Tenaris S.A. Consolidated Condensed Interim Financial Statements for the
nine-month period ended September 30, 2007
- --------------------------------------------------------------------------------
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 November 8, 2007
TENARIS, S.A.
(Translation of Registrant's name into English)
TENARIS, S.A.
46a, Avenue John F. Kennedy
L-1855 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 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
----- -----
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' Consolidated Condensed
Interim Financial Statements for the nine-month period ended September 30, 2007.
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: November 8, 2007
Tenaris, S.A.
By: /s/ Cecilia Bilesio
- -----------------------
Cecilia Bilesio
Corporate Secretary
2
TENARIS S.A.
CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
46a, Avenue John F. Kennedy - 2nd Floor.
L - 1855 Luxembourg
3
Tenaris S.A. Consolidated Condensed Interim Financial Statements for the nine-month period ended September 30, 2007
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED INTERIM INCOME STATEMENT
(all amounts in thousands of U.S. dollars, Three-month period ended Nine-month period ended
unless otherwise stated) September 30, September 30,
---------------------------------------------------------------
Notes 2007 2006 2007 2006
---------------------------------------------------------------
Continuing operations (Unaudited)
Net sales 2 2,523,553 1,803,598 7,553,058 5,266,835
Cost of sales 2 & 3 (1,436,511) (866,310) (4,132,567) (2,585,898)
---------------------------------------------------------------
Gross profit 1,087,042 937,288 3,420,491 2,680,937
Selling, general and administrative expenses 2 & 4 (400,886) (244,153) (1,183,664) (706,935)
Other operating income (expense), net 2 1,152 (359) (11,508) 5,946
---------------------------------------------------------------
Operating income 687,308 692,776 2,225,319 1,979,948
Interest income 5 22,666 17,687 65,065 43,303
Interest expense 5 (79,770) (15,482) (205,493) (41,558)
Other financial results 5 (12,900) (6,483) (10,822) 8,601
---------------------------------------------------------------
Income before equity in earnings of
associated companies and income tax 617,304 688,498 2,074,069 1,990,294
Equity in earnings of associated companies 18,280 29,653 73,585 76,725
---------------------------------------------------------------
Income before income tax 635,584 718,151 2,147,654 2,067,019
Income tax (199,220) (210,533) (667,410) (626,298)
---------------------------------------------------------------
Income for continuing operations 436,364 507,618 1,480,244 1,440,721
Discontinued operations
Income for discontinued operations - 2,338 - 6,689
---------------------------------------------------------------
Income for the period 436,364 509,956 1,480,244 1,447,410
---------------------------------------------------------------
Attributable to:
Equity holders of the Company 400,952 479,105 1,377,206 1,370,564
Minority interest 35,412 30,851 103,038 76,846
---------------------------------------------------------------
436,364 509,956 1,480,244 1,447,410
---------------------------------------------------------------
Earnings per share attributable to the equity
holders of the Company during the period
Weighted average number of ordinary shares
(thousands) 1,180,537 1,180,537 1,180,537 1,180,537
Earnings per share (U.S. dollars per share) 0.34 0.41 1.17 1.16
Earnings per ADS (U.S. dollars per ADS) 0.68 0.81 2.33 2.32
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. The report of the Independent Registered Public
Accounting Firm on these consolidated condensed interim financial statements is
issued as a separate document. 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, 2006.
1
Tenaris S.A. Consolidated Condensed Interim Financial Statements for the nine-month period ended September 30, 2007
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED INTERIM BALANCE SHEET
(all amounts in thousands of U.S. dollars) At September 30, 2007 At December 31, 2006
---------------------------- -----------------------------
Notes (Unaudited)
ASSETS
Non-current assets
Property, plant and equipment, net 6 3,286,163 2,939,241
Intangible assets, net 6 4,900,650 2,844,498
Investments in associated companies 487,662 422,958
Other investments 43,912 26,834
Deferred tax assets 337,807 291,641
Receivables 56,067 9,112,261 41,238 6,566,410
-------------- --------------
Current assets
Inventories 2,642,851 2,372,308
Receivables and prepayments 234,040 272,632
Current tax assets 221,713 202,718
Trade receivables 1,717,578 1,625,241
Non current assets held for sale 10,128 -
Other investments 214,446 183,604
Cash and cash equivalents 1,651,780 6,692,536 1,372,329 6,028,832
---------------------------- -----------------------------
Total assets 15,804,797 12,595,242
-------------- ---------------
EQUITY
Capital and reserves attributable to the
Company's equity holders
Share capital 1,180,537 1,180,537
Legal reserves 118,054 118,054
Share premium 609,733 609,733
Currency translation adjustments 230,441 3,954
Other reserves 20,528 28,757
Retained earnings 4,420,629 6,579,922 3,397,584 5,338,619
---------------------------- -----------------------------
Minority interest 477,759 363,011
-------------- ---------------
Total equity 7,057,681 5,701,630
-------------- ---------------
LIABILITIES
Non-current liabilities
Borrowings 3,769,956 2,857,046
Deferred tax liabilities 1,360,203 991,945
Other liabilities 204,151 186,724
Provisions 91,199 92,027
Trade payables 31 5,425,540 366 4,128,108
-------------- --------------
Current liabilities
Borrowings 1,139,789 794,197
Current tax liabilities 441,200 565,985
Other liabilities 302,347 187,701
Provisions 25,354 26,645
Customer advances 601,788 352,717
Trade payables 811,098 3,321,576 838,259 2,765,504
---------------------------- -----------------------------
Total liabilities 8,747,116 6,893,612
-------------- ---------------
Total equity and liabilities 15,804,797 12,595,242
-------------- ---------------
Contingencies, commitments and restrictions to the distribution of profits are
disclosed in Note 8.
