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 March 6, 2006
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 x Form 40-F
--- ---
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12G3-2(b) under the Securities Exchange Act of 1934.
Yes No x
--- ---
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-____.
The attached material is being furnished to the Securities and Exchange
Commission pursuant to Rule 13a-16 and Form 6-K under the Securities Exchange
Act of 1934, as amended. This report contains Tenaris' consolidated condensed
interim financial statements as of September 30, 2005.
TENARIS S.A.
CONSOLIDATED
FINANCIAL STATEMENTS
For the years ended December 31, 2005, 2004 and 2003
46a, Avenue John F. Kennedy - 2nd Floor.
L - 1855 Luxembourg
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
Year ended December 31,
--------------------------------------------------
(all amounts in thousands of U.S. dollars, unless Notes 2005 2004 2003
otherwise stated)
Net sales 1 6,736,197 4,136,063 3,179,652
Cost of sales 2 (3,942,758) (2,776,936) (2,207,827)
=================================================
Gross profit 2,793,439 1,359,127 971,825
Selling, general and administrative expense 3 (842,574) (672,449) (566,835)
Other operating income 5(i) 11,986 152,591 8,859
Other operating expense 5(ii) (14,405) (25,751) (125,659)
=================================================
Operating income 1,948,446 813,518 288,190
Financial income (expense), net 6 (109,738) 5,802 (29,420)
=================================================
Income before equity in earnings of associated
companies and income tax 1,838,708 819,320 258,770
Equity in earnings of associated companies 7 117,377 206,037 27,585
=================================================
Income before income tax 1,956,085 1,025,357 286,355
Income tax 8 (568,753) (220,376) (63,918)
=================================================
Income for the year (1) 1,387,332 804,981 222,437
=================================================
Income for the year attributable to (1):
Equity holders of the Company 1,277,547 784,703 210,308
Minority interest 109,785 20,278 12,129
=================================================
1,387,332 804,981 222,437
=================================================
Earnings per share attributable to equity holders of the
Company (1)
Weighted average number of ordinary shares outstanding
(in thousands) 9 1,180,537 1,180,507 1,167,230
Earnings per share (U.S. dollars per share) 9 1.08 0.66 0.18
Earnings per ADS (U.S. dollars per ADS) 9 10.82 6.65 1.80
(1) Prior to December 31, 2004 minority interest was shown in the income
statement before net income, as required by International Financial
Reporting Standards ("IFRS") in effect. For years beginning on or after
January 1, 2005, International Accounting Standards ("IAS") 1 (revised)
requires that income for the year as shown on the income statement not
exclude minority interest. Earnings per share, however, continue to be
calculated on the basis of net income attributable solely to the equity
holders of the Company (see Section IV (a)).
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(all amounts in thousands of U.S. dollars)
At December 31, At December 31,
2005 2004
----------------------- ------------------------
Notes
ASSETS
Non-current assets
Property, plant and equipment, net 10 2,230,038 2,164,601
Intangible assets, net 11 159,099 49,211
Investments in associated companies 12 257,234 99,451
Other investments 13 25,647 24,395
Deferred tax assets 21 194,874 161,173
Receivables 14 65,852 2,932,744 151,365 2,650,196
------------ -----------
Current assets
Inventories 15 1,376,113 1,269,470
Receivables and prepayments 16 143,282 279,450
Current tax assets 17 102,455 94,996
Trade receivables 18 1,324,171 936,931
Other investments 19(i) 119,907 119,666
Cash and cash equivalents 19(ii) 707,356 3,773,284 311,579 3,012,092
----------------------- ----------------------
Total assets 6,706,028 5,662,288
=========== ===========
EQUITY AND LIABILITIES (Section IV. (a))
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
Other distributable reserve - 82
Currency translation adjustments (59,743) (30,020)
Other reserves 2,718 -
Retained earnings 1,656,503 3,507,802 617,538 2,495,924
------------ ------------
Minority interest 268,071 165,271
----------- -----------
Total equity 3,775,873 2,661,195
----------- -----------
LIABILITIES
Non-current liabilities
Borrowings 20 678,112 420,751
Deferred tax liabilities 21 353,395 371,975
Other liabilities 22(i) 154,378 172,442
Provisions 23(ii) 43,964 31,776
Trade payables 1,205 1,231,054 4,303 1,001,247
------------ ------------
Current liabilities
Borrowings 20 332,180 838,591
Current tax liabilities 452,534 222,735
Other liabilities 22(ii) 138,875 194,945
Provisions 24(ii) 36,945 42,636
Customer advances 113,243 108,847
Trade payables 625,324 1,699,101 592,092 1,999,846
----------------------- -----------------------
Total liabilities 2,930,155 3,001,093
----------- -----------
Total equity and liabilities 6,706,028 5,662,288
=========== ===========
Contingencies, commitments and restrictions to the distribution of profits are
disclosed in Note 26. The accompanying notes are an integral part of these
consolidated financial statements.
-2-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(all amounts in thousands of U.S. dollars)
-----------------------------------------------------------------------------------------------------
Attributable to equity holders of the Company
-----------------------------------------------------------------------
Minority
Interest
Other Currency Retained (see
Share Legal Share Distributable translation Other Earnings Section
Capital Reserves Premium Reserve (*) adjustment Reserves (*) IV.(a)) Total
---------------------------------------------------------------------------------------------------
Balance at January 1, 2005 1,180,537 118,054 609,733 82 (30,020) - 617,538 165,271 2,661,195
Effect of adopting IFRS 3
(see Section IV.) - - - - - - 110,775 - 110,775
---------------------------------------------------------------------------------------------------
Adjusted balance at
January 1, 2005 1,180,537 118,054 609,733 82 (30,020) - 728,313 165,271 2,771,970
Currency translation
differences - - - - (29,723) - - 7,180 (22,543)
Increase in equity reserves in
Ternium (see Note 28) 2,718 2,718
Acquisition of minority
interest - - - - - - - 153 153
Dividends paid in cash - - - (82) - - (349,357) (14,318) (363,757)
Income for the year - - - - - - 1,277,547 109,785 1,387,332
---------------------------------------------------------------------------------------------------
Balance at December 31, 2005 1,180,537 118,054 609,733 - (59,743) 2,718 1,656,503 268,071 3,775,873
---------------------------------------------------------------------------------------------------
(*) The Distributable Reserve and Retained Earnings calculated according to
Luxembourg Law are disclosed in Note 26 (v).
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONT'D.)
(all amounts in thousands of U.S. dollars)
-----------------------------------------------------------------------------------------------
Attributable to equity holders of the Company
----------------------------------------------------------------------- Minority
Other Currency Interest
Share Legal Share Distributable translation Retained (see Section
Capital Reserves Premium Reserve adjustments Earnings IV. (a)) Total
---------------------------------------------------------------------------------------------------
Balance at January 1, 2004 1,180,288 118,029 609,269 96,555 (34,194) (128,667) 119,984 1,961,264
Currency translation
differences - - - - 4,174 - 9,478 13,652
Capital Increase and
acquisition of
minority interest 249 25 464 82 - - 20,457 21,277
Dividends paid in cash - - - (96,555) - (38,498) (4,926) (139,979)
Income for the year - - - - - 784,703 20,278 804,981
---------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,180,537 118,054 609,733 82 (30,020) 617,538 165,271 2,661,195
---------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Attributable to equity holders of the Company
----------------------------------------------------------------------- Minority
Other Currency Interest
Share Legal Share Distributable translation Retained (see Section
Capital Reserves Premium Reserve adjustments Earnings IV. (a)) Total
---------------------------------------------------------------------------------------------------
Balance at January 1, 2003 1,160,701 116,070 587,493 206,744 (34,503) (342,451) 186,783 1,880,837
Currency translation
differences - - - - 309 - 16,738 17,047
Capital Increase, exchange
transaction and acquisition
of minority interest 19,587 1,959 21,776 4,813 - 3,476 (81,602) (29,991)
Dividends paid - - - (115,002) - - (14,064) (129,066)
Income for the year - - - - - 210,308 12,129 222,437
---------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,180,288 118,029 609,269 96,555 (34,194) (128,667) 119,984 1,961,264
---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENTS
Year ended December 31,
-----------------------------------
(all amounts in thousands of U.S. dollars) 2005 2004 2003
-----------------------------------
Cash flows from operating activities
Income for the year 1,387,332 804,981 222,437
Adjustments for:
Depreciation and amortization 10&11 214,227 208,119 199,799
Income tax accruals less payments 30(ii) 149,487 44,659 (138,570)
Equity in earnings of associated companies 7 (117,377) (206,037) (27,585)
Interest accruals less payments, net 30(iii) 1,919 16,973 (3,032)
26
Power plant impairment (iv)(d) - 11,705 -
Changes in provisions 23&24 6,497 11,455 (13)
Result from disposition of investments in associated companies - - (1,018)
Proceeds from Fintecna arbitration award net of BHP settlement 26(i) 66,594 (126,126) 114,182
Changes in working capital (1) 30(i) (433,939) (621,187) (107,156)
Other, including currency translation adjustment 20,583 (46,254) 16,592
-----------------------------------
Net cash provided by operating activities 1,295,323 98,288 275,636
-----------------------------------
Cash flows from investing activities
Capital expenditures 10&11 (284,474) (183,312) (162,624)
Acquisitions of subsidiaries 28(a) (48,292) (97,595) (65,283)
Convertible loan to associated companies 28(d) (40,358) - (31,128)
Proceeds from disposal of property, plant and equipment and intangible
assets 9,995 12,054 5,965
Proceeds from sales of investments in associated companies - - 1,124
Dividends and distributions received from associated companies 12 59,127 48,598 -
Changes in restricted bank deposits 11,452 (13,500) -
Investments in short term securities (119,907) - -
Reimbursement from trust funds 119,666 20,359 -
Acquisitions of minority interest - - (299)
-----------------------------------
Net cash used in investing activities (292,791) (213,396) (252,245)
-----------------------------------
Cash flows from financing activities
Dividends paid (349,439) (135,053) (115,002)
Dividends paid to minority interest in subsidiaries (14,318) (31) (14,064)
Proceeds from borrowings 1,222,861 632,095 552,446
Repayments of borrowings (1,463,233) (326,453) (506,717)
-----------------------------------
Net cash (used in) provided by financing activities (604,129) 170,558 (83,337)
-----------------------------------
Increase (decrease) in cash and cash equivalents 398,403 55,450 (59,946)
Movement in cash and cash equivalents
At beginning of the year 293,824 238,030 294,887
Effect of exchange rate changes (11,636) 344 3,089
Increase in cash and cash equivalents 398,403 55,450 (59,946)
-----------------------------------
At December 31, 680,591 293,824 238,030
-----------------------------------
Non-cash financing activities:
Fair value adjustment of minority interest acquired - - (925)
Common stock issued in acquisition of minority interest - 820 51,611
Conversion of debt to equity in subsidiaries - 13,072 -
(1) In 2004, includes USD55.1 million corresponding to the first installment
paid in connection with the final settlement of BHP claim
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
I. GENERAL INFORMATION V. OTHER NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
1 Segment information
II. ACCOUNTING POLICIES ("AP") 2 Cost of sales
A Basis of presentation 3 Selling, general and administrative expenses
B Group accounting 4 Labor costs (included in Cost of sales and
Selling, general and administrative expenses)
C Segment information 5 Other operating items
D Foreign currency translation 6 Financial income (expenses), net
E Property, plant and equipment 7 Equity in earnings of associated companies
F Impairment of non financial assets 8 Income tax
G Intangible assets 9 Earnings and dividends per share
H Other investments 10 Property, plant and equipment, net
I Inventories 11 Intangible assets, net
J Trade receivables 12 Investments in associated companies
K Cash and cash equivalents 13 Other investments non current
L Shareholders' Equity 14 Receivables non current
M Borrowings 15 Inventories
N Income taxes - Current and Deferred 16 Receivables and prepayments
O Employee - related liabilities 17 Current tax assets
P Employees' statutory profit sharing 18 Trade receivables
Q Provisions and other liabilities 19 Cash and cash equivalents, and Other investments
R Revenue recognition 20 Borrowings
S Cost of sales and sales expenses 21 Deferred income tax
T Earnings per share 22 Other liabilities
U Derivative financial instruments 23 Non-current allowances and provisions
24 Current allowances and provisions
III. FINANCIAL RISK MANAGEMENT 25 Derivative financial instruments
26 Contingencies, commitments and restrictions on the
distribution of profits
IV. IMPACT OF NEW ACCOUNTING 27 Ordinary shares and share premium
PRONOUNCEMENTS
28 Business and other acquisitions
29 Related party transactions
30 Cash flow disclosures
31 Principal subsidiaries
-6-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
I. GENERAL INFORMATION
Tenaris S.A. (the "Company" or "Tenaris"), 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. A list of the Company's investment holdings is included in Note
31.
Tenaris shares are listed on the New York, Buenos Aires, Milan and Mexico City
Stock Exchanges.
These consolidated financial statements were approved for issue by the Tenaris
Board of Directors on March 1, 2006.
II. ACCOUNTING POLICIES
A Basis of presentation
The Consolidated Financial Statements of Tenaris and its subsidiaries have been
prepared in accordance with International Financial Reporting Standards
("IFRS"). The consolidated financial statements are presented in thousands of
U.S. dollars ("$").
At December 31, 2005, 2004 and 2003, the financial statements of Tenaris and its
subsidiaries have been consolidated.
Certain comparative amounts have been reclassified to conform to changes in
presentation in the current year.
The preparation of consolidated financial statements in conformity with IFRS
requires management to make certain accounting estimates and assumptions that
might affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the balance sheet dates, and the
reported amounts of revenues and expenses during the reporting years. Actual
results may differ from these estimates.
B Group accounting
(1) Subsidiary companies
Subsidiary companies are entities which are controlled by Tenaris as a result of
its ownership of more than 50% of the voting rights or its ability to otherwise
govern an entity's financial and operating policies. Subsidiaries are
consolidated from the date on which control is exercised by the Company and are
no longer consolidated from the date that the Company ceases to have control.
The Company has applied IFRS 3 for all business combinations after March 31,
2004.
The purchase method of accounting is used to account for the acquisition of
subsidiaries by the Company. The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of acquisition, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date. The excess of the cost of acquisition over
the fair value of the Company's share of the identifiable net assets acquired is
recorded as goodwill. If the cost of acquisition is less than the fair value of
the net assets of the subsidiary acquired, the difference is recognized directly
in the income statement.
Material intercompany transactions and balances between Tenaris subsidiaries
have been eliminated in consolidation. However, the fact that the functional
currency of some subsidiaries is their respective local currency, generates some
financial gains (losses) arising from intercompany transactions, that are
included in the consolidated income statement under Financial income (expense),
net.
See Note 31 for the list of the consolidated subsidiaries.
