14     -       -       -       91,542  
Income for the period         166,472       73,420       401,706       278,995  
                                     
Attributable to:                                    
Owners of the parent         168,328       74,524       403,311       279,651  
Non-controlling interests         (1,856 )     (1,104 )     (1,605 )     (656 )
          166,472       73,420       401,706       278,995  
Earnings per share attributable to the owners of the parent during the period:                                    
Weighted average number of ordinary shares (thousands)         1,180,537       1,180,537       1,180,537       1,180,537  
Continuing operations                                    
Basic and diluted earnings per share (U.S. dollars per share)         0.14       0.06       0.34       0.16  
Basic and diluted earnings per ADS (U.S. dollars per ADS) (1)         0.29       0.13       0.68       0.32  
Continuing and discontinued operations                                    
Basic and diluted earnings per share (U.S. dollars per share)         0.14       0.06       0.34       0.24  
Basic and diluted earnings per ADS (U.S. dollars per ADS) (1)         0.29       0.13       0.68       0.47  

 

(1) Each ADS equals two shares.

 

CONSOLIDATED CONDENSED INTERIM STATEMENT OF COMPREHENSIVE INCOME

 

(all amounts in thousands of U.S. dollars)   Three-month period ended
June 30,
  Six-month period ended
June 30,
    2018   2017   2018   2017
    (Unaudited)   (Unaudited)
Income for the period     166,472       73,420       401,706       278,995  
Items that may be subsequently reclassified to profit or loss:                                
Currency translation adjustment     (111,526 )     62,347       (79,062 )     90,297  
Change in value of cash flow hedges and instruments at fair value     (12,417 )     8,239       (14,300 )     12,066  
Share of other comprehensive income of non-consolidated companies:                                
 - Currency translation adjustment     (33,459 )     (8,593 )     (38,411 )     (3,862 )
 - Changes in the fair value of derivatives held as cash flow hedges and others     (51 )     4,662       (40 )     4,652  
Income tax relating to components of other comprehensive income     31       -       52       23  
      (157,422 )     66,655       (131,761 )     103,176  
Items that will not be reclassified to profit or loss:                                
Remeasurements of post employment benefit obligations     508       605       508       605  
Income tax on items that will not be reclassified     (36 )     (219 )     (52 )     (219 )
Remeasurements of post employment benefit obligations of non-consolidated companies     (207 )     (134 )     (263 )     1,461  
      265       252       193       1,847  
Other comprehensive (loss) income for the period, net of tax     (157,157 )     66,907       (131,568 )     105,023  
Total comprehensive income for the period     9,315       140,327       270,138       384,018  
Attributable to:                                
Owners of the parent     11,504       141,090       271,934       384,287  
Non-controlling interests     (2,189 )     (763 )     (1,796 )     (269 )
      9,315       140,327       270,138       384,018  
Total comprehensive income for the period                                
attributable to Owners of the parent arises from                                
Continuing operations     11,504       141,090       271,934       292,745  
Discontinued operations     -       -       -       91,542  
      11,504       141,090       271,934       384,287  

 

The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements. These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2017.

  1  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

CONSOLIDATED CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION

 

(all amounts in thousands of U.S. dollars)       At June 30, 2018   At December 31, 2017
    Notes   (Unaudited)    
ASSETS                    
Non-current assets                                    
  Property, plant and equipment, net   8     6,139,845               6,229,143          
  Intangible assets, net   9     1,614,043               1,660,859          
  Investments in non-consolidated companies   13     663,261               640,294          
  Available for sale assets         21,572               21,572          
  Other investments   10     197,158               128,335          
  Deferred tax assets         177,266               153,532          
  Receivables, net         155,734       8,968,879       183,329       9,017,064  
Current assets                                    
  Inventories, net         2,530,072               2,368,304          
  Receivables and prepayments, net         142,276               135,698          
  Current tax assets         151,964               132,334          
  Trade receivables, net         1,536,323               1,214,060          
  Derivative financial instruments   11     2,484               8,231          
  Other investments   10     730,240               1,192,306          
  Cash and cash equivalents   10     427,960       5,521,319       330,221       5,381,154  
Total assets                 14,490,198               14,398,218  
EQUITY                                    
Capital and reserves attributable to owners of the parent                 11,431,575               11,482,185  
Non-controlling interests                 95,139               98,785  
Total equity                 11,526,714               11,580,970  
LIABILITIES                                    
Non-current liabilities                                    
  Borrowings         31,826               34,645          
  Deferred tax liabilities         472,965               457,970          
  Other liabilities         214,599               217,296          
  Provisions         35,966       755,356       36,438       746,349  
Current liabilities                                    
  Borrowings         808,669               931,214          
  Derivative financial instruments   11     91,615               39,799          
  Current tax liabilities         158,235               102,405          
  Other liabilities         219,890               157,705          
  Provisions         27,181               32,330          
  Customer advances         89,566               56,707          
  Trade payables         812,972       2,208,128       750,739       2,070,899  
Total liabilities                 2,963,484               2,817,248  
Total equity and liabilities                 14,490,198               14,398,218  

 

The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements. These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2017.