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. The report of the Independent Registered Public
Accounting Firm on these consolidated condensed interim financial statements is
issued as a separate document. 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, 2006.
2
Tenaris S.A. Consolidated Condensed Interim Financial Statements for the nine-month period ended September 30, 2007
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CONDENSED INTERIM STATEMENT OF CHANGES IN EQUITY
(all amounts in thousands of U.S. dollars)
-------------------------------------------------------------------------------------
Attributable to equity holders of the Company
---------------------------------------------------------------
Currency
Share Legal Share Other translation Retained Minority
Capital Reserves Premium Reserves adjustment Earnings(*) Interest Total
-------------------------------------------------------------------------------------
(Unaudited)
Balance at January 1, 2007 1,180,537 118,054 609,733 28,757 3,954 3,397,584 363,011 5,701,630
-------------------------------------------------------------------------------------
Currency translation differences - - - - 226,487 - 36,242 262,729
Change in equity reserves - - - (8,229) - - - (8,229)
Acquisition and decrease of minority
interest - - - - - - 20,783 20,783
Dividends paid in cash - - - - - (354,161) (45,315) (399,476)
Income for the period - - - - - 1,377,206 103,038 1,480,244
-------------------------------------------------------------------------------------
Balance at September 30, 2007 1,180,537 118,054 609,733 20,528 230,441 4,420,629 477,759 7,057,681
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Attributable to equity holders of the Company
---------------------------------------------------------------
Currency
Share Legal Share Other translation Retained Minority
Capital Reserves Premium Reserves adjustment Earnings Interest Total
-------------------------------------------------------------------------------------
(Unaudited)
Balance at January 1, 2006 1,180,537 118,054 609,733 2,718 (59,743) 1,656,503 268,071 3,775,873
-------------------------------------------------------------------------------------
Currency translation differences - - - - 30,372 - 13,090 43,462
Change in equity reserves - - - 26,117 - - - 26,117
Acquisition and increase of minority
interest - - - - - - (10,131) (10,131)
Dividends paid in cash - - - - - (204,233) (19,621) (223,854)
Income for the period - - - - - 1,370,564 76,846 1,447,410
-------------------------------------------------------------------------------------
Balance at September 30, 2006 1,180,537 118,054 609,733 28,835 (29,371) 2,822,834 328,255 5,058,877
-------------------------------------------------------------------------------------
(*) Retained Earnings calculated in accordance with Luxembourg Law are disclosed in Note 8.
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. The report of the Independent Registered Public
Accounting Firm on these consolidated condensed interim financial statements is
issued as a separate document. 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, 2006.
3
CONSOLIDATED CONDENSED INTERIM CASH FLOW STATEMENT
Nine-month period ended
September 30,
---------------------------------
(all amounts in thousands of U.S. dollars) 2007 2006
---------------------------------
(Unaudited)
Cash flows from operating activities
Income for the period 1,480,244 1,447,410
Adjustments for:
Depreciation and amortization 371,647 166,008
Income tax accruals less payments (220,582) 1,947
Equity in earnings of associated companies (73,585) (76,725)
Interest accruals less payments, net 63,519 1,456
Income from disposal of investment - (6,933)
Changes in provisions (4,279) 8,207
Changes in working capital 94,669 (250,654)
Other, including currency translation adjustment 77,498 21,447
---------------------------------
Net cash provided by operating activities 1,789,131 1,312,163
---------------------------------
Cash flows from investing activities
Capital expenditures (334,568) (302,077)
Acquisitions of subsidiaries and minority interest (see Note 9) (1,927,227) (39,828)
Other disbursements relating to the acquisition of Hydril (71,580) -
Decrease in subsidiaries (1,195) -
Proceeds from disposal of property, plant and equipment and intangible
assets 6,923 16,568
Dividends received 11,496 -
Changes in restricted bank deposits - 2,027
Investments in short terms securities (30,842) (14,744)
---------------------------------
Net cash used in investing activities (2,346,993) (338,054)
---------------------------------
Cash flows from financing activities
Dividends paid (354,161) (204,233)
Dividends paid to minority interest in subsidiaries (45,315) (19,621)
Proceeds from borrowings 2,451,963 293,845
Repayments of borrowings (1,247,324) (443,328)
---------------------------------
Net cash provided by (used in) financing activities 805,163 (373,337)
---------------------------------
Increase in cash and cash equivalents 247,301 600,772
Movement in cash and cash equivalents
At beginning of the period 1,365,008 680,591
Effect of exchange rate changes 36,245 (4,951)
Increase in cash and cash equivalents 247,301 600,772
---------------------------------
At September 30, 1,648,554 1,276,412
---------------------------------
At September 30,
---------------------------------
Cash and cash equivalents 2007 2006
---------------------------------
Cash and bank deposits 1,651,780 1,295,184
Bank overdrafts (3,205) (18,751)
Restricted bank deposits (21) (21)
---------------------------------
1,648,554 1,276,412
---------------------------------
Non-cash financing activity
Conversion of debt to equity in subsidiaries
35,140 -
The accompanying notes are an integral part of these consolidated condensed
interim financial statements. The report of the Independent Registered Public
Accounting Firm on these consolidated condensed interim financial statements is
issued as a separate document. 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, 2006.