-7-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
(2) Associated companies
Investments in associated companies are accounted for by the equity method of
accounting and initially recognized at cost. Associated companies are companies
in which Tenaris owns between 20% and 50% of the voting rights or over which
Tenaris has significant influence, but does not have control. Unrealized results
on transactions between Tenaris and its associated companies are eliminated to
the extent of Tenaris' interest in the associated companies. Unrealized losses
are also eliminated but considered an impairment indicator of the asset
transferred. Accounting policies of associated companies have been changed where
necessary to ensure consistency with the policies adopted by the Company. The
Company's pro-rata share of earnings in associated companies is recorded in
Equity in earnings of profit of associated companies. The Company's pro-rata
share of changes in other reserves is recognized in reserves in the Statement of
Changes in Equity.
The Company's investment in Ternium S.A. ("Ternium") has been accounted for
under the equity method, as Tenaris has significant influence as defined in IAS
28, Investments in Associates. At December 31, 2005, Tenaris held 15.0% of
Ternium's common stock. The Company's investment in Ternium is carried at
historical cost plus proportional ownership of Ternium's earnings and other
shareholders' equity accounts. Because the exchange of its holdings in Amazonia
and Ylopa for shares in Ternium was considered to be a transaction between
companies under common control of San Faustin N.V., Tenaris recorded its initial
ownership interest in Ternium at $229.7 million, the carrying value of the
investments exchanged. This value is $22.6 million less than Tenaris'
proportional ownership of Ternium's shareholders' equity at the transaction
date. As a result of this treatment, Tenaris' investment in Ternium will not
reflect its proportional ownership of Ternium's net equity position. Ternium
carried out an initial public offering of its shares on February 1, 2006,
listing its shares on the New York Stock Exchange.
See Note 12 for a list of principal associated companies.
C Segment information
The Company is organized around four major business segments: Seamless, Welded
and Other Metallic Products, Energy and Others. A business segment is a group of
assets and operations that are subject to risks and returns that are different
from those of other business segments.
The secondary reporting format is based on geographical segments. For
geographical purposes, Tenaris groups its operations into five segments: South
America, Europe, North America, Middle East and Africa, and Far East and
Oceania. Allocation of net sales is based on the geographic location of the
Company's customers, while allocation of assets and capital expenditures and
associated depreciation and amortization are based on the geographic location of
the assets.
D Foreign Currency Translation
(1) Functional currency
IAS 21(revised) defines the functional currency as the currency of the primary
economic environment in which an entity operates.
The functional currency of Tenaris S.A. is the U.S. dollar. The U.S. dollar is
the currency that best reflects the economic substance of the underlying events
and circumstances relevant to the Company's global operations. Generally, the
functional currency of Tenaris's subsidiaries is the respective local currency.
The Company's Argentine operations, however, which consist of Siderca S.A.I.C.
("Siderca") and its Argentine subsidiaries, have determined their functional
currency to be the U.S. dollar, based on the following considerations:
o Sales are mainly negotiated, denominated and settled in U.S. dollars.
If priced in a currency other than the U.S. dollar, the price
considers exposure to fluctuation in the rate of exchange rate versus
the U.S. dollar;
o Prices of critical raw materials and inputs are priced and settled in
U.S. dollars;
o The exchange rate of the currency of Argentina has long-been affected
by recurring and severe economic crises;
o Net financial assets and liabilities are mainly received and
maintained in U.S. dollars.
-8-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
In addition to Siderca, the Company's commercial network subsidiaries and
intermediate holding subsidiaries also use the U.S. dollar as their functional
currency, reflecting the transaction environment and cash flow of these
operations.
(2) Translation of financial information in currencies other than the
functional currency
Results of operations for subsidiaries whose functional currencies are not the
U.S. dollar are translated into U.S. dollars at the average exchange rates for
each quarter of the year. Balance sheet positions are translated at the
end-of-year exchange rates. Translation differences are recognized in equity as
currency translation adjustments. In the case of a sale or other disposal of any
such subsidiary, any accumulated translation difference would be recognized in
income as a gain or loss from the sale.
(3) Transactions in currencies other than the functional currency
Transactions in currencies other than the functional currency are accounted for
at the exchange rates prevailing at the date of the transactions. Gains and
losses resulting from the settlement of such transactions, including
intercompany transactions, and from the translation of monetary assets and
liabilities denominated in currencies other than the functional currency, are
recorded as gains and losses from foreign exchange and included in Financial
income (expense), net in the income statement.
E Property, plant and equipment
Property, plant and equipment are recognized at historical acquisition or
construction cost less accumulated depreciation and impairment losses. Property,
Plant and Equipment acquired through acquisitions accounted for as business
combinations have been valued initially at the fair market value of the assets
acquired.
Major overhaul and rebuilding expenditures are capitalized as property, plant
and equipment only when the investment enhances the condition of assets beyond
its original condition.
Ordinary maintenance expenses on manufacturing properties are recorded as cost
of products sold in the year in which they are incurred.
Borrowing costs that are attributable to the acquisition or construction of
certain capital assets are capitalized as part of the cost of the asset, in
accordance with IAS 23, Borrowing Costs. Capital assets for which borrowing
costs may be capitalized are those that require a substantial period of time to
prepare for their intended use.
Depreciation is calculated using the straight-line method to amortize the cost
of each asset to its residual value over its estimated useful life, as follows:
Buildings and improvements 30-50 years
Plant and production equipment 10-20 years
Vehicles, furniture and fixtures, and other equipment 4-10 years
The residual values and useful lives of significant plant and equipment are
reviewed, and adjusted if appropriate, at each year-end date. Any charges from
such reviews are included in Cost of sales in the income statement.
Estimating useful lives for depreciation is particularly difficult as the
service lives of assets are also impacted by maintenance and changes in
technology, and the Company's ability to adapt technological innovation to the
existing asset base. As a result, management considers estimation of asset lived
as a critical accounting estimate. Management's reestimation of asset useful
lives did not materially affect depreciation expense for 2005.
Gains and losses on disposals are determined by comparing net proceeds with the
carrying amount of assets. These are included in Other operating income or Other
operating expense in the income statement.
-9-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
F Impairment of non financial assets
Events and circumstances may potentially affect the recoverability of the
carrying value of tangible and intangible assets, including investments in
associated and other companies. The carrying value of other non financial assets
is evaluated whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. An impairment loss is recognized for
the amount by which the assets's carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset's fair value less costs to sell
and value in use. Assets other than goodwill that have been impaired are
reviewed for possible reversal of the impairment at each reporting date.
Goodwill is tested for impairment on an annual basis. Assessment of the
recoverability of the carrying value of goodwill and other non financial assets
require a significant judgment. The Company evaluates goodwill allocated to the
operating units for impairment on an annual basis in accordance with IAS 36,
Impairment of Assets (see AP G).
Although management believes its estimates and projections are appropriate based
on currently available information, the actual operating performance of an asset
or group of assets which has been tested for impairment may be significantly
different from current expectations. In such an event, the carrying value of
goodwill, investments in associates and other non-financial assets may be
different from amounts currently recorded and materially affect asset values and
results of operations.
G Intangible assets
(1) Goodwill
Goodwill represents the excess of the acquisition cost over the fair value of
the Company's share of net assets acquired as part of business combinations. In
accordance with IFRS 3, beginning January 1, 2005, goodwill is considered to
have an indefinite life and is not amortized, but is subject to annual
impairment testing. In the event of impairment, impairment losses on goodwill
are not reversed. No impairment losses related to goodwill were recorded by the
Company during the three years covered by these financial statements. Goodwill
is included in `Intangible assets, net' on the balance sheet.
Gains and losses on the disposal of a business include the carrying amount of
any goodwill related to the business being sold. Goodwill is allocated to
cash-generating units for the purpose of impairment testing. The allocation is
made to those cash-generating units or groups of cash-generating units expected
to benefit from the business combination which generated the goodwill being
tested.
Negative goodwill represents an excess of the fair value of identifiable net
assets acquired in a business combination over the cost of the acquisition. IFRS
3 requires negative goodwill to be recognized immediately as a gain in the
income statement.
(2) Information systems projects
Generally, costs associated with developing or maintaining computer software
programs are recognized as an expense as incurred. However, costs directly
related to the development, acquisition and implementation of information
systems are recognized as intangible assets if it is probable they have economic
benefits exceeding beyond one year.
Information systems projects recognized as assets are amortized using the
straight-line method over their useful lives, not exceeding a period of 3 years.
Amortization charges are classified as Selling, general and administrative
expenses in the income statement.
(3) Licenses and patents
Expenditures on purchased patents, trademarks, technology transfer and licenses
are capitalized and amortized using the straight-line method over their
estimated useful lives.
-10-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
(4) Research and development
Research expenditures are recognized as expenses as incurred. Development costs
are recorded as cost of sales in the income statement as incurred because they
do not fulfill the criteria for capitalization. Research and development
expenditures for the years ended 2005, 2004 and 2003 totaled $34.7, $26.3 and
$21.9 million, respectively.
H Other Investments
Other investments consist primarily of investments in financial debt instruments
and equity investments where the Company holds less than 20% of the outstanding
equity and does not exert significant influence.
IAS 39 (revised), "Financial Instruments: Recognition and Measurement" ("IAS
39"), with effect as of January 1, 2005, requires that financial investments be
classified depending on the intent for the investment. IAS 39 (revised)
specifies four categories: financial assets held at "fair value through profit
or loss", "held-to-maturity investments", "loans and receivables" and
"available-for-sale". Investments that do not fulfill the specific requirements
of IAS 39 for financial assets at "fair value through profit or loss",
"held-to-maturity investments" or "loans and receivables" categories are
included in the residual "available-for-sale" category. All of Tenaris's
investments are classified as financial assets "at fair value through profit or
loss". As explained in section IV., the Company applied the transition
provisions of IAS 39 and designated as "financial assets carried at fair value
through profit or loss" the investments that were previously recognized as
"available-for-sale".
Purchases and sales of financial investments are recognized as of the trade
date, which is the date that Tenaris commits to purchase or sell the investment,
and which is not significantly different from the actual settlement date.
Subsequent to their acquisition, the change in fair value of financial
investments designated as held at fair value through profit or loss is charged
to financial income (expense) in the income statement.
Income from financial investments is recognized in Financial income (expense),
net in the income statement. Interest receivable on investments in debt
securities is calculated using the effective interest method. Dividends from
investments in equity instruments are recognized in the income statement when
the Company's right to receive payments is established.
The fair values of quoted investments are based on current bid prices. If the
market for a financial investment is not active or the securities are not
listed, the Company estimates fair value by using standard valuation techniques.
I Inventories
Inventories are stated at the lower of cost (calculated principally on the
first-in-first-out "FIFO" method) and net realizable value as a whole. The cost
of finished goods and goods in process is comprised of raw materials, direct
labor, other direct costs and related production overhead costs. Net realizable
value is estimated collectively for inventories as the sales price in the
ordinary course of business, less any costs of completion and selling expenses.
Goods in transit at year end are valued at supplier invoice cost.
For purposes of determining net realizable value, the Company establishes an
allowance for obsolete or slow-moving inventory related to finished goods,
supplies and spare parts. For slow moving or obsolete finished products, an
allowance is established for based on management's analysis of product aging. An
allowance for slow-moving inventory of supplies and spare parts is established
based on management's analysis of such items to be used as intended and the
consideration of potential obsolescence due to technological changes.
J Trade receivables
Trade receivables are recognized initially at original invoice amount. The
Company analyzes its trade accounts receivable on a regular basis and, when
aware of a specific client's difficulty or inability to meet its obligations to
Tenaris, impairs any amounts due by means of a charge to an allowance for
doubtful accounts receivable. Additionally, this allowance is adjusted
periodically based on the aging of receivables.
-11-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
K Cash and cash equivalents
Cash and cash equivalents are comprised of cash in banks, short-term money
market funds and highly liquid short-term securities with a maturity of less
than 90 days at date of purchase. Assets recorded in cash and cash equivalents
are carried at fair market value, or at historical cost which approximates fair
market value.
For the purposes of the cash flow statement, cash and cash equivalents is
comprised of cash, bank accounts and short-term highly liquid investments and
overdrafts.
On the balance sheet, bank overdrafts are included in borrowings in current
liabilities.
L Shareholder' Equity
(1) Basis of presentation
The consolidated statement of changes in equity includes:
o The value of share capital, legal reserve, share premium and other
distributable reserve calculated in accordance with Luxembourg Law;
o The currency translation adjustments, retained earnings, minority
interest and other reserves calculated in accordance with IFRS;
(2) Share Capital
Ordinary shares are classified as equity.
(3) Dividends Paid by Tenaris to Shareholders
Dividends payable are recorded in Tenaris' financial statements in the year in
which they are approved by the Company's shareholders, or when interim dividends
are approved by the Board of Directors in accordance with the by-laws of the
Company.
Dividends may be paid by Tenaris to the extent that it has distributable
retained earnings, calculated in accordance with Luxembourg law. As a result,
retained earnings included in the consolidated financial statements may not be
wholly distributable. See Note 26 (v).
M Borrowings
Borrowings are recognized initially for an amount equal to the proceeds received
net of transaction costs. In subsequent years, borrowings are stated at
amortized cost. Any difference between net proceeds and redemption value is
recognized as interest expense within Financial income (expense) in the income
statement over the expected tenor of the borrowings.
N Income Taxes - Current and Deferred
Under present Luxembourg law, the Company is not subject to income tax,
withholding tax on dividends paid to shareholders or capital gains tax payable
in Luxembourg as long as the Company maintains its status as a "Holding
Billionaire Company".
The current income tax charge is calculated on the basis of the tax laws in
effect in the countries where the Company's subsidiaries operate and generate
taxable income. Management periodically evaluates positions taken in tax returns
with respect to situations in which applicable tax regulations is subject to
interpretation and establishes provisions when appropriate.
Deferred income taxes are calculated applying the liability method on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the financial statements. The principal temporary
differences arise from the effect of currency translation on fixed assets,
depreciation on property, plant and equipment, valuation of inventories and
provisions for pensions. Deferred tax assets are also recognized for net
-12-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
operating loss carry-forwards. Deferred tax assets and liabilities are measured
at the tax rates that are expected to apply in the time period when the asset is
realized or the liability is expected to settled, based on tax laws that have
been enacted or substantially enacted by the balance sheet date.
Deferred tax assets are recognized to the extent it is probable that future
taxable income will be available to utilize those recognized deferred tax assets
against such income.
O Employee-related liabilities
(a) Employee severance indemnity
Employee severance indemnity costs are assessed annually using the projected
unit credit method. Employee severance indemnity obligations are measured at the
present value of the estimated future cash outflows, based on actuarial
calculations provided by independent advisors and in accordance with current
legislation and labor contracts in effect in each respective country. The cost
of this obligation is charged to the income statement over the expected service
lives of employees.
This provision is primarily related to the liability accrued for employees at
Tenaris' Italian and Mexican subsidiaries.