 

  2  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

CONSOLIDATED CONDENSED INTERIM 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
                                    (Unaudited)
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  
Changes in accounting policies (Note 2)     -       -       -       -       2,786       5,220       8,006       12       8,018  
Balance at December 31, 2017     1,180,537       118,054       609,733       (824,423 )     (317,783 )     10,724,073       11,490,191       98,797       11,588,988  
Income (loss) for the period     -       -       -       -       -       403,311       403,311       (1,605 )     401,706  
Currency translation adjustment     -       -       -       (78,891 )     -       -       (78,891 )     (171 )     (79,062 )
Remeasurements of post employment benefit obligations, net of taxes     -       -       -       -       482       -       482       (26 )     456  
Change in value of instruments at fair value through other comprehensive income and cash flow hedges, net of taxes     -       -       -       -       (14,254 )     -       (14,254 )     6       (14,248 )
Share of other comprehensive income of non-consolidated companies     -       -       -       (38,411 )     (303 )     -       (38,714 )     -       (38,714 )
Other comprehensive (loss) for the period     -       -       -       (117,302 )     (14,075 )     -       (131,377 )     (191 )     (131,568 )
Total comprehensive income (loss) for the period     -       -       -       (117,302 )     (14,075 )     403,311       271,934       (1,796 )     270,138  
Acquisition of non-controlling interests     -       -       -       -       -       -       -       (1 )     (1 )
Dividends approved to be distributed     -       -       -       -       -       (330,550 )     (330,550 )     (1,861 )     (332,411 )
Balance at June 30, 2018     1,180,537       118,054       609,733       (941,725 )     (331,858 )     10,796,834       11,431,575       95,139       11,526,714  

 

 

    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
                                    (Unaudited)
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 period     -       -       -       -       -       279,651       279,651       (656 )     278,995  
Currency translation adjustment     -       -       -       89,886       -       -       89,886       411       90,297  
Remeasurements of post employment benefit obligations, net of taxes     -       -       -       -       386       -       386       -       386  
Change in value of available for sale financial instruments and cash flow hedges, net of taxes     -       -       -       -       12,113       -       12,113       (24 )     12,089  
Share of other comprehensive income of non-consolidated companies     -       -       -       (3,862 )     6,113       -       2,251       -       2,251  
Other comprehensive income for the period     -       -       -       86,024       18,612       -       104,636       387       105,023  
Total comprehensive income (loss) for the period     -       -       -       86,024       18,612       279,651       384,287       (269 )     384,018  
Acquisition of non-controlling interests     -       -       -       -       -       -       -       (31 )     (31 )
Dividends paid in cash     -       -       -       -       -       (330,550 )     (330,550 )     (19,200 )     (349,750 )
Balance at June 30, 2017     1,180,537       118,054       609,733       (879,931 )     (294,476 )     10,607,237       11,341,154       106,155       11,447,309  

 

 

(1) The Company has an authorized share capital of a single class of 2.5 billion shares having a nominal value of USD1.00 per share. As of June 30, 2018 and 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 financial instruments measured at fair value through other comprehensive income.

 

(3) The Distributable Reserve and Retained Earnings as of June 30, 2018 calculated in accordance with Luxembourg Law are disclosed in Note 12.

 

The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements. These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2017.

 

 

 

  3  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

CONSOLIDATED CONDENSED INTERIM STATEMENT OF CASH FLOWS

 

(all amounts in thousands of U.S. dollars)       Six-month period ended June 30,
    Notes   2018   2017
Cash flows from operating activities       (Unaudited)
             
Income for the period         401,706       278,995  
Adjustments for:                    
Depreciation and amortization   8 & 9     282,203       311,066  
Income tax accruals less payments         67,851       (129,818 )
Equity in earnings of non-consolidated companies         (86,946 )     (65,401 )
Interest accruals less payments, net         6,775       4,889  
Changes in provisions         (5,621 )     (19,920 )
Income from the sale of Conduit business         -       (89,694 )
Changes in working capital         (357,655 )     (291,721 )
Derivatives, currency translation adjustment and others         13,362       (5,092 )
Net cash provided by (used in) operating activities         321,675       (6,696 )
                     
Cash flows from investing activities                    
Capital expenditures   8 & 9     (195,731 )     (293,806 )
Changes in advance to suppliers of property, plant and equipment         4,218       4,329  
Proceeds from disposal of Conduit business   14     -       327,631  
Loan to non-consolidated companies   13     (3,520 )     (10,956 )
Repayment of loan by non-consolidated companies   13     5,470       1,950  
Proceeds from disposal of property, plant and equipment and intangible assets         2,708       2,878  
Investment in companies under cost method         -       (3,681 )
Dividends received from non-consolidated companies         25,722       22,971  
Changes in investments in securities         396,078       170,071  
Net cash provided by investing activities         234,945       221,387  
                     