1
NOTES TO THE CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
Index to the notes to the consolidated condensed interim financial
statements
1 General information and basis of presentation
2 Segment information
3 Cost of sales
4 Selling, general and administrative expenses
5 Financial income (expenses), net
6 Property, plant and equipment and Intangible assets, net
7 Dividends per share
8 Contingencies, commitments and restrictions to the distribution of
profits
9 Business acquisitions, incorporation of subsidiaries and other
significant events
10 Non current assets held for sale and discontinued operations
11 Related Party Disclosures
2
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 and basis of presentation
Tenaris S.A. (the "Company"), a Luxembourg corporation (societe anonyme
holding), was incorporated on December 17, 2001 as a holding company for
investments in steel pipe manufacturing and distributing operations. The Company
holds, either directly or indirectly, controlling interests in various
subsidiaries. References in these financial statements to "Tenaris" refer to
Tenaris S.A. and its consolidated subsidiaries. A list of the Company's
subsidiaries is included in Note 32 to the audited Consolidated Financial
Statements for the year ended December 31, 2006 and updated in Note 9 to these
consolidated condensed interim financial statements.
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, 2006. These consolidated condensed
interim financial statements should be read in conjunction with the audited
Consolidated Financial Statements for the year ended December 31, 2006, which
have been prepared in accordance with International Financial Reporting
Standards ("IFRS").
Certain comparative amounts have been reclassified to conform to changes in
presentation in the current year.
In May 2007, Tenaris acquired Hydril Company ("Hydril"), a company engaged in
engineering, manufacturing and selling of premium connections and pressure
control products for oil and gas drilling production. Hydril's premium
connections business was allocated to the Tubes segment and a new segment was
created -Pressure Control- for Hydril's pressure control business.
The Tubes segment includes the operations that consist in the production and
selling of both seamless and welded steel tubular products and related services
mainly for energy and industrial applications.
The Projects segment includes the operations that consist in the production and
selling of welded steel pipe products mainly used in the construction of major
pipeline projects.
The Pressure Control segment includes the operations that consist in the
production and selling of products such as blowout preventers and subsea control
systems and related products used in oil and gas drilling applications.
The Others segment includes the operations that consist in the production and
selling of sucker rods, welded steel pipes for electric conduits, industrial
equipment and raw materials, such as hot briquetted iron, or HBI, that exceed
Tenaris's internal requirements.
Corporate general and administrative expenses have been allocated to the Tubes
segment.
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 also the reported amounts of revenues and expenses for the reported
periods. Actual results may differ from these estimates.
Material intercompany transactions and balances 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 condensed interim income statement under Other
financial results.
These consolidated condensed interim financial statements were approved for
issue by Tenaris's Board of Directors on November 7, 2007.