(b) Defined benefit pension obligations
Certain officers of the Company are covered by defined benefit employee
retirement plans designed to provide post-retirement, termination and other
benefits.
Post-retirement costs are assessed using the projected unit credit method.
Post-retirement obligations are measured at the present value of the estimated
future cash outflows, based on actuarial calculations provided by independent
advisors. Actuarial gains and losses are recognized over the average remaining
service lives of employees.
Benefits provided under the Company's main plan are provided in U.S. dollars,
and are calculated based on seven-year salary averages. Tenaris accumulates
assets for the payment of benefits expected to be disbursed by this plan in the
form of investments that are subject to time limitations for redemption. These
investments are neither part of a specific pension plan nor are they segregated
from the Company's other assets. As a result, this plan is considered to be
"unfunded" under IFRS definitions.
Certain other officers and former employees of one specific Tenaris subsidiary
are covered by a separate plan defined as "funded" under IFRS definitions.
(c) Other compensation obligations
Employee entitlements to annual leave and long-service leave are accrued as
earned.
Other length of service based compensation to employees in the event of
dismissal or death is charged to income in the year in which it becomes payable.
P Employee statutory profit sharing
Under Mexican law, the Company's Mexican subsidiaries are required to pay their
employees an annual benefit calculated on a basis similar to that used for local
income tax purposes. Employee statutory profit sharing is calculated using the
liability method, and is recorded in Current other liabilities and Non-current
other liabilities on the balance sheet. Because Mexican employee statutory
profit sharing is determined on a basis similar to that used for determining
local income taxes, the Company accounts for temporary differences arising
between the statutory calculation and reported expense as determined under IFRS
in a manner similar to the calculation of deferred income tax.
-13-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Q Provisions and other liabilities
Provisions are accrued to reflect estimates of expenses incurred based on best
available information. Estimates are based on information available as of the
date of preparation of the financial statements. If Tenaris expects to be
reimbursed for an accrued expense, as would be the case for an expense or loss
covered under an insurance contract, and reimbursement is considered virtually
certain, the expected reimbursement is recognized as a receivable.
Contingencies
Tenaris is subject to various claims, lawsuits and other legal proceedings,
including customer claims, in which a third party is seeking payment for alleged
damages, reimbursement for losses or indemnity. The Company's potential
liability with respect to such claims, lawsuits and other legal proceedings
cannot be estimated with certainty. Management periodically reviews the status
of each significant matter and assesses potential financial exposure. If a
potential loss from a claim or proceeding is considered probable and the amount
can be reasonably estimated, a liability 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 the Company's litigation and
settlement strategies. These estimates are primarily constructed with the
assistance of legal counsel. As the scope of liabilities become better defined,
there may be changes in the estimates of future costs which could have a
material adverse effect on its results of operations, financial condition and
net worth.
R Revenue recognition
The Company's products and services are sold based upon purchase orders,
contracts or upon other persuasive evidence of an arrangement with customers,
including that the sales price is known or determinable and the arrangement does
not include right of return or other similar provisions or other significant
post-delivery obligations. Sales are recognized as revenue upon delivery and
when collection is reasonably assured. Delivery is defined by the transfer of
risk provision of sales contracts and may include delivery to a customer's
storage facility located at one of the Company's subsidiaries.
Other revenues earned by Tenaris are recognized on the following bases:
o Interest income: on the effective yield basis.
o Dividend income from investments in other companies: when Tenaris'
right to collect is established.
S Cost of sales and sales expenses
Cost of sales and sales expenses are recognized in the income statement on the
accrual basis of accounting.
Shipping and handling costs related to customer sales are recorded in selling,
general and administrative expense in the income statement.
T Earnings per share
Earnings per share are calculated by dividing the net income attributable to
equity holders of the Company by the daily weighted average number of common
shares outstanding during the year.
U Derivative financial instruments
Accounting for derivative financial instruments and hedging activities is
included within the section III, "Financial Risk Management", below.
-14-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
III. FINANCIAL RISK MANAGEMENT
The multinational nature of Tenaris' operations and customer base expose the
Company to a variety of risks, including the effects of changes in foreign
currency exchange rates and interest rates. To manage the volatility related to
these exposures, management evaluates exposures on a consolidated basis to take
advantage of logical exposure netting. For a portion of the remaining exposures,
the Company or its subsidiaries may enter into various derivative transactions
in order to manage potential adverse impacts on the Company's financial
performance. Such derivative transactions are executed in accordance with
internal policies in areas such as counterparty exposure and hedging practices.
A. Financial Risk Factors
(i) Foreign exchange rate risk management
Tenaris manufactures and sells its products in a number of countries throughout
the world and as a result is exposed to foreign exchange rate risk. The purpose
of the Company's foreign currency hedging program is to reduce the risk caused
by short-term changes in exchange rates.
Tenaris aims to neutralize the potential negative impact of currency
fluctuations in the value of other currencies with respect to the dollar.
Because a number of subsidiaries have functional currencies other than the U.S.
dollar, the results of hedging activities as reported IFRS may not reflect
management's assessment of its foreign exchange risk hedging program.
(ii) Interest rate risk management
The Company's financing strategy is to manage interest expense using a mixture
of fixed-rate and variable-rate debt. To manage this risk in a cost efficient
manner, Tenaris enters into interest rate swaps in which it agrees to exchange
with the counterparty, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal amount. Dalmine and Tamsa have entered into interest rate swaps
related to long-term debt to partially hedge future interest payments, as well
as to convert borrowings from floating to fixed rates.
(iii) Concentration of credit risk
The Company's single largest customer is Petroleos Mexicanos, or Pemex. Sales to
Pemex, as a percentage of our total sales, amounted to approximately 8% in 2005.
The Company's credit policies related to sales of products and services are
designed to identify customers with acceptable credit history, and to allow the
Company to require the use of credit insurance, letters of credit and other
instruments designed to minimize credit risk whenever deemed necessary. Tenaris
maintains allowances for potential credit losses.
Derivative counterparties and cash transactions are limited to high credit
quality financial institutions. We have established strict counterparty credit
guidelines and normally enter into transactions with investment grade financial
institutions.
(iv) Liquidity risk
Management maintains sufficient cash and marketable securities or credit
facilities to finance normal operations. The Company also has committed credit
facilities that adequately backup its ability to close out market positions if
needed.
-15-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
B. Fair value estimation
For purposes of estimating the fair value of financial assets and liabilities
with maturities of less than one year, the market value was considered. Most
borrowings are comprised of variable rate debt or fixed rate debt that in
general terms are comparable to market rates. As a result, the fair value of the
Company's borrowings approximates its current amounts and is not disclosed
separately.
C. Accounting for Derivative Financial Instruments and Hedging Activities
Derivative financial instruments are initially recognized in the balance sheet
at cost and subsequently remeasured at fair value. The Company recognizes the
full amount related to the change in fair value of derivative financial
instruments in "Financial income (expense), net" in the current year.
Tenaris does not hold or issue derivative financial instruments for speculative
trading purposes.
IV. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Interpretations and amendments to published standards effective in 2005
IASB Project to Improve International Financial Reporting Standards
In December 2003, as a part of the project to improve International Financial
Reporting Standards, the IASB released revisions to certain standards including:
IAS 1, "Presentation of Financial Statements"; IAS 16, "Property, Plant and
Equipment"; IAS 39 (Amendment), "Transition and initial recognition of financial
assets and financial liabilities"; and, IFRS 3, "Business Combinations". The
revised standards apply to annual periods beginning on or after January 1, 2005.
Adoption of new or revised standards has been made in accordance with the
respective transition provisions.
The main impacts to the Company's consolidated financial statements are:
(a) Presentation of minority interest
IAS 1 (revised) requires disclosure on the face of the income statement of
an entity's income or loss for the year and the allocation of that amount
between "income or loss attributable to minority interest" and "income or
loss attributable to equity holders of the Company". Earnings per share
continue to be calculated on the basis of net income attributable solely to
the equity holders of the entity. Also, for periods beginning on or after
January 1, 2005, minority interest is included within equity in the
consolidated balance sheet and is no longer shown as a separate category in
the Liabilities section of the balance sheet. This change resulted in an
increase of $165.3 million in the Company's reported equity at January 1,
2005.
(b) Reestimation of Plant and Equipment Useful Lives
International Accounting Standard No. 16, Property, Plant and Equipment,
requires for periods beginning on or after January 1, 2005, that the
residual value and the useful life of fixed assets be reviewed at least at
each financial year-end, and, if expectations differ from previous
estimates, for the change to be treated as a change in an accounting
estimate. The impact of the reestimation of useful lives for the Company's
plant and equipment for the year ended December 31, 2005 was not material.
-16-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Interpretations and amendments to published standards effective in 2005
(Cont'd.)
(c) IAS 39 (revised), Financial Instruments: recognition and measurement
In accordance with the transition provisions of IAS 39 (revised), the
Company designated certain investments in financial instruments previously
recognized as "available for sale" as "financial assets carried at fair
value through profit or loss". Accordingly, the Company changed the
classification of these financial investments using the new designation in
its financial statements. Financial investments are included in current
assets unless management intends to dispose the investment more than 12
months from the balance sheet date.
(d) IFRS 3, Business Combinations: Goodwill and Negative Goodwill
During 2004 International Financial Reporting Standard (IFRS) 3, "Business
Combinations" was issued, which was applied by the Company for all business
combinations that occurred after March 31, 2004.
As per this standard, prior to January 1, 2005 goodwill was amortized on a
straight line basis over its estimated useful life, not to exceed 15 years,
and tested for impairment at each balance sheet date in the event
indicators of impairment were present. As required by IFRS 3, the Company
ceased amortization of goodwill for periods beginning on or after January
1, 2005. In addition, accumulated amortization as of December 31, 2004 has
been netted against the cost of the goodwill. For years ending on or after
December 31, 2005 goodwill is required to be tested annually for
impairment, as well as when there are indicators of impairment.
Amortization of goodwill expense included in the years ended December 31,
2004 and 2003 amounted to $9.4 million and $8.9 million respectively.
Upon the adoption of IFRS 3, which must be adopted together with the
revised IAS 38, Intangible Assets, and IAS 36, Impairment of Assets,
previously accumulated negative goodwill is required to be derecognized
through an adjustment to retained earnings. The derecognition of negative
goodwill in this manner resulted in an increase of $110.8 million in the
beginning balance of the Company's equity at January 1, 2005. Amortization
of negative goodwill in income amounted to $9.0 million and $8.9 million in
the years ended December 31, 2004 and 2003, respectively.
Management assessed the relevance of other new standards, amendments or
interpretations and concluded that they are not relevant to the Company.
Standards, interpretations and amendments to published standards that are not
yet effective
Certain new standards, amendments and interpretations to existing standards have
been published that are mandatory for the Company's accounting periods beginning
on or after January 1, 2006, or later periods but which the Company has not
early adopted as follows:
IAS 19, Employee Benefits: Actuarial Gains and Losses, Group Plans and
Disclosures (Amendment)
On December 16, 2004, the International Accounting Standards Board ("IASB")
issued International Accounting Standard No. 19, "Employee Benefits: Actuarial
Gains and Losses, Group Plans and Disclosures (Amendment)" ("IAS 19"). IAS 19
gives entities the option of recognizing actuarial gains and losses in full
during the period in which they occur, outside of profit and loss, in the
statement of recognized income and expense. Previously, entities were only
permitted to recognize actuarial gains and losses in profit and loss either (1)
in the period in which they occur or (2) spread over the service life of
employees. As the Company does not intend to change the accounting policy
adopted for recognition of actuarial gains and losses and does not participate
in any multi employer plans, adoption of this amendment will only impact the
format and extent of disclosures in the financial statements. Tenaris will apply
this amendment from annual periods beginning January 1, 2006.
-17-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
IAS 21, The Effects of Changes in Foreign Exchange Rates - Net Investment in
Foreign Operations
In December 2005, the IASB issued an amendment to IAS 21, The Effects of Changes
in Foreign Exchange Rates - Net Investment in Foreign Operations. The amendment
finalizes proposals that were contained in Draft Technical Correction 1 Proposed
Amendments to IAS 21 Net Investment in a Foreign Operation published in
September 2005 and is applicable for annual periods beginning on or after
January 1, 2006. The Company's management has not yet assessed the impact of
this standard on its financial statements. o
IFRS 7, Financial Instruments: Disclosure, and a complementary amendment to IAS
1, presentation of financial statements - Capital disclosure
IFRS 7 introduces new disclosures about financial instruments such as
qualitative and quantitative information about exposures to risks arising from
financial instruments. The Company will apply IFRS 7 and the amendment to IAS 1
for annual periods beginning on January 1, 2007.
Management assessed the relevance of other new standards, amendments or
interpretations not yet effective and concluded that they are not relevant to
the Company.
V. OTHER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In the notes all amount are shown in thousands of U.S. dollars, unless
otherwise stated)
1 Segment information
Primary reporting format: business segments
Welded and
other
metallic
Seamless products Energy Others Unallocated Total
------------ --------------- ------------ ------------ -------------- ------------
Year ended December 31, 2005
Net sales 5,123,975 845,089 526,406 240,727 - 6,736,197
Cost of sales (2,720,858) (556,142) (513,401) (152,357) - (3,942,758)
------------ --------------- ------------ ------------ -------------- ------------
Gross profit 2,403,117 288,947 13,005 88,370 - 2,793,439
Segment assets 4,747,808 525,199 147,019 1,032,206 253,796 6,706,028
Segment liabilities 2,410,540 217,183 124,290 178,142 - 2,930,155
Capital expenditures 252,974 25,101 1,379 5,020 - 284,474
Acquisition of property, plant and
equipment and intangible assets
due to business combination 67,980 - . - - 67,980
Depreciation and amortization 182,617 15,545 2,514 13,551 - 214,227
Year ended December 31, 2004
Net sales 3,273,267 348,137 417,870 96,789 -
4,136,063
Cost of sales (2,075,164) (249,471) (398,462) (53,839) - (2,776,936)
------------ --------------- ------------ ------------ -------------- ------------
Gross profit 1,198,103 98,666 19,408 42,950 -
1,359,127
Segment assets 4,322,982 510,669 121,846 610,162 96,629
5,662,288
Segment liabilities 2,430,935 313,600 122,046 134,512 -
3,001,093
Capital expenditures 149,326 23,276 1,438 9,272 -
183,312
Acquisition of property, plant and
equipment and intangible assets
due to business combination 73,846 - - 117,251 - 191,097
Depreciation and amortization 185,118 12,665 3,554 6,782 -
208,119
-18-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Year ended December 31, 2003
Net sales 2,388,177 350,745 333,207 107,523 - 3,179,652
Cost of sales (1,531,995) (274,643) (316,566) (84,623) - (2,207,827)
------------ --------------- ------------ ------------ -------------- ------------
Gross profit 856,182 76,102 16,641 22,900 - 971,825
Segment assets 3,534,575 408,498 105,629 217,846 43,000 4,309,548
Segment liabilities 1,959,274 252,993 91,982 44,035 - 2,348,284
Capital expenditures 129,405 24,245 5,380 3,594 - 162,624
Acquisition of property, plant and
equipment and intangible assets
due to business combination 28,535 - . 2,229 - 30,764
Depreciation and amortization 180,855 10,896 3,706 4,342 - 199,799
Tenaris' main business segment is seamless pipes.