Cash flows from financing activities                    
Dividends paid         (330,550 )     (330,550 )
Dividends paid to non-controlling interest in subsidiaries         (1,108 )     (19,200 )
Acquisitions of non-controlling interests         (1 )     (31 )
Proceeds from borrowings         576,007       519,735  
Repayments of borrowings         (696,852 )     (517,850 )
Net cash (used in) financing activities         (452,504 )     (347,896 )
Increase (decrease) in cash and cash equivalents         104,116       (133,205 )
Movement in cash and cash equivalents                    
At the beginning of the period         330,090       398,580  
Effect of exchange rate changes         (6,950 )     5,462  
Increase (decrease) in cash and cash equivalents         104,116       (133,205 )
At June 30,         427,256       270,837  

 

    At June 30,
Cash and cash equivalents   2018   2017
Cash and bank deposits     427,960       271,224  
Bank overdrafts     (704 )     (387 )
      427,256       270,837  

 

The accompanying notes are an integral part of these Consolidated Condensed Interim Financial Statements. These Consolidated Condensed Interim Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes for the fiscal year ended December 31, 2017.

  4  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

NOTES TO THE CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS

 

1 General information
2 Accounting policies and basis of presentation
3 Segment information
4 Cost of sales
5 Selling, general and administrative expenses
6 Financial results
7 Dividend distribution
8 Property, plant and equipment, net
9 Intangible assets, net
10 Cash and cash equivalents and other investments
11 Derivative financial instruments
12 Contingencies, commitments and restrictions to the distribution of profits
13 Investments in non-consolidated companies
14 Discontinued operations
15 Related party transactions
16 Category of financial instruments and classification within the fair value hierarchy
17 Nationalization of Venezuelan Subsidiaries

 

 

 

 

  5  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

NOTES TO THE CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS

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

 

1 General information

 

Tenaris S.A. (the "Company") was established as a public limited liability company ( société 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 Condensed Interim Financial Statements to "Tenaris" refer to Tenaris S.A. and its consolidated subsidiaries. A list of the principal Company’s subsidiaries is included in Note 30 to the Company’s audited Consolidated Financial Statements for the year ended December 31, 2017.

 

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 Condensed Interim Financial Statements were approved for issuance by the Company’s Board of Directors on August 1, 2018.

 

2 Accounting policies and basis of presentation

 

These Consolidated Condensed Interim Financial Statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. The accounting policies used in the preparation of these Consolidated Condensed Interim Financial Statements are consistent with those used in the audited Consolidated Financial Statements for the year ended December 31, 2017 except for the adoption of new and amended standards as set out below. These Consolidated Condensed Interim Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standard Board (“IASB”) and in conformity with IFRS as adopted by the European Union (“EU”).

 

The preparation of Consolidated Condensed Interim 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 as of the balance sheet dates, and the reported amounts of revenues and expenses for the reported periods. Actual results may differ from these estimates.

 

Material inter-company transactions, balances and unrealized gains (losses) on transactions between Tenaris’s 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 inter-company transactions are generated. These are included in the Consolidated Condensed Interim Income Statement under Other financial results .

 

There were no changes in valuation techniques during the period and there have been no changes in any risk management policies since the year ended December 31, 2017.

 

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

 

Accounting pronouncements applicable as from January 1, 2018 and relevant for Tenaris

 

IFRS 9, “Financial instruments”

 

Tenaris has adopted IFRS 9 “ Financial instruments” from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognized in the financial statements. In accordance with the transition provisions in IFRS 9, Tenaris has adopted the new rules using the retrospective approach, meaning that the cumulative impact of the adoption was recognized in the opening retained earnings and other reserves of the current period as of January 1, 2018 and that comparatives were not restated.

 

The new impairment model requires recognition of impairment provisions based on expected credit losses rather than on incurred credit losses. The impact of this change was a decrease of $6.4 million in the allowance for doubtful accounts.

 

 

  6  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

2 Accounting policies and basis of presentation (Cont.)

 

Accounting pronouncements applicable as from January 1, 2018 and relevant for Tenaris (Cont.)

 

IFRS 9, “Financial instruments” (Cont.)

 

The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at January 1, 2018 are compared as follows:

 

Financial Assets   FVPL   Held to
maturity
  Amortized cost
(loans & receivables
2017)
  FVOCI
(Available for
sale 2017)
Closing balance December 31, 2017 - IAS 39     1,163,808       344,336       1,541,724       21,572  
Reclassified bonds and other fixed income from HTM to FVOCI     -       (344,336 )     -       344,336  
Reclassified fixed income from FVPL to amortized cost     (550,646 )     -       550,646       -  
Reclassified bonds and other fixed income from FVPL to FVOCI     (153,702 )     -       -       153,702  
Opening balance January 1, 2018 - IFRS 9     459,460       -       2,092,370       519,610  

 

    Effect on
other reserves
  Effect on
retained earnings
Opening balance January 1, 2018 - IAS 39     (320,569 )     10,718,853  
Reclassify investments from HTM to FVOCI     3,126       -  
Reclassify investments from FVPL to FVOCI     (352 )     352  
Opening balance January 1, 2018 - IFRS 9     (317,795 )     10,719,205  

 

Since January 1, 2018 the Company classifies its financial instruments in the following measurement categories:

 

Amortized Cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest. Interest income from these financial assets is included in finance income using the effective interest rate method.