3
2 Segment information
Reportable operating segments
--------------------------------------------------------------------------------------------
(all amounts in thousands Total Total
of U.S. dollars) Pressure Continuing Discontinued
Tubes Projects Control Others operations operations (*)
--------------------------------------------------------------------------------------------
(Unaudited)
Nine-month period ended
September 30, 2007
Net sales 6,399,655 560,871 139,018 453,514 7,553,058 -
Cost of sales (3,291,194) (396,979) (91,015) (353,379) (4,132,567) -
--------------------------------------------------------------------------------------------
Gross profit 3,108,461 163,892 48,003 100,135 3,420,491 -
Selling, general and
administrative expenses (1,035,141) (60,181) (22,756) (65,586) (1,183,664) -
Other operating income
(expenses), net (16,323) 2,977 (433) 2,271 (11,508) -
--------------------------------------------------------------------------------------------
Operating income 2,056,997 106,688 24,814 36,820 2,225,319 -
Depreciation and
amortization 323,673 14,331 13,790 19,853 371,647 -
Nine-month period ended
September 30, 2006
Net sales 4,694,370 281,089 - 291,376 5,266,835 401,073
Cost of sales (2,179,881) (202,050) - (203,967) (2,585,898) (388,117)
--------------------------------------------------------------------------------------------
Gross profit 2,514,489 79,039 - 87,409 2,680,937 12,956
Selling, general and
administrative expenses (610,187) (50,588) - (46,160) (706,935) (5,947)
Other operating income
(expenses), net 5,411 570 - (35) 5,946 2,519
--------------------------------------------------------------------------------------------
Operating income 1,909,713 29,021 - 41,214 1,979,948 9,528
Depreciation and
amortization 140,844 15,071 - 8,590 164,505 1,503
Geographical information
----------------------------------------------------------------------------------------
(all amounts in thousands of Middle Total Total
U.S. dollars) North South East & Far East Continuing Discontinued
America America Europe Africa & Oceania operations operations (*)
----------------------------------------------------------------------------------------
Nine-month period ended (Unaudited)
September 30, 2007
Net sales 2,393,551 1,648,514 1,246,614 1,647,244 617,135 7,553,058 -
Depreciation and amortization 212,681 90,416 61,103 815 6,632 371,647 -
Nine-month period ended
September 30, 2006
Net sales 1,321,558 1,091,230 993,777 1,335,281 524,989 5,266,835 401,073
Depreciation and amortization 44,940 69,723 44,803 583 4,456 164,505 1,503
(*) Corresponds to Dalmine Energie operations.
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.
4
2 Segment information (Cont'd)
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 Venezuela; "Europe" comprises principally
France, Germany, Italy, Norway, Romania and the United Kingdom; "Middle East and
Africa" comprises principally Algeria, Egypt, Nigeria, Saudi Arabia and the
United Arab Emirates; "Far East and Oceania" comprises principally China,
Indonesia, Japan and South Korea.
3 Cost of sales
Nine-month period ended
September 30,
-------------------------------
(all amounts in thousands of U.S. dollars) 2007 2006
-------------------------------
(Unaudited)
Inventories at the beginning of the period 2,372,308 1,376,113
Plus: Charges of the period
Raw materials, energy, consumables and other 3,003,477 2,367,881
Increase in inventory due to business combinations 152,500 5,033
Services and fees 293,941 275,865
Labor cost 542,308 346,522
Depreciation of property, plant and equipment 191,939 144,390
Amortization of intangible assets 1,015 2,163
Maintenance expenses 139,406 82,128
Provisions for contingencies 3,212 -
Allowance for obsolescence 16,429 6,932
Taxes 5,428 2,964
Other 53,455 32,747
-------------------------------
4,403,110 3,266,625
Less: Inventories at the end of the period (2,642,851) (1,668,723)
-------------------------------
4,132,567 2,974,015
From Discontinued operations - (388,117)
-------------------------------
4,132,567 2,585,898
-------------------------------
4 Selling, general and administrative expenses
Nine-month period ended
September 30,
--------------------------------
(all amounts in thousands of U.S. dollars) 2007 2006
--------------------------------
(Unaudited)
Services and fees 144,071 87,477
Labor cost 297,446 194,589
Depreciation of property, plant and equipment 9,731 6,473
Amortization of intangible assets 168,962 12,982
Commissions, freight and other selling expenses 339,983 261,127
Provisions for contingencies 24,872 7,915
Allowances for doubtful accounts 3,961 1,991
Taxes 108,467 81,684
Other 86,171 58,644
--------------------------------
1,183,664 712,882
From Discontinued operations - (5,947)
--------------------------------
1,183,664 706,935
--------------------------------
5
5 Financial income (expenses), net
Nine-month period ended
September 30,
-------------------------------
(all amounts in thousands of U.S. dollars) 2007 2006
-------------------------------
(Unaudited)
Interest expense (205,493) (42,292)
Interest income 65,065 43,818
-------------------------------
Interest net (140,428) 1,526
Net foreign exchange transaction results and
changes in fair value of derivative instruments (3,626) 9,304
Other (7,196) 88
-------------------------------
Other financial results (10,822) 9,392
-------------------------------
Net financial results (151,250) 10,918
From Discontinued operations - (572)
-------------------------------
(151,250) 10,346
-------------------------------
Each comparative item included in this note differs from its corresponding line
in the income statement because it includes discontinued operations' results.
Tenaris has identified certain embedded derivatives and in accordance with IAS
39 ("Financial Instruments: Recognition and Measurement") accounted them
separately from their host contracts. This result has been recognized under "Net
foreign exchange transaction results and changes in fair value of derivative
instruments".