The main transactions between segments, which were eliminated in the
consolidation, relate to sales of Energy to Seamless units for $107,393 in 2005,
$86,721 in 2004 and $62,755 in 2003. Other transactions include sales of scrap
and pipe protectors from the Others segment to Seamless units for $41,163,
$36,765 and $37,647 in 2005, 2004 and 2003, respectively.
-19-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Secondary reporting format: geographical segments
South America Europe North Middle East Far East Unallocated Total
America and Africa and Oceania
---------------------------------------------------------------------------------------------
Year ended December 31, 2005
Net sales 1,823,735 1,570,207 1,708,126 959,020 675,109 - 6,736,197
Total assets 2,092,857 1,502,634 2,213,075 289,363 354,303 253,796 6,706,028
Trade receivables 358,859 265,378 310,153 255,379 134,402 - 1,324,171
Property, plant and equipment,
net 740,391 648,892 787,937 3,583 49,235 - 2,230,038
Capital expenditures 109,180 104,665 64,274 1,498 4,857 - 284,474
Acquisition of property, plant
and equipment and intangible
assets due to business
combination - 67,980 - - - - 67,980
Depreciation and amortization 87,430 71,122 49,038 404 6,233 - 214,227
Year ended December 31, 2004
Net sales 824,800 1,236,795 1,140,326 524,874 409,268 - 4,136,063
Total assets 1,773,958 1,808,557 1,596,464 109,266 277,414 96,629 5,662,288
Trade receivables 143,731 346,628 295,896 81,369 69,307 - 936,931
Property, plant and equipment,
net 728,468 635,939 737,507 4,645 58,042 - 2,164,601
Capital expenditures 83,003 29,694 64,845 2,257 3,513 - 183,312
Acquisition of property, plant
and equipment and intangible
assets due to business
combination 121,145 69,952 - - - - 191,097
Depreciation and amortization 89,934 68,432 41,986 35 7,732 - 208,119
Year ended December 31, 2003
Net sales 752,175 958,772 754,262 392,707 321,736 - 3,179,652
Total assets 1,464,835 1,193,960 1,310,471 90,699 206,583 43,000 4,309,548
Trade receivables 123,969 286,651 138,899 69,216 34,047 - 652,782
Property, plant and equipment,
net 624,542 557,637 716,952 2,376 58,807 - 1,960,314
Capital expenditures 63,636 47,965 42,988 358 7,677 - 162,624
Acquisition of property, plant
and equipment and intangible
assets due to business
combination 25,583 2,978 2,203 - 30,764
Depreciation and amortization 103,548 58,196 31,908 16 6,131 - 199,799
The South American segment comprises principally Argentina, Venezuela and
Brazil. The European segment comprises principally Italy, France, United
Kingdom, Germany, Romania and Norway. The North American segment comprises
principally Mexico, USA and Canada. The Middle East and Africa segment comprises
principally Egypt, United Arab Emirates, Saudi Arabia and Nigeria. The Far East
and Oceania segment comprises principally China, Japan, Indonesia and South
Korea.
-20-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
2 Cost of sales
Year ended December 31,
-------------------------------------------------
2005 2004 2003
Inventories at the beginning of the year 1,269,470 831,879 680,113
Plus: Charges of the year
Raw materials, energy,
consumables and other movements 2,960,080 2,269,351 1,515,990
Services and fees 324,799 259,025 272,313
Labor cost 420,714 369,681 286,748
Depreciation of property, plant and
equipment 182,696 174,880 171,896
Amortization of intangible assets 5,025 12,748 6,763
Maintenance expenses 99,171 82,323 54,335
Provisions for contingencies 200 994 3,802
Allowance for obsolescence 20,303 23,167 6,011
Taxes 3,170 3,088 4,273
Others 33,243 19,270 37,462
-------------------------------------------------
4,049,401 3,214,527 2,359,593
Less: Inventories at the end of the year (1,376,113) (1,269,470) (831,879)
-------------------------------------------------
3,942,758 2,776,936 2,207,827
-------------------------------------------------
3 Selling, general and administrative expense
Year ended December 31,
----------------------------------------------------
2005 2004 2003
Services and fees 122,953 121,269 129,237
Labor cost 214,216 157,114 134,769
Depreciation of property, plant and
equipment 10,319 10,218 8,477
Amortization of intangible assets 16,187 10,273 12,663
Commissions, freights and other selling
expenses 298,101 250,085 189,353
Provisions for contingencies 14,855 12,142 2,005
Allowances for doubtful accounts 7,069 7,187 5,704
Taxes 93,782 59,256 45,337
Others 65,092 44,905 39,290
----------------------------------------------------
842,574 672,449 566,835
----------------------------------------------------
-21-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
4 Labor costs (included in Cost of sales and Selling, general and
administrative expenses)
Year ended December 31,
---------------------------------------------
2005 2004 2003
Wages, salaries and social security costs 622,523 509,572 410,458
Employees' severance indemnity (Note 22 (i)(a)) 10,617 12,907 9,988
Pension benefits - defined benefit plans (Note 22
(i)(b)) 1,790 4,316 1,071
---------------------------------------------
634,930 526,795 421,517
---------------------------------------------
At the year-end, the number of employees was 17,693 in 2005, 16,447 in 2004 and
14,391 in 2003.
5 Other operating items
Year ended December 31,
---------------------------------------------
2005 2004 2003
(i) Other operating income
Reimbursement from insurance companies and other third
parties 1,966 3,165 1,544
Net income from other sales 5,767 16,063 4,075
Net income from disposition of investments in
associated companies - - 1,018
Net rents 2,501 1,362 2,222
Fintecna arbitration award, net of legal expenses,
related to BHP proceedings (Note 26 (i)) 1,752 123,000 -
Power plant - reimbursement from supplier
(Note 26 (iv)(d)) - 9,001 -
---------------------------------------------
11,986 152,591 8,859
---------------------------------------------
(ii) Other operating expense
Provision for BHP proceedings - - 114,182
Provisions for legal claims and contingencies 8,694 - -
Loss on disposal of fixed assets and material supplies 2,146 - -
Allowance for doubtful receivables 1,443 2,104 1,728
Power plant - impairment and associated charges
(Note 26 (iv)(d)) - 18,447 -
Miscellaneous 2,122 5,200 9,749
---------------------------------------------
14,405 25,751 125,659
---------------------------------------------
6 Financial income (expense), net
Year ended December 31,
---------------------------------------------
2005 2004 2003
Interest expense (53,504) (46,930) (33,134)
Interest income 24,268 14,247 16,426
Net foreign exchange transaction (losses) / gains and
changes in fair value of derivative instruments (86,618) 33,127 (16,165)
Miscellaneous 6,116 5,358 3,453
---------------------------------------------
(109,738) 5,802 (29,420)
---------------------------------------------
-22-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
7 Equity in earnings of associated companies
Year ended December 31,
---------------------------------------------
2005 2004 2003
Equity in earnings of associated companies (Note 12) 117,003 122,911 27,585
Change in the fair value of convertible debt option
in Amazonia (Note 28 (d)) - 83,126 -
Other 374 - -
---------------------------------------------
117,377 206,037 27,585
---------------------------------------------
8 Income tax
Year ended December 31,
---------------------------------------------
2005 2004 2003
Current tax 637,623 277,219 148,240
Deferred tax (Note 21) (61,837) (44,731) (63,862)
---------------------------------------------
575,786 232,488 84,378
Effect of currency translation on tax base (Note 21) (7,033) (12,112) (20,460)
---------------------------------------------
568,753 220,376 63,918
---------------------------------------------
The tax on Tenaris' income before tax differs from the theoretical amount that
would arise using the tax rate in each country as follows:
Year ended December 31,
---------------------------------------------
2005 2004 2003
Income before income tax 1,956,085 1,025,357 286,355
---------------------------------------------
Tax calculated at the tax rate in each country 592,153 268,488 99,060
Non taxable income / Non deductible expenses (32,408) (10,019) (27,907)
Changes in the tax rates in Mexico - (25,886) -
Effect of currency translation on tax base (a) (7,033) (12,112) (20,460)
Effect of taxable exchange differences 17,087 10,742 13,367
Utilization of previously unrecognized tax losses (1,046) (10,837) (142)
---------------------------------------------
Tax charge 568,753 220,376 63,918
---------------------------------------------
(a) Tenaris applies the liability method to recognize deferred income tax
expense on temporary differences between the tax bases of assets and their
carrying amounts in the financial statements. By application of this
method, Tenaris recognizes gains and losses on deferred income tax due to
the effect of the change in the value of the Argentine peso on the tax
bases of the fixed assets of its Argentine subsidiaries, which have the
U.S. dollar as their functional currency. These gains and losses are
required by IFRS even though the devalued tax basis of the relevant assets
will result in a reduced dollar value of amortization deductions for tax
purposes in future periods throughout the useful life of those assets. As a
result, the resulting deferred income tax charge does not represent a
separate obligation of Tenaris that is due and payable in any of the
relevant periods.
-23-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
9 Earnings and dividends per share
(i) Earnings per share are calculated by dividing the net income attributable
to equity holders of the Company by the daily weighted average number of
ordinary shares issued during the year.
Year ended December 31,
----------------------------------------------------
2005 2004 2003
Net income attributable to equity holders 1,277,547 784,703 210,308
Weighted average number of ordinary
shares in issue (thousands) 1,180,537 1,180,507 1,167,230
Basic and diluted earnings per share 1.08 0.66 0.18
Basic and diluted earnings per ADS 10.82 6.65 1.80
Dividends paid (349,439) (135,053) (115,002)
Dividends per share 0.296 0.11 0.10
Dividends per ADS 2.960 1.14 0.99
10 Property, plant and equipment, net
Land, building Plant and Vehicles, Work in Spare parts Total
and improvements production furniture and progress and
Year ended December 31, 2005 equipment fixtures equipment
-------------------------------------------------------------------------------------
Cost
Values at the beginning of the
year 353,416 5,386,286 118,193 84,942 19,263 5,962,100
Translation differences 5,566 (104,101) (244) 388 (844) (99,235)
Additions 2,722 10,159 2,494 238,314 10,706 264,395
Disposals / Consumptions (2,043) (9,344) (3,322) - (5,119) (19,828)
Transfers / Reclassifications 24,593 118,426 6,843 (150,097) 231 (4)
Increase due to business
combinations 23,937 40,755 2,351 168 - 67,211
-------------------------------------------------------------------------------------
Values at the end of the year 408,191 5,442,181 126,315 173,715 24,237 6,174,639
-------------------------------------------------------------------------------------
Depreciation
Accumulated at the beginning of
the year 128,148 3,568,058 94,577 - 6,716 3,797,499
Translation differences 1,778 (37,199) (158) - (376) (35,955)
Depreciation charge 13,177 170,491 8,649 - 698 193,015
Disposals / Consumptions (515) (7,047) (2,229) - (167) (9,958)
Transfers / Reclassifications (6,357) 6,373 (16) - - -
-------------------------------------------------------------------------------------
Accumulated at the end of the 136,231 3,700,676 100,823 - 6,871 3,944,601
year
-------------------------------------------------------------------------------------
At December 31, 2005 271,960 1,741,505 25,492 173,715 17,366 2,230,038
-------------------------------------------------------------------------------------
-24-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Year ended December 31, 2004 Land, building Plant and Vehicles, Work in Spare parts Total
and improvements production furniture and progress and
equipment fixtures equipment
-------------------------------------------------------------------------------------
Cost
Values at the beginning of the
year 303,929 5,031,525 112,371 86,193 12,799 5,546,817
Translation differences 6,938 87,970 2,520 2,107 643 100,178
Additions 11,547 10,744 2,509 133,193 5,165 163,158
Disposals / Consumptions (3,928) (16,587) (4,521) (1,258) (828) (27,122)
Transfers / Reclassifications 20,039 111,674 1,824 (135,293) 1,433 (323)
Increase due to business
combinations 14,891 172,665 3,490 - 51 191,097
-------------------------------------------------------------------------------------
Values at the end of the year 353,416 5,397,991 118,193 84,942 19,263 5,973,805
-------------------------------------------------------------------------------------
Depreciation
Accumulated at the beginning of
the year 112,693 3,378,536 89,222 - 6,052 3,586,503
Translation differences 1,836 37,514 1,773 - 135 41,258
Depreciation charge 14,246 162,726 7,497 - 629 185,098
Disposals / Consumptions (603) (11,083) (3,567) - (17) (15,270)
Transfers / Reclassifications (24) 365 (348) - (83) (90)
-------------------------------------------------------------------------------------
Accumulated at the end of the 128,148 3,568,058 94,577 - 6,716 3,797,499
year
-------------------------------------------------------------------------------------
Impairment (Note 26 (iv)(e)) - (11,705) - - - (11,705)
-------------------------------------------------------------------------------------
At December 31, 2004 225,268 1,818,228 23,616 84,942 12,547 2,164,601
-------------------------------------------------------------------------------------
Property, plant and equipment includes capitalized interest of $19,686. The net
amount at December 31, 2005 is $2,754.
11 Intangible assets, net
Year ended December 31, 2005 Information Licenses Goodwill (a) Negative Total
system projects and patents goodwill
(a)
----------------------------------------------------------------------
Cost
Values at the beginning of the year 114,584 11,028 112,664 (133,886) 104,390
Effect of adopting IFRS 3 - - - 133,886 133,886
Translation differences (4,148) (1,172) - - (5,320)
Additions 19,278 801 - - 20,079
Increase due to business combinations - - 769 - 769
Transfers / Reclassifications 4 - - - 4
Disposals (301) (372) - - (673)
----------------------------------------------------------------------
Values at the end of the year 129,417 10,285 113,433 - 253,135
----------------------------------------------------------------------
Amortization and impairment
Accumulated at the beginning of the year 68,989 9,301 - (23,111) 55,179
Effect of adopting IFRS 3 - - - 23,111 23,111
Translation differences (3,852) (1,066) - - (4,918)
Amortization charge 20,231 981 - - 21,212
Transfers/ Reclassifications - - - - -
Disposals (204) (344) - - (548)
----------------------------------------------------------------------
Accumulated at the end of the year 85,164 8,872 - - 94,036
----------------------------------------------------------------------
At December 31, 2005 44,253 1,413 113,433 - 159,099
----------------------------------------------------------------------
-25-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
As disclosed in AP G (1), previously accumulated negative goodwill at December
31, 2004 was derecognized with a corresponding adjustment to Retained earnings.