 

Fair value through other comprehensive income (“FVOCI”): Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest. Interest income from these financial assets is included in finance income using the effective interest rate method. Unrealized gains or losses are recorded as a fair value adjustment in the consolidated statement of comprehensive income and transferred to the consolidated income statement when the financial asset is sold. Exchange gains and losses and impairments related to the financial assets are immediately recognized in the consolidated income statement.

 

Fair value through profit and loss (“FVPL”): Assets that do not meet the criteria for amortized cost or FVOCI. Changes in fair value of financial instruments at FVPL are immediately recognized in the consolidated income statement.

 

The classification depends on the Company’s business model for managing the financial assets and contractual terms of the cash flows.

 

IFRS 15, “Revenue from contracts with customers”

 

The group has adopted IFRS 15 “Revenue from contracts with customers” from January 1 2018, which resulted in changes in accounting policies and adjustments to the amounts recognized in the financial statements. The policy sets out the requirements in accounting for revenue arising from contracts with customers and is based on the principle that revenue is recognized when control of a good or service is transferred to the customer. In accordance with the transition provisions in IFRS 15, the group has adopted the new rules using the modified retrospective approach, meaning that the cumulative impact of the adoption was recognized in retained earnings as of January 1, 2018 and that comparatives were not restated.

 

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

 

  7  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

2 Accounting policies and basis of presentation (Cont.)

 

New and amended standards not yet adopted and relevant for Tenaris

 

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.

 

This standard was endorsed by the EU.

 

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.

 

None of the accounting pronouncements issued after December 31, 2017 and as of the date of these Consolidated Condensed Interim Financial Statements has a material effect on the Company’s financial condition or result of operations.

 

3 Segment information

 

Reportable operating segment

(All amounts in millions of U.S. dollars)

 

Six-month period ended June 30, 2018   Tubes   Other   Continuing
operations
  Discontinued
operations
IFRS - Net Sales     3,452       203       3,655       -  
Management view - operating income     290       35       325       -  
Difference in cost of sales     103       3       106       -  
Direct cost and others     97       3       100       -  
Absorption     6       -       6       -  
Differences in depreciation and amortization     (2 )     -       (2 )     -  
Differences in selling, general and administrative expenses     -       6       6       -  
IFRS - operating income     391       44       435       -  
Financial income (expense), net                     31       -  
Income before equity in earnings of non-consolidated companies and income tax                     466       -  
Equity in earnings of non-consolidated companies                     87       -  
Income before income tax                     553       -  
Capital expenditures     194       2       196       -  
Depreciation and amortization     274       8       282       -  

 

Six-month period ended June 30, 2017   Tubes   Other   Continuing
operations
  Discontinued
operations
IFRS - Net Sales     2,260       137       2,397       12  
Management view - operating income     (28 )     12       (16 )     3  
Difference in cost of sales     92       (1 )     91       (1 )
Direct cost and others     67       (2 )     65       (1 )
Absorption     25       1       26       -  
Differences in Depreciation and Amortization     (2 )     -       (2 )     -  
Differences in Selling, general and administrative expenses     13       -       13       -  
Differences in Other operating income (expenses), net     1       -       1       -  
IFRS - operating income     76       11       87       2  
Financial income (expense), net                     (20 )     -  
Income before equity in earnings of non-consolidated companies and income tax                     67       2  
Equity in earnings of non-consolidated companies                     65       -  
Income before income tax                     132       2  
Capital expenditures     289       5       294       -  
Depreciation and amortization     304       7       311       -  

 

 

In the six-month period ended June 30, 2018 and 2017, 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 $26 and $25 million 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.

 

  8  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

3 Segment information (Cont.)

 

Geographical information

 

(all amounts in thousands of U.S. dollars)   North
America
  South
America
  Europe   Middle East
& Africa
  Asia
Pacific
  Total
continuing
operations
  Total
discontinued
operations
Six-month period ended June 30, 2018                                                        
Net sales     1,690,341       679,178       380,838       763,002       141,360       3,654,719       -  
Capital expenditures     110,708       40,049       41,613       808       2,553       195,731       -  
Depreciation and amortization     166,903       55,277       44,077       5,217       10,729       282,203       -  
                                                         
Six-month period ended June 30, 2017                                                        
Net sales     1,061,010       505,220       257,230       469,841       103,363       2,396,664       11,899  
Capital expenditures     238,140       32,445       16,005       5,188       1,883       293,661       145  
Depreciation and amortization     179,057       62,745       51,574       6,204       11,486       311,066       -  

 

Allocation of net sales to geographical information is based on customer location. Allocation of depreciation and amortization is based on the geographical location of the underlying assets.