6 Property, plant and equipment and Intangible assets, net
(all amounts in thousands of U.S. dollars) Net Property, Net
Plant and Intangible
Equipment Assets
--------------- --------------
(Unaudited) (Unaudited)
Nine-month period ended September 30, 2007
Opening net book amount 2,939,241 2,844,498
Currency translation differences 105,782 84,024
Additions 317,813 16,755
Increase due to business combinations 152,540 2,135,195
Disposals (6,741) (182)
Transfers (1,406) 1,406
Reclassifications (19,396) (11,069)
Depreciation / Amortization charge (201,670) (169,977)
--------------- --------------
At September 30, 2007 3,286,163 4,900,650
--------------- --------------
7 Dividends per share
On June 6, 2007, the Company's shareholders approved an annual dividend in the
amount of $0.30 per share of common stock currently issued and outstanding,
which in the aggregate amounted to approximately $354 million. The cash dividend
was paid on June 21, 2007.
On June 7, 2006, the Company's shareholders approved an annual dividend in the
amount of $0.30 per share of common stock currently issued and outstanding. The
amount approved included the interim dividend previously paid on November 16,
2005, in the amount of $0.127 per share. Tenaris paid the balance of the annual
dividend amounting to $0.173 per share ($0.346 per ADS) on June 16, 2006. In the
aggregate, the interim dividend paid in November 2005 and the balance paid in
June 2006 amounted to approximately $354 million.
6
8 Contingencies, commitments and restrictions to the distribution
of profits
This note should be read in conjunction with Note 26 to the Company's audited
Consolidated Financial Statements for the year ended December 31, 2006.
Significant changes or events since the date of such financial statements are
the following:
Asbestos-related Litigation
In addition to the previously known 12 civil proceedings for work-related
injuries arising from the use of asbestos in its manufacturing processes during
the period from 1960 to 1980, 40 asbestos-related out-of-court claims and 1
civil party claim, 2 new asbestos-related out-of-court claims have been notified
to Tenaris's subsidiary Dalmine during third quarter 2007; while 1 claim was
adjudicated, dismissed or settled. Accordingly, as of September 30, 2007, the
total asbestos-related claims pending against Dalmine are 54 (of which, 3 are
covered by insurance). Aggregate settlement costs to date are Euro 5.1 million.
Dalmine estimates that its potential liability in connection with the claims
above that are not yet settled is approximately Euro 17.7 million ($25.1
million) of which Euro 8.7 million ($12.3 million) relate to the claims and
proceedings notified to Dalmine during 2007.
Accruals for Dalmine's potential liability are based on the average of the
amounts paid by Dalmine for asbestos-related claims plus an additional amount
related to some reimbursements requested by the social security authority. The
maximum potential liability is not determinable as in some cases the requests
for damages do not specify amounts, and are instead to be determined by the
court. The timing of payment of the amounts claimed is not presently
determinable.
Maverick litigation
On December 11, 2006, The Bank of New York ("BNY"), as trustee for the holders
of Tenaris's subsidiary Maverick Tube Corporation ("Maverick") 2004 4%
Convertible Senior Subordinated Notes due 2033 issued pursuant to an Indenture
between Maverick and BNY ("Noteholders"), filed a complaint against Maverick and
Tenaris in the United States District Court for the Southern District of New
York. The complaint alleges that Tenaris's acquisition of Maverick triggered the
"Public Acquirer Change of Control" provision of Indenture, asserting breach of
contract claim against Maverick for refusing to deliver the consideration
specified in the Public Acquirer Change of Control provision of the Indenture to
Noteholders who entered their notes for such consideration. This complaint seeks
a declaratory judgement that Tenaris's acquisition of Maverick was a Public
Acquirer Change of Control under the Indenture, and asserts claims for tortuous
interference with contract and unjust enrichment against Tenaris. Defendants
filed a motion to dismiss the complaint, or in the alternative, for summary
judgment on March 13, 2007. Plaintiff filed a motion for partial summary
judgment on the same date. Briefing on the motions has been completed.
Tenaris believes that these claims are without merit. Accordingly, no provision
was recorded in these financial statements. Were plaintiff to prevail, Tenaris
estimates that the recovery would be approximately $50 million.
European Commission Fine
On January 25, 2007, the Court of Justice of the European Commission confirmed
the December 8, 1998 decision by the European Commission to fine eight
international steel pipe manufacturers, including Dalmine, for violation of
European competition laws. Pursuant to the Court's decision, Dalmine is required
to pay a fine of Euro 10.1 million plus interest ($13.3 million plus interest).
Since the infringements for which the fine was imposed took place prior to the
acquisition of Dalmine by Tenaris in 1996, Dalmine's former owner, has
reimbursed Dalmine for 84.1% of the fine. The remaining 15.9% of the fine has
been paid out in 2007 of the provision that Dalmine established in 1999 for such
proceeding.
7
8 Contingencies, commitments and restrictions to the distribution of
profits (Cont'd)
Customer Claim
A lawsuit was filed on September 6, 2007 against Tenaris's subsidiary Maverick
Tube Corporation ("Maverick"), alleging negligence, gross negligence and
intentional acts characterized as fraudulent inducement concerning allegedly
defective well casing and the complete loss of one natural gas production well.