As a consequence, the opening balance of the Company's shareholders' equity at
January 1, 2005 increased of $110.8 million.
Year ended December 31, 2004 Information Licenses Negative
system projects and patents Goodwill (a) goodwill
(a) Total
---------------------------------------------------------------------
Cost
Values at the beginning of the year 88,802 10,490 142,904 (130,692) 111,504
Translation differences 3,850 579 164 (3,194) 1,399
Additions 20,022 132 - - 20,154
Transfers / Reclassifications 2,657 (173) - - 2,484
Disposals (747) - - - (747)
---------------------------------------------------------------------
Values at the end of the year 114,584 11,028 143,068 (133,886) 134,794
---------------------------------------------------------------------
Amortization
Accumulated at the beginning of the year 42,101 8,561 20,882 (14,077) 57,467
Translation differences 2,695 522 172 - 3,389
Amortization charge 21,600 1,105 9,350 (9,034) 23,021
Transfers/ Reclassifications 3,138 (887) - - 2,251
Disposals (545) - - - (545)
---------------------------------------------------------------------
Accumulated at the end of the year 68,989 9,301 30,404 (23,111) 85,583
---------------------------------------------------------------------
At December 31, 2004 45,595 1,727 112,664 (110,775) 49,211
---------------------------------------------------------------------
(a) Corresponds to the Seamless segment
Impairment tests for goodwill
Goodwill is allocated to the Company's cash-generating units ("CGU") identified
according to country of operation and business segment.
11 Intangible assets, net (Cont'd.)
A geographical segment-level summary of the goodwill allocation is presented
below.
Year ended December 31,
---------------------------------
2005 2004
South America 93,239 93,239
Europe 769 -
North America 19,425 19,425
---------------------------------
At the end of the year 113,433 112,664
---------------------------------
The recoverable amount of goodwill allocated to a CGU is determined based on its
value-in-use. These calculations use cash flow projections based on financial
assumptions approved by management covering at least a minimum period of five
years. Cash flows beyond the minimum period are extrapolated using estimated
growth rates. No impairment charge was required as a result of the impairment
tests performed.
12 Investments in associated companies
Year ended
December 31,
---------------------
2005 2004
At the beginning of year 99,451 45,814
Translation differences (22,869) (21,094)
Equity in earnings of associated companies 117,003 122,911
Dividends and distributions received (59,127) (48,598)
Acquisitions - 418
Capitalization of convertible loan in Amazonia (see
note 28 (d)) 120,058 -
Increase in equity reserves in Ternium (see note 28 (d)) 2,718 -
---------------------
At the end of year 257,234 99,451
---------------------
-26-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
The principal associated companies are:
Country of Percentage of ownership and Value at December 31,
Company incorporation voting rights at December 31,
----------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------
Ternium S.A. Luxembourg 15.00% - 253,796 -
Consorcio Siderurgia
Amazonia Ltd. Cayman Islands - 14.49% - 76,007
Ylopa Servicos de
Consultadoria Lda. Madeira - 24.40% - 20,622
Condusid C.A. Venezuela 20.00% 20.00% 2,860 2,375
Others - - - 578 447
---------------------------
257,234 99,451
---------------------------
Summarized financial information of each significant associated company,
including the aggregated amounts of assets, liabilities, revenues and profit or
loss is as follows:
Company Assets Liabilities Revenues Profit/Loss
2005 2004 2005 2004 2005 2004 2005 2004
Ternium S.A. 8,659,981 - 5,084,062 - 4,447,680 - 704,406 -
Consorcio
Siderurgia Amazonia
Ltd. (a) - 878,829 - 354,279 - 526,446 - 507,965
Ylopa Servicos de
Consultadoria Lda.
(b) - 800,289 - 715,772 - 205,080 - 203,763
Condusid C.A. 33,109 31,445 18,586 19,571 56,911 29,619 3,877 (1,794)
-----------------------------------------------------------------------------------------------
(a) An impairment provision recorded in 2003 of $51.9 million was reversed in
2004 due to improved economic conditions and an improvement in the market
for Sidor's products, based on projections of future cash flows estimated
by Amazonia's management.
(b) At December 31, 2004 the retained earnings of Ylopa Servicos de
Consultadoria Lda. ("Ylopa") totalled $77.1 million.
13 Other investments - non current
Year ended December 31,
------------------------------------
2005 2004
Deposits with insurance companies 12,004 11,315
Investments in other companies 12,869 12,702
Others 774 378
------------------------------------
25,647 24,395
------------------------------------
-27-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
14 Receivables - non current
Year ended December 31,
-------------------------------------
2005 2004
Government entities 5,918 4,064
Employee advances and loans 5,053 5,086
Tax credits 6,121 8,455
Trade receivables 1,108 1,112
Receivables from related parties 3,321 4,750
Convertible loans (Note 28 (d)) 40,358 121,955
Receivables on off-take contract 9,677 7,338
Miscellaneous 9,746 11,777
------------------------------------
81,302 164,537
Allowances for doubtful accounts (Note 23 (i)) (15,450) (13,172)
------------------------------------
65,852 151,365
------------------------------------
15 Inventories
Year ended December 31,
------------------------------------
2005 2004
Finished goods 479,756 526,623
Goods in process 404,518 256,203
Raw materials 183,900 196,141
Supplies 241,974 214,604
Goods in transit 151,715 143,021
------------------------------------
1,461,863 1,336,592
Allowance for obsolescence (Note 24 (i)) (85,750) (67,122)
------------------------------------
1,376,113 1,269,470
------------------------------------
16 Receivables and prepayments
Year ended December 31,
------------------------------------
2005 2004
Reimbursements and other services receivable 25,044 33,306
Government entities 19,044 15,999
Employee advances and loans 7,922 8,281
Advances to suppliers 49,219 35,397
Other advances 1,624 2,218
Government tax refunds on exports 16,410 19,683
Fintecna arbitration award (Note 26 (i)) - 126,126
Receivables from related parties 13,695 19,004
Miscellaneous 23,411 27,782
------------------------------------
156,369 287,796
Allowance for other doubtful accounts (Note 24 (i)) (13,087) (8,346)
------------------------------------
143,282 279,450
------------------------------------
-28-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
17 Current tax assets
Year ended December 31,
------------------------------------
2005 2004
V.A.T. credits 90,000 82,580
Prepaid taxes 12,455 12,416
------------------------------------
102,455 94,996
------------------------------------
18 Trade receivables
Year ended December 31,
------------------------------------
2005 2004
Current accounts 1,256,882 848,304
Notes receivables 60,972 83,882
Receivables from related parties 31,279 28,909
------------------------------------
1,349,133 961,095
Allowance for doubtful accounts (Note 24 (i)) (24,962) (24,164)
------------------------------------
1,324,171 936,931
------------------------------------
19 Cash and cash equivalents, and Other investments
Year ended December 31,
------------------------------------
2005 2004
(i) Other investments
Financial assets 119,907 119,666
------------------------------------
(ii) Cash and cash equivalents
Cash and short-term highly liquid investments 707,356 311,573
Time deposits with related parties - 6
------------------------------------
707,356 311,579
------------------------------------
20 Borrowings
Year ended December 31,
------------------------------------
2005 2004
Non-current
Bank borrowings 634,280 372,275
Debentures and other loans 38,407 40,845
Finance lease liabilities 5,425 7,631
------------------------------------
678,112 420,751
------------------------------------
Current
Bank borrowings 238,510 530,949
Debentures and other loans 67,451 300,856
Bank overdrafts 24,717 4,255
Finance lease liabilities 1,502 2,531
------------------------------------
332,180 838,591
------------------------------------
Total Borrowings 1,010,292 1,259,342
------------------------------------
-29-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
The maturity of borrowings is as follows:
At December 31, 2005 1 year 1 - 2 2 - 3 3 - 4 4 - 5 Over 5
or less years years Years years Years Total
------------------------------------------------------------------------
Financial leases 1,502 1,184 970 739 678 1,854 6,927
Other borrowings 330,678 155,337 207,708 159,343 87,843 62,456 1,003,365
------------------------------------------------------------------------
Total borrowings 332,180 156,521 208,678 160,082 88,521 64,310 1,010,292
------------------------------------------------------------------------
Significant borrowings include:
o $300.0 million syndicated loan issued by Tamsa in March, 2005, maturing in
March 2010.
o $125.0 million syndicated loan issued by Siderca in April, 2005, maturing
in April, 2008.
o $144.0 million syndicated loan granted to Dalmine in June, 2005, of which
$72.0 million had been disbursed as of December 31, 2005.
The main financial covenants related to these loan agreements are commitment not
to incur in additional indebtedness above agreed limits or pledges of certain
assets, and compliance with certain debt service ratios as calculated on each
subsidiary's financial statements.
Additionally, Tenaris total borrowings include $204.8 million secured by certain
properties of Dalmine and Confab.
As of December 31, 2005, Tenaris was in compliance with all of its financial
covenants. Management believes that current debt covenants allow the Company a
high degree of operational and financial flexibility and do not impair its
ability to obtain additional financing at competitive costs.
The average interest rates shown below were calculated using the rates set for
each instrument in its corresponding currency and weighted using the
dollar-equivalent outstanding principal amount of said instruments at December
31, 2005 and 2004. These rates reflect the upward trend in the reference rates.
2005 2004
----------------- ------------------
Bank borrowings 5.14% 3.89%
Debentures and other loans 4.51% 3.48%
Finance lease liabilities 3.14% 2.99%
Breakdown of long-term borrowings by currency and rate is as follows:
Non current bank borrowings
Currency Interest rates Year ended December 31,
--------------------------------------------------------------------------------------------
2005 2004
USD Variable 545,305 215,730
EUR Variable 93,621 160,026
EUR Fixed 30,709 9,794
JPY Variable 23,310 48,170
JPY Fixed 17,084 27,065
BRS Variable 23,306 24,099
MXN Variable - 24,406
-------------------------------------
733,335 509,290
Less: Current portion of medium and long-term loans (99,055) (137,015)
-------------------------------------
Total non current bank borrowings 634,280 372,275
-------------------------------------
-30-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Non current debentures and other loans
Currency Interest rates Year ended December 31,
-------------------------------------------------------------------
2005 2004
EUR Variable - 70,811
USD Variable 49,332 45,382
USD Fixed - 5,449
---------------------------
49,332 121,642
Less: Current portion of medium
and long-term loans (10,925) (80,797)
---------------------------
Total non current Debentures
and other loans 38,407 40,845
===========================
The Debentures issued in January 1998 were repaid at maturity, in January,
2005.
Non current finance lease liabilities
Currency Interest rates Year ended December 31,
-------------------------------------------------------------------
2005 2004
EUR Variable 29 573
EUR Fixed - 78
SGD Fixed - 9
JPY Fixed 6,898 9,502
---------------------------
6,927 10,162
Less: Current portion of medium
and long-term loans (1,502) (2,531)
---------------------------
Total non current finance leases 5,425 7,631
===========================
The carrying amounts of Tenaris' assets pledged as collateral of liabilities are
as follows:
Year ended December 31,
---------------------------
2005 2004
Property, plant and equipment mortgages 595,627 573,513
===========================
Breakdown of short-term borrowings by currency and rate is as follows:
Current bank borrowings
Currency Interest rates Year ended December 31,
------------------------------------------------------------------------
2005 2004
USD Variable 50,597 161,357
USD Fixed 55,946 153,448
EUR Variable 64,810 51,232
EUR Fixed 1,882 3,111
JPY Variable 10,741 11,985
JPY Fixed 5,226 4,995
BRS Variable 5,197 3,450
ARS Variable - 169
ARS Fixed 44,111 134,004
VEB Variable - 5,189
VEB Fixed - 2,009
-----------------------------------
Total current bank borrowings 238,510 530,949
===================================
-31-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Bank overdrafts
Currency Year ended December 31,
-------------------------------------------------------------------------
2005 2004
USD 16,406 326
EUR 3,298 567
ARS 3,193 3,050
NGN - 195
RON - 117
VEB 1,820 -
-----------------------------------
Total current bank borrowings 24,717 4,255
===================================
Current debentures and other loans
Currency Interest rates Year ended December 31,
-------------------------------------------------------------------------
2005 2004
EUR Variable 51,333 280,156
USD Variable 16,118 9,177
USD Fixed - 11,523
-----------------------------
Total current debentures and other loans 67,451 300,856
=============================
Current finance lease liabilities
Currency Interest rates Year ended December 31,
-------------------------------------------------------------------------
2005 2004
EUR Variable - 573
EUR Fixed 29 78
SGD Fixed - 2
JPY Fixed 1,473 1,878
-----------------------------
Total current finance leases 1,502 2,531
=============================
21 Deferred income tax
Deferred income taxes are calculated in full on temporary differences under the
liability method using the tax rate of each country.
-32-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
The movement on the deferred income tax account is as follows:
Year ended December 31,
-----------------------------
2005 2004
At the beginning of the year 210,802 287,521
Translation differences 8,605 (926)
Increase due to business
combinations - 392
Income statement credit (61,837) (44,731)
Effect of currency translation
on tax base (7,033) (12,112)
Deferred employees' statutory
profit sharing charge 7,984 (19,342)
-------------- -------------
At the end of the year 158,521 210,802
============== =============
The evolution of deferred tax assets and liabilities during the year are as
follows:
Deferred tax liabilities
Fixed assets Inventories Other (a) Total at 2005
---------------------------------------------------------------
At the beginning of the year 204,243 63,453 104,279 371,975
Translation differences 19,486 2,482 489 22,457
Income statement charge/(credit) 3,641 (20,335) (24,343) (41,037)
---------------------------------------------------------------
At December 31, 2005 227,370 45,600 80,425 353,395
===============================================================
Fixed assets Inventories Other (a) Total at 2004
---------------------------------------------------------------
At beginning of year 232,791 52,637 132,905 418,333
Translation differences 6,449 94 2,076 8,619
Increase due to business combinations - - 392 392
Acquisition of minority interest in subsidiaries 20 276 (338) (42)
Income statement (credit)/charge (35,017) 10,446 (30,756) (55,327)
---------------------------------------------------------------
At December 31, 2004 204,243 63,453 104,279 371,975
===============================================================
(a) Includes the effect of currency translation on tax base explained in Note 8
Deferred tax assets
Provisions
and
allowances Inventories Tax losses Other Total at 2005
---------------------------------------------------------------
At beginning of year (62,629) (41,292) (15,707) (41,545) (161,173)
Translation differences (13,239) (232) 792 (1,173) (13,852)
Income statement charge/(credit) 43,237 (32,690) 2,922 (33,318) (19,849)
---------------------------------------------------------------
At December 31, 2005 (32,631) (74,214) (11,993) (76,036) (194,874)
===============================================================
Provisions
and
allowances Inventories Tax losses(a) Other Total at 2005
---------------------------------------------------------------
At beginning of year (75,925) (28,307) ( 8,287) (18,293) (130,812)
Translation differences (7,365) (316) (351) (1,513) (9,545)
Acquisition of minority interest in subsidiaries (49) - - 91 42
Income statement charge/(credit) 20,710 (12,669) (7,069) (21,830) (20,858)
---------------------------------------------------------------
At December 31, 2004 (62,629) (41,292) (15,707) (41,545) (161,173)
===============================================================
(a) The tax loss carry-forwards arising from the BHP settlement is included in
provisios and allowances.