 

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; “South America” comprises principally Argentina, Brazil and Colombia; “Europe” comprises principally Italy and Romania; “Middle East and Africa” comprises principally Egypt, Kazakhstan, Nigeria and Saudi Arabia and; “Asia Pacific” comprises principally China, Japan, Indonesia and Thailand.

 

4 Cost of sales

 

    Six-month period ended June 30,
(all amounts in thousands of U.S. dollars)   2018   2017
    (Unaudited)
Inventories at the beginning of the period     2,368,304       1,563,889  
                 
Plus: Charges of the period                
Raw materials, energy, consumables and other     1,686,567       1,329,052  
Services and fees     143,862       115,251  
Labor cost     439,051       361,198  
Depreciation of property, plant and equipment     217,179       183,741  
Amortization of intangible assets     4,770       11,503  
Maintenance expenses     100,810       75,540  
Allowance for obsolescence     14,921       (8,319 )
Taxes     16,497       8,924  
Other     70,174       45,029  
      2,693,831       2,121,919  
Less: Inventories at the end of the period     (2,530,072 )     (1,988,820 )
From discontinued operations     -       (7,403 )
      2,532,063       1,689,585  

 

5 Selling, general and administrative expenses

 

    Six-month period ended June 30,
(all amounts in thousands of U.S. dollars)   2018   2017
    (Unaudited)
Services and fees     64,458       69,476  
Labor cost     239,563       221,689  
Depreciation of property, plant and equipment     8,430       8,942  
Amortization of intangible assets     51,824       106,880  
Commissions, freight and other selling expenses     236,131       153,638  
Provisions for contingencies     9,395       3,181  
Allowances for doubtful accounts     (6,661 )     (4,738 )
Taxes     33,568       23,424  
Other     50,500       41,112  
      687,208       623,604  
From discontinued operations     -       (2,041 )
      687,208       621,563  

 

  9  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

6 Financial results

 

(all amounts in thousands of U.S. dollars)   Six-month period ended June 30,
    2018   2017
    (Unaudited)
     Interest Income     21,208       25,684  
     Net result on changes in FV of financial assets at FVTPL     (2,226 )     (1,698 )
Finance Income     18,982       23,986  
Finance Cost     (20,596 )     (11,958 )
     Net foreign exchange transactions results (*)     28,070       (33,057 )
     Foreign exchange derivatives contracts results     4,891       (6,384 )
     Other     (644 )     7,350  
Other Financial results     32,317       (32,091 )
Net Financial results     30,703       (20,063 )
From discontinued operations     -       9  
      30,703       (20,054 )

 

(*)The six-month period ended June 2018 includes the positive impact from Euro depreciation against the U.S. dollar on Euro denominated intercompany liabilities in subsidiaries with functional currency U.S. Dollar largely offset by a decrease in currency translation adjustment reserve from an Italian subsidiary. Also includes the positive impact from Argentinian peso depreciation against the U.S. dollar on Peso denominated financial, trade, social and fiscal payables at certain Argentinian subsidiaries which functional currency is the U.S. dollar. The six-month period ended 2017 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

 

7 Dividend distribution

 

On May 2, 2018, 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 22, 2017 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 23, 2018. In the aggregate, the interim dividend paid in November 2017 and the balance paid in May 2018 amounted to approximately $484.0 million.

 

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.

 

8 Property, plant and equipment, net

 

(all amounts in thousands of U.S. dollars)   2018   2017
    (Unaudited)
Six-month period ended June 30,        
Opening net book amount     6,229,143       6,001,939  
Currency translation adjustment     (42,303 )     40,807  
Additions (*)     177,583       275,690  
Disposals     (1,908 )     (2,100 )
Transfers     2,939       689  
Depreciation charge     (225,609 )     (192,683 )
At June 30,     6,139,845       6,124,342  

 

(*) Mainly due to the progress in the construction of the greenfield seamless facility in Bay City, Texas.

 

 

 

  10  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

9 Intangible assets, net

 

(all amounts in thousands of U.S. dollars)   2018   2017
    (Unaudited)
Six-month period ended June 30,        
Opening net book amount     1,660,859       1,862,827  
Currency translation adjustment     (4,631 )     562  
Additions     18,148       17,971  
Disposals     (800 )     (602 )
Transfers     (2,939 )     (689 )
Amortization charge     (56,594 )     (118,383 )
At June 30,     1,614,043       1,761,686  

 

10 Cash and cash equivalents and other investments

 

(all amounts in thousands of U.S. dollars)   At June 30,   At December 31,
    2018   2017
Cash and cash equivalents   (Unaudited)
Cash at banks     115,445       150,948  
Liquidity funds     216,167       66,033  
Short – term investments     96,348       113,240  
      427,960       330,221  
                 
Other investments - current                
Bonds and other fixed Income     407,995       754,800  
Fixed Income (time-deposit, zero coupon bonds, commercial papers)     322,245       437,406  
Others     -       100  
      730,240       1,192,306  
Other investments - non-current                
Bonds and other fixed Income     172,605       123,498  
Fixed Income (time-deposit, zero coupon bonds, commercial papers)     20,008       -  
Others     4,545       4,837  
      197,158       128,335  