Plaintiff seeks compensatory and punitive damages of $25 million in its original
petition. On September 10, 2007, this lawsuit was tendered to Maverick's insurer
and on September 26, 2007, Maverick received the insurer's agreement to provide
a defense. No provision was recorded on these financial statements.
Employee retention and long term incentive program
On January 1, 2007 Tenaris adopted an employee retention and long term incentive
program. Pursuant to this program, certain senior executives will be granted a
number of units equivalent in value to the equity book value per share
(excluding minority interest). The units will be vested over a period of four
years and Tenaris will redeem vested units following a period of ten years from
the grant date, or when the employee ceases employment, at the equity book value
per share at the time of payment. Beneficiaries will also receive a cash amount
per unit equivalent to the dividend paid per share whenever the Company pays a
cash dividend to its shareholders.
Compensation under this program is not expected to exceed 35% in average of the
total annual compensation of the beneficiaries.
The total value of the units granted to date under the program, considering the
number of units and the book value per share as of September 30, 2007, is $7.6
million. As of September 30, 2007, Tenaris has recorded a total liability of
$14.3 million taking into account expected industry growth and discount rate.
Commitments
Set forth is a description of Tenaris's main outstanding commitments:
o A Tenaris company is a party to a ten year raw material purchase
contract with QIT, under which it committed to purchase steel bars,
with deliveries starting in July 2007. The estimated aggregate amount
of the contract at current prices is approximately $299 million.
o A Tenaris company is a party to a five year contract with Nucor
Corporation, under which it committed to purchase from Nucor steel
coils, with deliveries starting in January 2007. Prices are adjusted
quarterly in accordance with market conditions and the estimated
aggregate amount of the contract at current prices is approximately
$1,053 million.
o A Tenaris company is a party to a steel supply agreement with IPSCO,
under which it is committed to purchase steel until 2011. Prices are
adjusted monthly or quarterly and the estimated aggregate amount of
the contract at current prices is approximately $123 million. Each
party may terminate this agreement at any time upon a one-year notice.
o A Tenaris company is a party to transportation capacity agreements
with Transportadora de Gas del Norte S.A. for capacity of 1,000,000
cubic meters per day until 2017. As of September 30, 2007, the
outstanding value of this commitment was approximately $55.4 million.
The Tenaris company also expects to obtain additional gas
transportation capacity of 315,000 cubic meters per day until 2027.
This commitment is subject to the enlargement of certain pipelines in
Argentina.
o A Tenaris company is party to a contract with Siderar for the supply
of steam generated at the power generation facility owned by Tenaris
in San Nicolas. Under this contract, the Tenaris company is required
to provide 250 tn/hour of steam, and Siderar has the obligation to
take or pay this volume. This outsourcing contract is due to terminate
in 2018.
8
8 Contingencies, commitments and restrictions to the distribution of
profits (Cont'd)
Restrictions to the distribution of profits and payment of dividends
As of September 30, 2007, shareholders' equity as defined under Luxembourg law
and regulations consisted of the following:
(all amounts in thousands of U.S. dollars) (unaudited)
Share capital 1,180,537
Legal reserve 118,054
Share premium 609,733
Retained earnings including net income for the nine-month
period ended September 30, 2007 2,095,862
---------------
Total shareholders equity in accordance with Luxembourg law 4,004,186
---------------
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 September
30, 2007, 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 and providing the compliance of the covenant related to restricted
payments stated in Note 9.
At September 30, 2007, retained earnings under Luxembourg law totalled $2,095.9
million, as detailed below.
(all amounts in thousands of U.S. dollars) (unaudited)
Retained earnings at December 31, 2006 under Luxembourg law 1,527,096
Dividends received 897,110
Other income and expenses for the nine-month period
ended September 30, 2007 25,817
Dividends paid (354,161)
---------------
Retained earnings at September 30, 2007 under Luxembourg law 2,095,862
---------------
9 Business acquisitions, incorporation of subsidiaries and other
significant events
(a) Acquisition of Hydril Company
On May 7, 2007, Tenaris paid $2.0 billion to acquire Hydril, a North American
manufacturer of premium connections and pressure control products for the oil
and gas industry. To finance the acquisition, Tenaris entered into syndicated
loans in the amount of $2.0 billion, of which $0.5 billion were used to
refinance an existing loan in the Company. The balance of the acquisition cost
was paid out of cash on hand. Of the loan amount, $1.7 billion was allocated to
the Company and the balance to Hydril.