-33-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Deferred income tax assets and liabilities are offset when (1) there is a
legally enforceable right to setoff current tax assets against current tax
liabilities and (2) the deferred income taxes relate to the same fiscal
authority. The following amounts, determined after appropriate setoff, are shown
in the consolidated balance sheet:
Year ended December 31,
-----------------------------------
2005 2004
Deferred tax assets (194,874) (161,173)
Deferred tax liabilities 353,395 371,975
-----------------------------------
158,521 210,802
===================================
The amounts shown in the balance sheet include the following:
Year ended December 31,
-------------------------
2005 2004
Deferred tax assets to be recovered after
more than 12 months (49,662) (31,869)
Deferred tax liabilities to be settled
after more than 12 months 225,486 246,072
22 Other liabilities
Year ended December 31,
------------------------
(i) Other liabilities - Non-current 2005 2004
Employee liabilities
Employees' statutory profit sharing 64,010 68,917
Employee severance indemnity (a) 62,279 71,759
Pension benefits (b) 10,788 11,578
------------------------
137,077 152,254
Other liabilities
Taxes payable 9,364 8,757
Miscellaneous 7,937 11,431
------------------------
17,301 20,188
------------------------
154,378 172,442
========================
(a) Employees' severance indemnity
The amounts recognized in the balance sheet are as follows:
Year ended December 31,
------------------------
2005 2004
Total included in non-current
Employee liabilities 62,279 71,759
========================
The amounts recognized in the income statement are as follows:
Year ended December 31,
--------------------------------
2005 2004 2003
Current service cost 7,846 9,999 7,291
Interest cost 2,771 2,908 2,697
--------------------------------
Total included in Labor costs 10,617 12,907 9,988
================================
The principal actuarial assumptions used were as follows:
Year ended December 31,
-----------------------------
2005 2004 2003
Discount rate 5% 4% 5%
Rate of compensation increase 4% 3% 4%
-34-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
(b) Pension benefits
The amounts recognized in the balance sheet are determined as follows:
Year ended December 31,
-----------------------------
2005 2004
Present value of unfunded obligations 15,707 16,478
Unrecognized actuarial losses (4,919) (4,900)
-----------------------------
Liability in the balance sheet 10,788 11,578
=============================
The amounts recognized in the income statement are as follows:
Year ended December 31,
--------------------------------
2005 2004 2003
Current service cost 544 571 381
Interest cost 917 875 637
Net actuarial losses
recognized in the year 329 2,870 53
--------------------------------
Total included in Labor costs 1,790 4,316 1,071
================================
Movement in the liability recognized in the balance sheet:
Year ended December 31,
-----------------------
2005 2004
At the beginning of the year 11,578 8,569
Transfers and new participants of the plan - 1,244
Total expense 1,790 4,316
Translation differences (272) 167
Contributions paid (2,308) (2,718)
----------------------
At the end of year 10,788 11,578
=====================
The principal actuarial assumptions used were as follows:
Year ended December 31,
------------------------------
2005 2004 2003
Discount rate 7% 7% 7%
Rate of compensation increase 2% 2% 2%
Year ended December 31,
-------------------------
(ii) Other liabilities - current 2005 2004
Payroll and social security payable 102,052 86,189
Accounts payable- BHP Settlement
(Note 26 (i)) - 80,517
Liabilities with related parties 2,688 1,432
Miscellaneous 34,135 26,807
-------------------------
138,875 194,945
=========================
-35-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
23 Non-current allowances and provisions
(i) Deducted from assets
Allowance for doubtful accounts- Receivables Year ended December 31,
-----------------------
2005 2004
Values at the beginning of the year (13,172) (21,258)
Translation differences 185 154
Reversals / Additional allowances (*) (81) 154
Used (*) (2,382) 7,778
-----------------------
At December 31, (15,450) (13,172)
=======================
(*) Includes effect of allowances on off-take credits, which are reflected in
the Cost of sales.
(ii) Liabilities
Legal claims and contingencies Year ended December 31,
-----------------------
2005 2004
Values at the beginning of the year 31,776 23,333
Translation differences 406 800
Increased due to business combinations - 2,355
Reversals / Additional provisions 16,015 7,438
Used (4,233) (2,150)
-----------------------
At December 31, 43,964 31,776
=======================
24 Current allowances and provisions
(i) Deducted from assets
Allowance for Allowance for other Allowance for
doubtful accounts- doubtful accounts- inventory
Trade receivables Other receivables obsolescence
----------------------------------------------------------------
Year ended December 31, 2005
Values at the beginning of the year (24,164) (8,346) (67,122)
Translation differences 1,309 (174) 2,941
Reversals /Additional allowances (4,722) (3,709) (20,303)
Increase due to business combinations (843) - (11,931)
Used 3,458 (858) 10,665
----------------------------------------------------------------
At December 31, 2005 (24,962) (13,087) (85,750)
=================================================================
Year ended December 31, 2004
Values at the beginning of the year (24,003) (5,761) (47,743)
Translation differences (611) (83) (1,814)
Reversals /Additional allowances (7,402) (2,043) (23,167)
Increase due to business combinations (835) (484) (6,334)
Used 8,687 25 11,936
----------------------------------------------------------------
At December 31, 2004 (24,164) (8,346) (67,122)
=================================================================
-36-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
(ii) Liabilities
Other claims and
Sales risks contingencies Total
------------------------------------------
Year ended December 31, 2005
Values at the beginning of the year 5,509 37,127 42,636
Translation differences (518) (3,849) (4,367)
Reversals / Additional provisions (493) 8,227 7,734
Used (1,009) (8,049) (9,058)
------------------------------------------
At December 31, 2005 3,489 33,456 36,945
==========================================
Year ended December 31, 2004
Values at the beginning of the year 4,065 35,559 39,624
Translation differences 341 2,878 3,219
Reversals / Additional provisions 6,254 (556) 5,698
Used (5,151) (1,673) (6,824)
Increase due to business combinations - 919 919
------------------------------------------
At December 31, 2004 5,509 37,127 42,636
==========================================
25 Derivative financial instruments
Net fair values of derivative financial instruments
The net fair values of derivative financial instruments disclosed in Other
liabilities and Other receivables at the balance sheet date, in accordance with
IAS 39, were:
Year ended December 31,
------------------------
2005 2004
Contracts with positive fair values:
Interest rate swap contracts 3,641 192
Forward foreign exchange contracts 441 12,163
Contracts with negative fair values:
Interest rate swap contracts (921) (3,595)
Forward foreign exchange contracts (7,818) (3,749)
Commodities contracts - (283)
Derivative financial instruments breakdown is as follows:
Variable interest rate swaps
Fair Value
December 31,
Notional amount --------------------------
(in thousands) Swap Term 2005 2004
-------------------------------------------------------------------------------------------
EUR 111,975 Pay fixed/Receive variable 2005 - (1,493)
EUR 22,616 Pay fixed/Receive variable 2007 (410) (853)
MXN 275,000 Pay fixed/Receive variable 2007 - (148)
EUR 1,404 Pay fixed/Receive variable 2009 (82) (152)
EUR 6,714 Pay fixed/Receive variable 2010 (429) (757)
USD 100,000 Pay fixed/Receive variable 2009 2,228 -
USD 200,000 Interest rate collar 2010 1,413 -
--------------------------
2,720 (3,403)
==========================
-37-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Exchange rate derivatives
Fair Value
December 31,
------------------
Currencies Contract 2005 2004
---------------------------------------------------------------------------
USD/EUR Euro Forward sales - (107)
USD/EUR Euro Forward purchases (1,502) 1,083
JPY/USD Japanese Yen Forward purchases (3,579) 5,388
CAD/USD Canadian Dollar Forward sales - (1,108)
BRL/USD Brazilian Real Forward sales 8 (1,885)
ARS/USD Argentine Peso Forward purchases (2,186) 2,154
GBP/USD Pound Sterling Forward purchases - 3,449
USD/MXN Mexican Peso Forward sales - (560)
KWD/USD Kuwaiti Dinar Forward sales (118) -
-------------------
(7,377) 8,414
===================
Commodities price derivatives
Fair Value
December
----------------------
Contract Terms 2005 2004
----------------------------------------------------------------------
Gas put options 2004-2005 - (283)
----------------------
- (283)
======================
26 Contingencies, commitments and restrictions on the distribution of profits
Tenaris is involved in litigation arising from time to time in the ordinary
course of business. Based on management's assessment and the advice of legal
counsel, it is not anticipated that the ultimate resolution of pending
litigation will result in amounts in excess of recorded provisions (Notes 22 and
23) that would be material to Tenaris' consolidated financial position or
results of operations.
(i) BHP litigation and arbitration proceeding against Fintecna
On December 30, 2003 Dalmine and a consortium led by BHP Billiton Petroleum Ltd.
("BHP") settled their litigation concerning the failure of an underwater
pipeline. The pipe that was the subject of the litigation with BHP was
manufactured and sold, and the tort alleged by BHP took place, prior to the
privatization of Dalmine. According to the terms of the settlement, Dalmine paid
BHP a total of GBP 108.0 million ($207.2 million), inclusive of expenses. This
amount, was payable in three annual installments, net of advances previously
made. The first two installments of GBP 30.3 million and GBP 30.4 million were
paid in January and December 2004, respectively, and the final installment of
GBP 30.4 million plus interest at Libor plus 1% ($60.6 million) was paid on
March 29, 2005. No charges against income resulted from this payment, as Tenaris
had previously recorded a provision related to this matter.
Techint Investments Netherlands B.V. ("Tenet") - the Tenaris subsidiary party to
the contract pursuant to which Dalmine was privatized - commenced arbitration
proceedings against Fintecna S.p.A. ("Fintecna"), an Italian state-owned entity
and successor to ILVA S.p.A., the former owner of Dalmine, seeking
indemnification from Fintecna for any amounts paid or payable by Dalmine to BHP.
On December 28, 2004, an arbitral tribunal rendered a final award in the
arbitration proceeding against Fintecna. Pursuant to this final award, Fintecna
paid Tenaris a total amount of euros 93.8 million ($127.2 million) on March 15,
2005. As a result of these settlements, the arbitration proceedings have been
definitively concluded and Tenaris has no further oustanding obligations under
the BHP settlement agreement.
(ii) Tax matters
-38-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Conversion of tax loss carry-forwards
On December 18, 2000, the Argentine tax authorities notified Siderca of an
income tax assessment related to the conversion of tax loss carry-forwards into
Debt Consolidation Bonds under Argentine Law No. 24.073. The adjustments
proposed by the tax authorities represent an estimated contingency of ARP64.4
million (approximately $21.2 million) at December 31, 2005 in taxes and
penalties. Based on the views of Siderca's tax advisors, Tenaris believes that
the ultimate resolution of the matter will not result in a material obligation.
Accordingly, no provision was recorded in these financial statements.
Application of inflationary adjustment procedures
On its tax return for the year ended December 31, 2002, Siat S.A., ("Siat", a
subsidiary of Tenaris domiciled in Argentina), applied the inflation adjustment
procedure set forth in Title VI of the Argentine Income Tax Law to reflect the
impact of inflation on its monetary positions. The application of such
procedure, however, had been suspended in March 1992 following the introduction
of the convertibility regime that pegged the Argentine peso to the United States
dollar at a fixed exchange rate of one peso to one dollar and had not been
reinstated after the termination of the convertibility regime.
Siat commenced legal proceedings objecting to the suspension of the inflationary
adjustment procedure on constitutional grounds, arguing that the suspension
resulted in artificial gains arising from the impact of inflation on monetary
positions during 2002. In July 29, 2005 Siat paid $4.5 million corresponding to
the amount of tax due excluding the inflationary correction adjustment, pending
resolution of the legal proceeding. The injunction has been appealed by the
Argentine Tax Authority before the Federal Court of Appeals.
Siderca S.A.I.C. had also initiated similar proceedings against Argentine fiscal
authorities seeking relief through the application of the inflationary
adjustment correction in the calculation of its income tax liability for the
year ended December 31, 2002. However, on October 29, 2004, Siderca applied for
benefits under the promotional regime established by Argentine Law 25.924 and
committed to dismiss the legal proceedings described in the previous paragraphs
in the event that Siderca were granted participation.
On February 11, 2005, Siderca was granted the right to participate in the
promotional tax regime established by Argentine Law 25,924 under which it could
potentially earn certain tax benefits. As a result, Siderca withdrew its claim
against the Argentine fiscal authorities. On February 21, 2005, Siderca paid ARS
$69.4 million ($23.8 million). No charges against income resulted from this
payment, as Tenaris had previously recorded a provision related to this matter.
(iii) Other Proceedings
Dalmine is currently subject to twelve civil proceedings for work-related
injuries arising from the use of asbestos in its manufacturing processes during
the period from 1960 to 1980. On June 1, 2005, the First Instance Court of
Bergamo, Italy, found against three former Dalmine managers subject to a
consolidated criminal proceeding for "objective responsibility" in the injuries
of 21 employees of the company caused by the use of asbestos in manufacturing
processes from 1960 to 1980. The managers have decided to appeal before the
Court of Appeal of Brescia.
Of the 21 civil parties related to the above consolidated criminal proceeding,
20 have been settled. In addition to the civil and criminal cases, another 22
asbestos related out-of-court claims have been forwarded to Dalmine. Dalmine
estimates that its potential liability in connection with the claims not yet
settled or covered by insurance is approximately EUR 10.3 million ($12.4
million).
(iv) Commitments
(a) In connection with its equity interest in Complejo Siderurgico de
Guayana C.A. ("Comsigua"), Tenaris pledged its shares in Comsigua and
provided a proportional guarantee of $11.7 million in support of
project financing provided by the International Finance Corporation
("IFC") in the amount of $156 million. On March 15, 2005 Comsigua
-39-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
prepaid the remaining balance of approximately $42.5 million owed to
the IFC related to the project financing loans. Tenaris has applied to
the IFC for release from its proportional guarantee commitment of
Comsigua's project loan. This release is pending.
(b) In July 2004, Tenaris' subsidiary Matesi Materiales Siderurgicos S.A.
("Matesi") entered into a twenty-year agreement with C.V.G.
Electrificacion del Caroni, C.A. ("Edelca") for the purchase of
electric power under certain take-or-pay conditions, with an option to
terminate the contract at any time upon three years notice. The
agreement established a start-up period until June 2005 for which the
take-or-pay conditions were not be in force. The outstanding value of
the contract at December 31, 2005 is approximately $60.1 million.