 

11 Derivative financial instruments

 

(all amounts in thousands of U.S. dollars)   At June 30,   At December 31,
    2018   2017
Assets   (Unaudited)
Derivatives hedging borrowings and investments     862       2,036  
Other Derivatives     1,622       6,195  
      2,484       8,231  
Liabilities                
Derivatives hedging borrowings and investments     88,668       34,770  
Other Derivatives     2,947       5,029  
      91,615       39,799  

 

  11  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

12 Contingencies, commitments and restrictions to the distribution of profits

 

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 Condensed Interim Financial Statements 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 which are outstanding as of the date of these Consolidated Condensed Interim Financial Statements. In addition, Tenaris is subject to other legal proceedings, none of which is believed to be material.

 

§ 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. On March 5, 2018, the court of appeals ruled that CSN’s appeal did not meet the requirements for submission to the Superior Court of Justice and rejected the appeal. On May 8, 2018, CSN appealed against such ruling. If CSN’s appeal is granted, the Superior Court of Justice will also review admissibility, and, if declared admissible, will then render a decision on the merits. The Superior Court of Justice is restricted to the analysis of alleged violations to federal laws and cannot assess matters of fact.

 

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.

 

  12  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

12 Contingencies, commitments and restrictions to the distribution of profits (Cont.)

 

Contingencies (Cont.)

 

§ 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. Evidentiary stage for both proceedings has been closed but such decision has been appealed by Confab as explained below.

 

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. In April and May 2018, the parties filed their observations and/or opinions concerning the expert’s second report. On April 17, 2018, the court closed the evidentiary stage, a decision that was appealed by Confab on May 16, 2018. Approximately 54% of the amounts claimed by Itaú and Veracel are 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 June 30, 2018, the estimated amount of Itaú’s claim was approximately BRL86.2 million (approximately $22.4 million), and the estimated amount of Veracel’s claim is approximately BRL54.7 million (approximately $14.2 million), for an aggregate amount BRL140.9 million (approximately $36.6 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. On June 27, 2018, TGS initiated arbitration proceedings against PAM before the Quito Chamber of Commerce Arbitration Center seeking reimbursement of the penalty amounts plus interest. Tenaris believes, based on the advice of counsel, that PAM had 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.

 

 

 

  13  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

12 Contingencies, commitments and restrictions to the distribution of profits (Cont.)

 

Contingencies (Cont.)

 

§ Contractor claim for additional costs

 

Tenaris Bay City Inc. (“Tenaris Bay City”), a U.S. subsidiary of the Company, 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 $90 million. On June 30, 2017, the contractor filed a demand for arbitration of these claims. An arbitral panel was selected and a scheduling order issued. The parties have already submitted statements of claim and responses to the other party’s claim. The discovery process is currently underway. The 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.

 

§ Investigation concerning currency exchange declarations

 

Siderca S.A.I.C, an Argentine subsidiary of the Company (“Siderca”), and some of its current and former directors and employees, were subject to an administrative criminal proceeding before a criminal court 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 $268.8 million. On July 13, 2018, the criminal court acquitted all defendants, including Siderca.

 

§ 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 of 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 certain purchases of scrap made by the companies during 2013 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 challenged tax deductions. As of June 30, 2018, the estimated exposure under these proceedings, including principal, interest and penalties, amounted to MXN4,117 million (approximately $207.3 million). No final decision has yet been issued on this matter. Tenaris believes, based on the advice of counsel, that it is unlikely that the ultimate resolution of this tax assessment will result in a material obligation.

 

Commitments and other purchase orders

 

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

 

§ A Tenaris company entered into a contract with supplier Voest Alpine Grobblech Gmb pursuant to which it committed to purchase carbon steel for a total amount of approximately $29.7 million to use for manufacturing pipes related to the Zohr 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 June 30, 2018, the aggregate commitment to take or pay the committed volumes for a 9-year term totalled approximately $47.4 million.

 

§ Several Tenaris companies entered into a contract with Praxair S.A. for the service of oxygen and nitrogen supply. As of June 30, 2018, the aggregate commitment to take or pay the committed volumes for a 14-year term totalled approximately $55.3 million.

 

§ Several Tenaris companies entered into a contract with Graftech for the supply of graphite electrodes. As of June 30, 2018, the aggregate commitment to take or pay the committed volumes totalled approximately $66.3 million.

 

  14  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

12 Contingencies, commitments and restrictions to the distribution of profits (Cont.)

 

Commitments and other purchase orders (Cont.)

 

§ 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.

 

§ A Tenaris company entered into a contract with Vale International S.A. for the supply of iron ore, for which it is committed to purchase at least 70% of its annual iron ore needs, up to 770 thousand tons of pellets annually. The contract expires on December 31, 2020. The aggregate commitment amounts to approximately $229 million.