The main covenants on these loan agreements are limitations on liens and
encumbrances, restrictions on investments and capital expenditures, limitations
on the sale of certain assets and compliance with financial ratios (e.g.,
leverage ratio and interest coverage ratio in Hydril's syndicated loan
agreement, and leverage ratio and debt service coverage ratio in the Company's
syndicated loan agreement). In addition, the Company's syndicated loan agreement
is secured with a pledge of 100% of Hydril's shares; immediately upon each
payment or prepayment under this agreement, the number of shares subject to the
pledge shall be reduced proportionally, and the pledge will be completely
released immediately after the aggregate outstanding principal amount of the
loan is less than or equal to $600 million. The Company is allowed to make
payments such as dividends, repurchase or redemption of shares up to the greater
of $475 million or 25% of the consolidated operating profit for the previous
fiscal year; once the outstanding amount of this facility does not exceed $1,000
million, no such restrictions will apply.
9
9 Business acquisitions, incorporation of subsidiaries and other
significant events (Cont'd)
(a) Acquisition of Hydril Company (Cont'd)
On October 29, 2007, Tenaris gave notice to the administrative agent under its
syndicated loan agreement entered into to finance the acquisition of Hydril, of
its commitment to prepay, on November 8, 2007, loans there under in a principal
amount of $0.7 billion plus accrued interest thereon to such date. Immediately
upon such prepayment, approximately 64% of Hydril shares shall be released from
the pledge granted to secure the obligations under the loan agreement, and all
dividend restrictions under the syndicated loan agreement will cease to apply.
Tenaris began consolidating Hydril's balance sheet and results of operations
since May, 2007.
Pro forma data including acquisitions for the nine-month period ended
September 30, 2007
Had the Hydril transaction been consummated on January 1, 2007, then Tenaris's
unaudited pro forma net sales and net income for the nine-month period ended
September 30, 2007 would have been approximately $7.7 billion and $1.5 billion,
respectively. These pro forma results were prepared based on public information
and unaudited accounting records maintained under US GAAP prior to such
acquisition and adjusted by depreciation and amortization of tangible and
intangible assets and interest expense of the borrowing incurred for the
acquisition as described in Note 9(a) considering the repayment stated in Note
9(b). Carrying amounts of assets, liabilities and contingent liabilities in
Hydril's books, determined in accordance with IFRS immediately before the
combination are not disclosed separately, as Hydril did not report financial
information under IFRS.
(b) Acquisition of Maverick
On October 5, 2006, Tenaris completed its acquisition of Maverick, pursuant to
which, Maverick merged with and into a wholly owned subsidiary of Tenaris. On
that date, Tenaris paid $65 per share in cash for each issued and outstanding
share of Maverick's common stock. The value of the transaction at the
acquisition date was $3,160 million, including Maverick's financial debt.
Tenaris began consolidating Maverick's balance sheet and results of operations
in the fourth quarter of 2006.
A Tenaris syndicated loan facility in an aggregate principal amount of $500
million, which had been incurred in connection with the Maverick acquisition,
was prepaid in its entirety in May 2007, and upon such prepayment the previous
pledge on Maverick's shares was released. During this quarter, Tenaris's
subsidiary Algoma Tubes syndicated loan facility in an aggregate amount of $100
million was prepaid in its entirety.
(c) Minority Interest
During the nine-month period ended September 30, 2007, additional shares of
Silcotub and Dalmine were acquired from minority shareholders for an aggregate
purchase price of approximately $3.3 million.
Effective July 12, 2007 Silcotub was delisted from the Romanian Stock Exchange.
10
9 Business acquisitions, incorporation of subsidiaries and other
significant events (Cont'd)
The assets and liabilities arising from the acquisitions are as a follows:
Nine-month period ended September 30,
---------------------- ---------------------
2007 2006
---------------------- ---------------------
Other assets and liabilities (net) (348,876) 5,052
Property, plant and equipment 152,540 22,892
Customer relationships / Backlog 593,800 -
Trade names 149,100 -
Proprietary technology 333,400 -
Goodwill 1,042,015 1,402
---------------------- ---------------------
Net assets acquired 1,921,979 29,346
Minority interest 5,248 10,131
---------------------- ---------------------
Sub-total 1,927,227 39,477
Cash-acquired 117,326 -
---------------------- ---------------------
Purchase consideration 2,044,553 39,477
---------------------- ---------------------
Businesses acquired during the nine-month period ended September 30, 2007
contributed revenues of $266.9 million and an operating income of $34.9 million.
Businesses acquired during the nine-month period ended September 30, 2006 did
not materially contribute to the Tenaris's revenue and operating income.
10 Non current assets held for sale and discontinued operations
(a) Subsequent event: Sale of 25% interest in Dalmine Energie S.p.A. ("Dalmine
Energie")
On November 5, 2007, Tenaris completed the sale of its remaining 25% interest in
Dalmine Energie to E.ON Sales and Trading GmbH, an indirect subsidiary of E.ON
AG (E.ON), for a purchase price of approximately $28.0 million. As a result,
Tenaris has classified its 25% participation in Dalmine Energie as an asset held
for sale in accordance with IFRS 5 - "Non-current Assets Held for Sale and
Discontinued Operations."