(c) On August 20, 2004 Matesi entered into a ten-year off-take contract
pursuant to which Matesi is required to sell to Sidor on a take-or-pay
basis 29.9% of Matesi's HBI production. In addition, Sidor has the
right to increase its proportion on Matesi's production by an extra
19.9% until reaching 49.8% of Matesi's HBI production. Under the
contract, the sale price is determined on a cost-plus basis. The
contract is renewable for additional three year periods unless Matesi
or Sidor objects its renewal more than a year prior to its
termination.
(d) Tenaris entered in a contract with Siderar for the supply of steam
generated at the power generation facility owned by Tenaris in San
Nicolas. Under this contract, Tenaris 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. In
October 2004, Tenaris detected technical problems at its electric
power generating facility located in San Nicolas, Argentina during the
routine maintenance of the equipment. GE Energy, the generator's
manufacturer, assumed the cost of the repairs of the generator,
estimated at $9.0 million. Tenaris recognized a receivable with the
manufacturer for the cost of the repairs. The Company impaired the
value of these assets under Property, Plant and Equipment for $11.7
million. The reparation of the generating facility was completed by
September 2005.
(e) Under a lease agreement entered into in 2000 between Gade Srl (Italy)
and Dalmine relating to a building located in Sabbio Bergamasco and
used by Dalmine's former subsidiary, Tad Commerciale, Dalmine is
obligated to bid in the auction for the purchase of a building owned
by Gade for a minimum amount of EUR 8.3 million ($10.0 million). As of
the present, a date for the auction has not been announced.
(f) In August 2001, Dalmine Energie S.p.A. ("Dalmine Energie") entered
into a ten-year contract ending October 1, 2011 with Eni S.p.A. Gas &
Power Division ("Eni") for the purchase of natural gas with certain
take-or-pay conditions. The outstanding value of these commitments at
December 31, 2005 amounts to approximately EUR 816.3 million ($963.0
million).
(g) Under the Gas Release Program enacted by Eni, in August 2004, Dalmine
Energie increased its supply of natural gas for the period from
October 1, 2004 to September 30, 2008. The gas purchase and sale
agreements entered into with Eni contain customary take-or-pay
conditions. The additional gas supply mentioned above is valued at
approximately EUR 266.3 million ($313.3 million), based on prices
prevailing as of December 2005. Dalmine Energie has also obtained the
necessary capacity on the interconnection infrastructure at the
Italian border to transport the natural gas to Italy for the supply
period.
(h) Dalmine Energie has entered into arrangements and expects to obtain
additional gas transportation capacity on the Trans Austria Gasleitung
GmbH ("TAG") pipeline, which is presently under construction. This
capacity will allow Dalmine Energie to import an incremental 1,176.5
million cubic meters of natural gas per year. The additional
transportation capacity, which is subject to "ship or pay" provisions,
will be available on a firm basis on the TAG pipeline beginning
October 2008 and through September 2028.
The expected annual value of this "ship or pay" commitment is
approximately EUR 5.0 million per year. Tenaris provided bank
guarantees in the amount of EUR 15.1 million in support of Dalmine
Energie. The value of the bank guarantees correspond to the
termination penalties that would be due TAG in the event of
termination or non-utilization of the transportation capacity.
(v) Restrictions on the distribution of profits and payment of dividends
-40-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
As of December 31, 2005, shareholders' 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, 2005 1,171,738
------------
Total shareholders equity according to Luxembourg law 3,080,062
============
At least 5% of the 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 share capital. As of December 31, 2005, this
reserve is fully allocated and additional allocations to the reserve are not
required under Luxembourg law. Dividends may not be paid from this reserve.
Tenaris may pay dividends to the extent that it has distributable retained
earnings and distributable reserve calculated in accordance with Luxembourg law
and regulations.
At December 31, 2005, the distributable reserve, including retained earnings and
profit for the financial year, of Tenaris under Luxembourg law totalled $1,171.7
million, as detailed below.
(all amounts in thousands of U.S. dollars)
Distributable reserve at December 31, 2004
under Luxembourg law 536,541
Dividends and distributions received 449,270
Other income and expenses for the year
ended December 31, 2005 535,366
Dividends paid (349,439)
------------
Distributable reserve at December 31, 2005
under Luxembourg law 1,171,738
============
27 Ordinary shares and share premium
Number of Ordinary shares
------------------------------------
2005 2004
At January 1 1,180,536,830 1,180,287,664
Net issue of shares - 249,166
------------------------------------
At December 31 1,180,536,830 1,180,536,830
------------------------------------
The total of issued and outstanding ordinary shares as of December 31, 2005 is
1,180,536,830 with a par value of $1.00 per share with one vote each.
28 Business combinations and other acquisitions
(a) As described in AP B, management has applied IFRS 3 to the business
combinations detailed below.
On May 4, 2005, the Company completed the acquisition of 97% of the equity in
S.C. Donasid S.A., a Romanian steel producer, for approximately $47.9 million in
cash and assumed liabilities. The shares of Siprofer A.G. and Donasid Service
S.r.l. were also acquired as part of this transaction.
-41-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
On July 26, 2004 Tenaris acquired all of the shares of Tubman International Ltd.
("Tubman"), a company incorporated under the laws of Gibraltar, which owned
84.86% of the shares of S. C. Silcotub S.A. ("Silcotub") and controlling
interests in two minor subsidiaries, and all of the shares of Intermetal Com
S.r.l. ("Intermetal") for a total consideration of $42.0 million. Silcotub, the
minor subsidiaries and Intermetal are incorporated in Romania. The acquisition
of these companies did not generate goodwill.
On July 9, 2004 Tenaris and Sidor, through their jointly owned company Matesi,
acquired the industrial facilities for the production of pre-reduced HBI located
in Ciudad Guayana, Venezuela, from Posven, a Venezuelan company. The price of
the acquisition was $120.0 million. The acquisition did not generate goodwill.
As of December 31, 2005 Tenaris held 50.2% of Matesi, while Sidor owned the
remaining 49.8%.
Subsequently, Tenaris reached agreement with the Romanian privatization agency
("AVAS") to settle litigation commenced by the latter against Tubman in
connection with its alleged breach of certain obligations under the
privatization agreement under which Tubman purchased control of S.C. Laminorul
S.A. ("Laminorul"). Pursuant to the agreement, signed on November 1, 2004
Tenaris transferred 9,931,375 shares of Laminorul (representing 69.99% of
Laminorul's capital stock) to the Romanian government, retaining 2,334,145
shares (16.45% of Laminorul's capital stock).
The businesses acquired in 2004 contributed revenues of $93.2 million and net
income of $6.1 million to Tenaris. Businesses acquired in 2005 did not
materially contribute to the Company's revenue and income.
The assets and liabilities arising from the acquisitions are as a follows:
Year ended December 31,
2005 2004
--------------------------
(all amounts in thousands of U.S. dollars)
Other assets and liabilities (net) (41,755) (25,060)
Property, plant and equipment 67,211 191,097
Goodwill 769 -
--------------------------
Net assets acquired 26,225 166,037
Minority Interest (527) (8,034)
--------------------------
Total non-current liabilities (*) - (60,408)
--------------------------
Total liabilities assumed - (60,408)
--------------------------
Sub-total 25,698 97,595
--------------------------
Cash-acquired - 5,177
Common stock issued in acquisition of
minority interest 820
--------------------------
Purchase consideration 25,698 103,592
Liabilities paid as part of purchase
agreement 22,594 -
--------------------------
Total disbursement 48,292 103,592
==========================
Net cash consideration (total disbursement less cash acquired and common
stock issued in acquisition of minority interest) amounted to $ 48,292 and
$ 97,595 at December 31, 2005 and 2004 respectively.
(*) At December 31, 2004 includes Matesi's liability with Sidor (minority
shareholder of Matesi).
(b) Incorporations: On January 23, 2004 Tenaris Investments Limited was
incorporated in Ireland to assist the financial activities of the Company
and its other subsidiaries; on that date, Tenaris underwrote all of the
common shares of the new company and increased the subsidiary's capital
stock to $50.0 million.
(c) Asset Purchases: On February 2, 2004 Tenaris completed the purchase of the
land and manufacturing facilities that were previously leased by its
Canadian operating subsidiary. The assets were acquired from Algoma Steel
Inc. for the price of approximately $9.6 million, plus transaction costs.
-42-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
(d) Capitalization of Convertible Debt of Consorcio Siderurgia Amazonia, Ltd.
("Amazonia") and Exchange of Interests in Amazonia and Ylopa Servicos de
Consultadoria Lda. ("Ylopa") for shares of Ternium S.A. ("Ternium")
On February 3, 2005, Ylopa exercised its option to convert the convertible
debt it held in Amazonia into common stock. In connection of this
conversion, Tenaris recognized a gain of $83.1 million in 2004. As a
result, Tenaris' ownership stake in Amazonia increased from 14.5% to 21.2%,
and its indirect ownership in Sidor C.A. ("Sidor") increased from 8.7% to
12.6%.
On September 9, 2005, the Company exchanged its interest in Amazonia and
its interest in Ylopa, for 209,460,856 shares in Ternium, a new company
formed by San Faustin N.V. (a Netherlands Antilles corporation and
controlling shareholder of Tenaris) to consolidate its Latin American
holdings in flat and long steel producers Siderar S.A.I.C., Sidor C.A. and
Hylsamex, S.A de C.V. . As a result of the exchange, which was carried out
based on fair values as determined by an internationally recognized
investment bank engaged for this purpose, Tenaris obtained an ownership
interest of approximately 17.9% in Ternium.
Subsequently, on October 27, 2005, Usinas Siderurgicas de Minas Gerais S.A.
("Usiminas") reached agreement with Ternium to exchange its interests in
Amazonia, Ylopa and Siderar S.A.I.C., plus additional consideration of
approximately $114.1 million provided as a convertible loan, for an equity
stake in Ternium. As a result of this transaction, at December 31, 2005,
Tenaris' ownership stake in Ternium was reduced to 15.0% of Ternium's
outstanding common stock. As this was an equity transaction in Ternium, the
effect of $2.7 million at Tenaris's percentage of ownership was recognized
in other reserves in equity.
In addition, as of December 31, 2005, Tenaris had also extended two loans
totaling approximately $40.4 million to Ternium, consisting of principal
amount of $39.7 million plus accrued interest. The principal amount of
these loans at the date issue corresponded to the amount of excess cash
distributions received from Amazonia during the second and third quarters
of 2005. The loans were convertible into shares of Ternium at the
discretion of Tenaris upon the occurrence of: 1) maturity of the loan in
July and August 2011; 2) an event of default as defined in certain loan
agreements between Ternium and its banks. Conversion of the loan was
mandatory upon an initial public offering ("IPO") of shares by Ternium.
On February 1, 2006, Ternium completed its initial public offering of
shares, issuing an additional 248,447,200 shares (equivalent to 24,844,720
ADS) at a price of $2.00 per share, or $20.00 per ADS. Tenaris received an
additional 20,252,338 shares upon the mandatory conversion of its loans to
Ternium. In addition to the shares issued to Tenaris, Ternium issued
additional shares to other shareholders corresponding to their mandatory
convertible loans. As a result of the IPO and the conversion of loans, as
of February 1, 2006, Tenaris' ownership stake in Ternium common stock
amounted to 11.59%.
Because the exchange of its holdings in Amazonia and Ylopa for shares in
Ternium, were considered to be transactions between companies under common
control, Tenaris has initially recorded its ownership interest in Ternium
at the carrying value of the investments exchanged. At the transaction
date, the carrying value of Amazonia and Ylopa was $229.7 million while
Tenaris' proportional ownership in the equity of Ternium at September 30,
2005 amounted to $252.3 million. The difference of $22.6 million between
the carrying value of Amazonia and Ylopa and Tenaris' proportional
ownership in the equity of Ternium will be maintained in the future. As a
result of this accounting treatment, Tenaris' reported value of its
investment in Ternium will not reflect its proportional ownership of
Ternium's net equity position.
Until September 30, 2005, Tenaris recognized its proportional earnings in
Amazonia and Ylopa, which amounted to $26.5 million. For the quarter ended
December 31, 2005, Tenaris recognized earnings from its investment in
Ternium in the amount of $21.8 million. Going forward, Tenaris will
continue to recognize its share of Ternium's earnings to the extent of its
proportional ownership.
(e) Acindar: On May 18, 2005, Siat S.A., a subsidiary of Tenaris, and Acindar
Industria Argentina de Aceros S.A. ("Acindar") signed a letter of intent
pursuant to which Siat confirmed its intention to acquire Acindar's welded
pipe assets and facilities located in Villa Constitucion, province of Santa
Fe, Argentina, for $28.0 million. On January 31, 2006 Siat completed this
-43-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
acquisition. The facilities acquired have an annual capacity of 80,000 tons
of welded pipes whose small diameter range largely complements the range of
welded pipes that Tenaris produces in Argentina. Of the $28.0 million
purchase price, approximately $4.0 million are pending of completion of
certain actions by Acindar.
(f) Capital Investment: On September 16, 2004 Tenaris' Board of Directors
approved an investment to construct a gas-fired 120 MW combined heat and
power plant in Dalmine, Italy with an estimated cost of approximately EUR
109 million (approximately $131 million). This investment is expected to
improve the competitiveness of Tenaris' Italian seamless pipe operations by
reducing energy costs and securing a reliable source of power.
29 Related party transactions
The Company is controlled by San Faustin N.V., a Netherlands Antilles
corporation, which owns 60.4% of the Company's outstanding shares, either
directly or through its wholly-owned subsidiary I.I.I. Industrial Investments
Inc., a Cayman Islands corporation. The Company's directors and executive
officers as a group own 0.2% of the Company's outstanding shares, while the
remaining 39.4% is publicly traded. The ultimate controlling entity of the
Company is Rocca & Partners S.A., a British Virgin Islands corporation.