 

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 June 30, 2018, 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  

 

13 Investments in non-consolidated companies

 

This note supplements and should be read in conjunction with Note 12 to the Company’s audited Consolidated Financial Statements for the year ended December 31, 2017.

 

a) Ternium

 

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 June 30, 2018, the closing price of Ternium’s ADSs as quoted on the New York Stock Exchange was $34.82 per ADS, giving Tenaris’s ownership stake a market value of approximately $799.9 million. At June 30, 2018, the carrying value of Tenaris’s ownership stake in Ternium, based on Ternium’s IFRS financial statements, was approximately $592.6 million.

 

  15  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

13 Investments in non-consolidated companies (Cont.)

 

b) Usiminas

 

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

 

In 2014, a conflict arose between the T/T Group (comprising Confab and Ternium’s subsidiaries Ternium Investments, Ternium Argentina and Prosid Investments) and Nippon Steel & Sumitomo Metal Corporation (“NSSMC”) with respect to the governance of Usiminas, including with respect to the rules applicable to the appointment of senior managers, the application of the shareholders’ agreement in matters involving fiduciary duties, and generally with respect to Usiminas’ business strategy.

 

On February 8, 2018, Ternium Investments resolved the dispute with NSSMC, and on April 10, 2018, the T/T Group entities (including Confab), the NSSMC Group and Previdência Usiminas entered into a new shareholders’ agreement for Usiminas, amending and restating the previously existing shareholders agreement (the “New SHA”). Usiminas’ control group now holds, in the aggregate, 483.6 million ordinary shares bound to the New SHA, representing approximately 68.6% of Usiminas’ voting capital, with the T/T Group holding approximately 47.1% of the total shares held by the control group (39.5% corresponding to the Ternium entities and the other 7.6% corresponding to Confab); the NSSMC Group holding approximately 45.9% of the total shares held by the control group; and Previdência Usiminas holding the remaining 7% of the total shares held by the control group.

 

The New SHA reflects the agreed-upon corporate governance rules for Usiminas, including, among others, an alternation mechanism for the nomination of each of the chief executive officer and the chairman of the board of directors, as well as a mechanism for the nomination of other members of Usiminas’ executive board. The New SHA also incorporates an exit mechanism consisting of a buy-and-sell procedure, exercisable at any time during the term of the New SHA after the fourth-and-a-half-year anniversary from the May 2018 election of Usiminas’ executive board. Such exit mechanism shall apply with respect to shares held by the NSSMC Group and the T/T Group, and would allow either Ternium or NSSMC to purchase all or a majority of the Usiminas shares held by the other shareholder group.

 

In connection with the execution of the New SHA, the Ternium entities and Confab amended and restated their separate shareholders’ agreement governing their respective rights and obligations as members of the T/T Group to include provisions relating to the exit mechanism and generally to conform such separate shareholders’ agreement to the other provisions of the New SHA.

 

As of June 30, 2018, the closing price of the Usiminas’ ordinary and preferred shares, as quoted on the B3, was BRL11.23 ($2.91) and BRL7.32 ($1.90), respectively, giving Tenaris’s ownership stake a market value of approximately $108.8 million. As that date, the carrying value of Tenaris’s ownership stake in Usiminas was approximately $64.5 million.

 

c) Techgen, S.A. de C.V. (“Techgen”)

 

Techgen is a Mexican company that operates a 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, with a power capacity of 900 megawatts. As of June 30, 2018, 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 June 30, 2018, Tenaris’s exposure under these agreements amounted to $56.6 million and $1.8 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 $680 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 June 30, 2018, the loan agreement had been fully disbursed and, as a result, the amount guaranteed by Tenaris was approximately $149.6 million. During 2018 the shareholders of Techgen made additional investments, in Techgen, in form of subordinated loans, which in case of Tenaris amounted to $3.5 million. In the same period, there were repayments of these loans for $5.5 million. As of June 30, 2018, the aggregate outstanding principal amount under these loans was $91.3 million.

 

  16  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

14 Discontinued operations

 

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 19 January 2017, with effect from 20 January 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.

 

In addition, the financial performance of the conduit business relative to the 19 days of January 2017 showed a gain of $1.8 million.

 

     
    2017
 Income from discontinued operations     1,848  
 After tax gain on the sale of Conduit     89,694  
 Net Income for discontinued operations     91,542  

 

For further information regarding this transaction please refer to Note 28 of our Consolidated Financial Statements as of 31 December 2017.