(b) Sale of a 75% interest in Dalmine Energie
On December 1, 2006, Tenaris completed for $58.9 million the sale of a 75%
participation of Dalmine Energie, its Italian supply business, to E.ON.
This note should be read in conjunction with Note 30 to the Company's audited
Consolidated Financial Statements for the year ended December 31, 2006.
Analysis of the result of discontinued operations:
September 30, 2006
----------------------
Net sales 401,073
Cost of sales (388,117)
----------------------
Gross profit 12,956
Selling, general and administrative expenses (5,947)
Other operating income (expense), net 2,519
----------------------
Operating income 9,528
Interest income 515
Interest expense (734)
Other financial results 791
----------------------
Income before equity in earnings of associated companies
and income tax 10,100
Equity in earnings of associated companies -
----------------------
Income before income tax 10,100
Income tax (3,411)
----------------------
Income for the period from discontinued operations 6,689
----------------------
10 Non current assets held for sale and discontinued operations (Cont'd)
Cash and cash equivalents from discontinued operations increased by $3.0 million
in the nine-month period ended September 30, 2006.
11
11 Related party disclosures
The Company is controlled by San Faustin N.V., a Netherlands Antilles
corporation, which owns 60.4% of the Company's outstanding shares through its
wholly-owned subsidiary I.I.I. Industrial Investments Inc., a Cayman Islands
corporation. Tenaris's directors and executive officers as a group own 0.2% of
the Company's shares, while the remaining 39.4% is publicly traded. The ultimate
controlling entity of the Company is Rocca & Partners.
At September 30, 2007, the closing price of Ternium ADS as quoted on the New
York Stock Exchange was $31.40 per ADS, giving Tenaris's ownership stake a
market value of approximately $721 million. At September 30, 2007, the carrying
value of Tenaris's ownership stake in Ternium was approximately $468 million.
Transactions and balances disclosed as with "Associated" companies 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 with
related parties which are not Associated and which are not consolidated are
disclosed as "Other".
The transactions and balances with related parties are shown below:
(all amounts in thousands of U.S. dollars)
Nine-month period ended September 30, 2007
Associated (1) Other Total
--------------------------------------------------
(i) Transactions
(a) Sales of goods and services
Sales of goods 74,494 30,731 105,225
Sales of services 16,314 4,073 20,387
--------------------------------------------------
90,808 34,804 125,612
--------------------------------------------------
(b) Purchases of goods and services
Purchases of goods 188,436 14,627 203,063
Purchases of services 69,608 57,821 127,429
--------------------------------------------------
258,044 72,448 330,492
--------------------------------------------------
Nine-month period ended September 30, 2006
Associated (2) Other Total
--------------------------------------------------
(i) Transactions
(a) Sales of goods and services
Sales of goods 96,672 44,332 141,004
Sales of services 13,586 2,661 16,247
--------------------------------------------------
110,258 46,993 157,251
--------------------------------------------------
(b) Purchases of goods and services
Purchases of goods 66,658 16,903 83,561
Purchases of services 8,368 58,254 66,622
--------------------------------------------------
75,026 75,157 150,183
--------------------------------------------------
12
11 Related party disclosures (Cont'd)
At September 30, 2007
Associated (1) Other Total
--------------------------------------------------
(ii) Period-end balances
(a) Related to sales / purchases of goods /
services
Receivables from related parties 57,764 7,903 65,667
Payables to related parties (65,942) (10,047) (75,989)
--------------------------------------------------
(8,178) (2,144) (10,322)
--------------------------------------------------
(b) Other balances - - -
(c) Financial debt
Borrowings (4) (28,057) - (28,057)
At December 31, 2006
Associated (3) Other Total
--------------------------------------------------
(ii) Period-end balances
(a) Related to sales / purchases of goods /
services
Receivables from related parties 25,400 14,429 39,829
Payables to related parties (37,920) (13,388) (51,308)
--------------------------------------------------
(12,520) 1,041 (11,479)
--------------------------------------------------
(b) Other balances 2,079 - 2,079
(c) Financial debt
Borrowings (5) (60,101) - (60,101)
(1) Includes Ternium S.A. and its subsidiaries ("Ternium"), Condusid C.A.
("Condusid"), Finma S.A.I.F ("Finma"), Lomond Holdings B.V. group ("Lomond"),
Dalmine Energie S.p.A. ("Dalmine Energie"), Socotherm Brasil S.A. ("Socotherm"),
Hydril Jindal International Private Ltd. and TMK - Hydril JV.
(2) Includes Ternium and Condusid. It also includes Finma since September 1,
2006.
(3) Includes Ternium, Condusid, Finma, Lomond and Dalmine Energie.
(4) Includes convertible loan from Sidor to Materiales Siderurgicos S.A.
("Matesi") of $26.0 million at September 30, 2007.
(5) Includes convertible loan from Sidor to Matesi of $58.4 million at December
31, 2006.
Ricardo Soler
Chief Financial Officer
13