 

15 Related party transactions

 

As of June 30, 2018:

 

§ 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 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)   Six-month period ended June 30,
      2018   2017
(i) Transactions   (Unaudited)
  (a) Sales of goods and services        
  Sales of goods to non-consolidated parties     13,540       16,251  
  Sales of goods to other related parties     65,453       18,382  
  Sales of services to non-consolidated parties     3,886       5,739  
  Sales of services to other related parties     3,214       1,648  
        86,093       42,020  
                   
  (b) Purchases of goods and services                
  Purchases of goods to non-consolidated parties     109,334       106,301  
  Purchases of goods to other related parties     50,859       6,801  
  Purchases of services to non-consolidated parties     5,039       5,653  
  Purchases of services to other related parties     25,020       25,024  
        190,252       143,779  

 

 

  17  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

15 Related party transactions (Cont.)

 

  (all amounts in thousands of U.S. dollars)   At June 30,   At December 31,
      2018   2017
(ii) Period-end balances     (Unaudited)          
  Arising from sales / purchases of goods / services / others                
  Receivables from non-consolidated parties     113,696       117,853  
  Receivables from other related parties     25,891       50,815  
  Payables to non-consolidated parties     (32,376 )     (49,354 )
  Payables to other related parties     (22,552 )     (14,475 )
        84,659       104,839  

 

16 Category of financial instruments and classification within the fair value hierarchy

 

The following table illustrates the three hierarchical levels for valuing financial instruments at fair value and those measured at amortized cost as of June 30, 2018.

 

 

        Measurement Categories   At Fair Value
June 30, 2018   Carrying
amount
  Amortized
Cost
  Fair Value   Level 1   Level 2   Level 3
                         
Assets                                                
Cash and cash equivalents     427,960       211,793       216,167       216,167       -       -  
Cash at banks     115,445       115,445       -       -       -       -  
Liquidity funds     216,167       -       216,167       216,167       -       -  
Short – term investments     96,348       96,348       -       -       -       -  
Other investments     730,240       322,245       407,995       361,873       46,122       -  
Fixed income (time-deposit, zero coupon bonds, commercial papers)     322,245       322,245       -       -       -       -  
Certificates of deposits     201,589       201,589       -       -       -       -  
Commercial papers     19,861       19,861       -       -       -       -  
Other notes     100,795       100,795       -       -       -       -  
Bonds and other fixed income     407,995       -       407,995       361,873       46,122       -  
U.S. government securities     23,520       -       23,520       23,520       -       -  
Non - U.S. government securities     134,015       -       134,015       134,015       -       -  
Corporates securities     204,338       -       204,338       204,338       -       -  
Structured notes     46,122       -       46,122       -       46,122       -  
Derivative financial instruments     2,484       -       2,484       -       2,484       -  
Other Investments Non- current     197,158       20,008       177,150       172,605       -       4,545  
Bonds and other fixed income     172,605       -       172,605       172,605       -       -  
Fixed income (time-deposit, zero coupon bonds, commercial papers)     20,008       20,008       -       -       -       -  
Other investments     4,545       -       4,545       -       -       4,545  
Trade receivables     1,536,323       1,536,323       -       -       -       -  
Receivables C and NC     298,010       166,043       -       -       -       -  
Other receivables     166,043       166,043       -       -       -       -  
Other receivables (non-financial)     131,967       -       -       -       -       -  
Available for sale assets  (*)     21,572       -       21,572       -       -       21,572  
Total             2,256,412       825,368       750,645       48,606       26,117  
Liabilities                                                
Borrowings C and NC     840,495       840,495       -       -       -       -  
Trade payables     812,972       812,972       -       -       -       -  
Derivative financial instruments     91,615       -       91,615       -       91,615       -  
Total             1,653,467       91,615       -       91,615       -  

 

(*) For further detail regarding Available for sale assets, see Note 17.

 

There were no transfers between Levels during the period.

 

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.

 

  18  

Tenaris S.A. Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2018

 

16 Category of financial instruments and classification within the fair value hierarchy (Cont.)

 

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.

 

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 17).

 

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 99.2% of its carrying amount including interests accrued as of June 30, 2018 as compare with 99.4% as of December 31, 2017. Fair values were calculated using standard valuation techniques for floating rate instruments and comparable market rates for discounting flows.

 

17 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”). Between August 2011 and July 2012, Tenaris and its wholly-owned subsidiary Talta - Trading e Marketing Sociedade Unipessoal Lda (“Talta”) initiated two arbitration proceedings against Venezuela before the ICSID in Washington D.C., seeking adequate and effective compensation for the expropriation of their investments in the Venezuelan Companies. On January 29, 2016, the tribunal in the first arbitration proceeding released its award upholding 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, which as of June 30, 2018, amounted to $41 million.

 

On December 12, 2016, the tribunal in the second arbitration proceeding 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 June 30, 2018, amounted to $94.6 million.

 

Venezuela submitted requests for annulment of the awards in accordance with the ICSID Convention and Arbitration Rules. Annulment requests are pending final resolution by the ad-hoc committees. 

 

On June 8, 2018, Tenaris and Talta filed two actions in federal court in the District of Columbia to recognize and enforce the awards. Tenaris and Talta are in the process of effecting service on Venezuela in accordance with US law.

 

For further information on the nationalization of the Venezuelan subsidiaries, see note 31 “Nationalization of Venezuelan Subsidiaries” to our audited consolidated financial statements for the year ended December 31, 2017. 

 

 

 

 

 

 

Edgardo Carlos

Chief Financial Officer

 

 

20


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