The following transactions were carried out with related parties:
At December 31, 2005
Associated (1) Other Total
(i) Transactions
(a) Sales of goods and services
Sales of goods 104,054 75,948 180,002
Sales of services 7,499 7,830 15,329
--------------------------------------
111,553 83,778 195,331
--------------------------------------
(b) Purchases of goods and services
Purchases of goods 67,814 33,949 101,763
Purchases of services 15,773 63,220 78,993
--------------------------------------
83,587 97,169 180,756
--------------------------------------
At December 31, 2004
Associated (2) Other Total
(i) Transactions
(a) Sales of goods and services
Sales of goods 26,088 46,844 72,932
Sales of services 15,365 9,618 24,983
--------------------------------------
41,453 56,462 97,915
--------------------------------------
(b) Purchases of goods and services
Purchases of goods 30,648 32,484 63,132
Purchases of services 7,526 51,305 58,831
--------------------------------------
38,174 83,789 121,963
--------------------------------------
-44-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
At December 31, 2003
Associated (2) Other Total
(i) Transactions
(a) Sales of goods and services
Sales of goods 5,206 52,659 57,865
Sales of services 2,895 8,916 11,811
--------------------------------------
8,101 61,575 69,676
--------------------------------------
(b) Purchases of goods and services
Purchases of goods 26,679 44,305 70,984
Purchases of services 459 64,334 64,793
--------------------------------------
27,138 108,639 135,777
--------------------------------------
(c) Acquisitions of subsidiaries - (304) (304)
--------------------------------------
At December 31, 2005
Associated (3) Other Total
(ii) Year-end balances
(a) Arising from sales/purchases of
goods/services
Receivables from related parties 30,988 15,228 46,216
Payables to related parties (1) (21,034) (8,413) (29,447)
--------------------------------------
9,954 6,815 16,769
--------------------------------------
(b) Other balances 42,437 - 42,437
--------------------------------------
(c) Financial debt
Borrowings and overdrafts (4) (54,801) - (54,801)
--------------------------------------
At December 31, 2004
Associated (2) Other Total
(ii) Year-end balances
(a) Arising from sales/purchases of
goods/services
Receivables from related parties 25,593 27,070 52,663
Payables to related parties (1) (4,914) (12,487) (17,401)
--------------------------------------
20,679 14,583 35,262
--------------------------------------
(b) Cash and cash equivalents
Time deposits - 6 6
--------------------------------------
(c) Other balances
Trust Fund - 119,666 119,666
Convertible debt instruments -
Ylopa 121,955 - 121,955
--------------------------------------
121,955 119,666 241,621
--------------------------------------
(d) Financial debt
Borrowings and overdrafts (5) (51,457) (5,449) (56,906)
--------------------------------------
-45-
At December 31, 2003
Associated (2) Other Total
(ii) Year-end balances
(a) Arising from sales/purchases of
goods/services
Receivables from related parties 6,253 35,863 42,116
Payables to related parties (18,968) (18,251) (37,219)
--------------------------------------
(12,715) 17,612 4,897
--------------------------------------
(b) Cash and cash equivalents
Time deposits - 420 420
--------------------------------------
(c) Other balances
Trust Fund - 118,087 118,087
Convertible debt instruments -
Ylopa 33,508 - 33,508
--------------------------------------
33,508 118,087 151,595
--------------------------------------
(d) Financial debt
Borrowings and overdrafts - (5,716) (5,716)
Borrowings from trust fund - (1,789) (1,789)
--------------------------------------
- (7,505) (7,505)
--------------------------------------
(1) Up to September 30, 2005 includes: Condusid, Ylopa, Amazonia and Sidor.
From October 1, 2005 includes: Condusid and Ternium.
(2) Includes: Condusid, Ylopa, Amazonia and Sidor
(3) Includes: Condusid and Ternium.
(4) Convertible loan from Sidor to Matesi.
(5) Includes convertible loan from Sidor to Matesi of $51.5 million at December
31, 2004.
(iii) Officers and directors' compensation
The aggregate compensation of the directors and executive officers earned during
2005 and 2004 amounts to $14.3 million and $9.8 million respectively.
30 Cash flow disclosures
Year ended December 31,
-----------------------------------------------------
2005 2004 2003
(i) Changes in working capital
Inventories (101,143) (411,045) (151,766)
Receivables and prepayments 1,513 (82,845) 10,900
Trade receivables (387,240) (271,225) 4,142
Other liabilities 34,526 (37,443) 39,585
Customer advances (14,156) 72,678 17,636
Trade payables 32,561 108,693 (27,653)
-----------------------------------------------------
(433,939) (621,187) (107,156)
-----------------------------------------------------
-46-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
(ii) Income tax accruals less payments
Tax accrued 568,753 220,376 63,918
Taxes paid (419,266) (175,717) (202,488)
-----------------------------------------------------
149,487 44,659 (138,570)
-----------------------------------------------------
(iii) Interest accruals less payments, net
Interest accrued 29,236 32,683 16,708
Interest paid net (27,317) (15,710) (19,740)
-----------------------------------------------------
1,919 16,973 (3,032)
-----------------------------------------------------
(iv) Cash and cash equivalents
Cash and bank deposits 707,356 311,579 247,834
Bank overdrafts (24,717) (4,255) (9,804)
Restricted bank deposits (2,048) (13,500) -
-----------------------------------------------------
680,591 293,824 238,030
-----------------------------------------------------
-47-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
31 Principal subsidiaries
The following is a list of Tenaris's subsidiaries and its direct and indirect
percentage of ownership of each company at December 31, 2005, 2004 and 2003.
---------------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership
Organization at December 31,
---------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------
Algoma Tubes Inc. Canada Manufacturing of seamless steel 100% 100% 100%
pipes
---------------------------------------------------------------------------------------------------------------------------
Confab Industrial S.A. and subsidiaries Brazil Manufacturing of welded steel 39% 39% 39%
(c) pipes and capital goods
---------------------------------------------------------------------------------------------------------------------------
Dalmine Energie S.p.A. (h) Italy Trading of energy 100% 100% 100%
---------------------------------------------------------------------------------------------------------------------------
Dalmine Holding B.V. and subsidiaries Netherlands Holding company 99% 99% 99%
---------------------------------------------------------------------------------------------------------------------------
Dalmine S.p.A. Italy Manufacturing of seamless steel 99% 99% 99%
pipes
---------------------------------------------------------------------------------------------------------------------------
Tenaris Fittings S.A. de C.V. (previously Mexico Manufacturing of welded fittings 100% 100% 100%
Empresas Riga S.A. de C.V.) for seamless steel pipes
---------------------------------------------------------------------------------------------------------------------------
Energy Network S.R.L. (b) Romania Trading of energy 100% - -
---------------------------------------------------------------------------------------------------------------------------
Exiros S.A. Uruguay Procurement services for 100% 100% 100%
industrial companies
---------------------------------------------------------------------------------------------------------------------------
Information Systems and Technologies N.V. Netherlands Software development and 75% 75% 75%
maintenance
---------------------------------------------------------------------------------------------------------------------------
Information Systems and Technologies S.A. Argentina Software development and 100% 100% 100%
(d) maintenance
---------------------------------------------------------------------------------------------------------------------------
Inmobiliaria Tamsa S.A. de C.V. Mexico Leasing of real estate 100% 100% 100%
---------------------------------------------------------------------------------------------------------------------------
Insirger S.A. and subsidiaries (g) Argentina Electric power generation - 100% 100%
---------------------------------------------------------------------------------------------------------------------------
Intermetal Com SRL (a) Romania Marketing of Scrap and other raw 100% 100% -
materials
---------------------------------------------------------------------------------------------------------------------------
Inversiones Berna S.A. (b) Chile Financial company 100% - -
---------------------------------------------------------------------------------------------------------------------------
Inversiones Lucerna S.A. (b) Chile Financial company 82% - -
---------------------------------------------------------------------------------------------------------------------------
Invertub S.A. and subsidiaries (g) Argentina Holding Company - 100% 100%
---------------------------------------------------------------------------------------------------------------------------
Lomond Holdings B.V. and subsidiaries Netherlands Procurement services for 100% 100% 100%
industrial companies
---------------------------------------------------------------------------------------------------------------------------
Matesi, Materiales Siderurgicos S.A. (a) Venezuela Production of hot briquetted iron 50% 50% -
(HBI)
---------------------------------------------------------------------------------------------------------------------------
Metalcentro S.A. Argentina Manufacturing of pipe-end 100% 100% 100%
protectors and lateral impact
tubes
---------------------------------------------------------------------------------------------------------------------------
Metalmecanica S.A. Argentina Manufacturing of steel products 100% 100% 100%
for oil extraction
---------------------------------------------------------------------------------------------------------------------------
NKK Tubes K.K. Japan Manufacturing of seamless steel 51% 51% 51%
pipes
---------------------------------------------------------------------------------------------------------------------------
Operadora Electrica S.A. (e) Argentina Electric power generation 100% 100% 100%
---------------------------------------------------------------------------------------------------------------------------
-48-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
31 Principal subsidiaries (Cont'd.)
--------------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership at
Organization December 31,
--------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Quality Tubes (UK) Ltd. (h) United Kingdom Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
S.C. Donasid and subsidiary (b) Romania Manufacturing of steel 99% - -
products
--------------------------------------------------------------------------------------------------------------------------
S.C. Silcotub S.A. and subsidiaries (a) Romania Manufacturing of seamless 85% 85% -
steel pipes
--------------------------------------------------------------------------------------------------------------------------
Scrapservice S.A. Argentina Processing of scrap 75% 75% 75%
--------------------------------------------------------------------------------------------------------------------------
Servicios Generales TenarisTamsa S.A. de Mexico Handling and maintenance of 100% 100% 100%
C.V. (f) steel pipes
--------------------------------------------------------------------------------------------------------------------------
Siat S.A. Argentina Manufacturing of welded steel 82% 82% 82%
pipes
--------------------------------------------------------------------------------------------------------------------------
Siderca International A.p.S. Denmark Holding company 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Siderca S.A.I.C. Argentina Manufacturing of seamless 100% 100% 100%
steel pipes
--------------------------------------------------------------------------------------------------------------------------
Siderestiba S.A. Argentina Logistics 99% 99% 99%
--------------------------------------------------------------------------------------------------------------------------
Sidtam Limited B.V.I. Holding company 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Siprofer A.G. (b) Switzerland Holding company 100% - -
--------------------------------------------------------------------------------------------------------------------------
SO.PAR.FI Dalmine Holding S.A. Luxembourg Holding company 99% 99% 99%
--------------------------------------------------------------------------------------------------------------------------
Sociedad Industrial Puntana S.A. Argentina Manufacturing of steel 100% 100% 100%
products
--------------------------------------------------------------------------------------------------------------------------
Socominter S.A. Venezuela Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Socominter Ltda. Chile Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Talta - Trading e Marketing Lda. (a) Madeira Holding Company 100% 100% -
--------------------------------------------------------------------------------------------------------------------------
Tamdel LLC and subsidiaries (f) Mexico Holding company 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tamser S.A. de C.V. (f) Mexico Marketing of scrap 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tamsider LLC USA Holding company 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tamsider S.A. de C.V. and subsidiaries (g) Mexico Promotion and organization of - 100% 100%
steel-related companies and
marketing of steel products
--------------------------------------------------------------------------------------------------------------------------
Tamtrade S.A.de C.V. (g) Mexico Marketing of steel products - 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Techint Investment Netherlands B.V. Netherlands Holding company 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Autopartes S.A. de C.V. Mexico Manufacturing of supplies for 100% 100% 100%
the automotive industry
--------------------------------------------------------------------------------------------------------------------------
-49-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Tenaris Confab Hastes de Bombeio S.A. (a) Brazil Manufacturing of steel 70% 70% -
products for oil extraction
--------------------------------------------------------------------------------------------------------------------------
Tenaris Connections A.G. and subsidiaries Liechtenstein Ownership and licensing of 100% 100% 99%
steel technology
--------------------------------------------------------------------------------------------------------------------------
Tenaris Financial Services S.A. Uruguay Financial Services 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services B.V. Netherlands Sales agent of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (B.V.I.) Ltd. B.V.I. Holding company 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (Canada) Inc. Canada Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services de Bolivia S.R.L. Bolivia Marketing of steel products 100% 100% 100%
(previously Socominter de Bolivia S.R.L.)
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services Ecuador S.A. Ecuador Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (Egypt) Ltd. (b) Egypt Marketing of steel products 100% - -
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services Far East Pte. Singapore Marketing of steel products 100% 100% 100%
Ltd.
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (Japan) K.K. Japan Marketing of steel products 100% 100% 100%
(previously DST Japan K.K.)
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (Kazakhstan ) LLP Kazakhstan Marketing of steel products 100% 100% -
(a)
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services Korea Korea Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services LLC U.S.A. Sales agent of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services Nigeria Ltd. Nigeria Marketing of steel products 100% 100% 100%
(Previously Tubular DST Nigeria Ltd.)
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services Norway AS Norway Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (Panama) S.A. Panama Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services S.A. Uruguay Holding company and marketing 100% 100% 100%
of steel products
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (UK) Ltd. United Kingdom Marketing of steel products 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Tenaris Global Services (U.S.A.) U.S.A. Marketing of steel products 100% 100% 100%
Corporation
--------------------------------------------------------------------------------------------------------------------------
Tenaris Investments Ltd. (a) Ireland Holding company 100% 100% -
--------------------------------------------------------------------------------------------------------------------------
Tenaris Qingdao Steel Pipes Ltd. (b) China Manufacturing of steel pipes 100% - -
and connections
--------------------------------------------------------------------------------------------------------------------------
Tenaris West Africa Ltd. United Kingdom Finishing of steel pipes 100% 100% 100%
--------------------------------------------------------------------------------------------------------------------------
Texas Pipe Threaders Co. U.S.A. Finishing and marketing of 100% 100% 100%
steel pipes
--------------------------------------------------------------------------------------------------------------------------
-50-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Company Country of Main activity Percentage of ownership
Organization at December 31,
--------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Tubman Holdings (Gibraltar) LLP (a) Gibraltar Holding company 100% 100% -
--------------------------------------------------------------------------------------------------------------------------
Tubman International Ltd. (a) Gibraltar Holding company 100% 100% -
--------------------------------------------------------------------------------------------------------------------------
Tubos de Acero de Mexico S.A. Mexico Manufacturing of seamless 100% 100% 100%
steel pipes
--------------------------------------------------------------------------------------------------------------------------
Tubos de Acero de Venezuela S.A. Venezuela Manufacturing of seamless 70% 70% 70%
steel pipes
--------------------------------------------------------------------------------------------------------------------------
(a) Incorporated or acquired during 2004
(b) Incorporated or acquired during 2005
(c) Tenaris holds 99% of the voting shares of Confab Industrial S.A. and has,
directly or indirectly, the majority of voting rights in all of its
subsidiaries.
(d) Included in December 2003 in "Information Systems and technologies N.V. and
subsidiaries" and in December 2004 in "Invertub S.A. and subsidiaries"
(e) Included in December 2004 in "Insirger S.A. and subsidiaries"
(f) Included in December 2004 in "Tamsider S.A. de C.V. and subsidiaries"
(g) Merged during 2005
(h) Included in December 2003 and 2004 in "Dalmine Holding B.V. and
subsidiaries"
Carlos Condorelli
Chief Financial Officer
-51-
Tenaris S.A. Consolidated financial statements for the years ended December 31,
2005, 2004 and 2003
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Tenaris S.A.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in equity
present fairly, in all material respects, the financial position of Tenaris S.A.
and its subsidiaries at December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with International Financial Reporting
Standards. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Buenos Aires, March 1, 2006
PRICE WATERHOUSE & CO. S.R.L.
by (Partner)
-----------------------------------------
Daniel A. Lopez Lado
-52-
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: March 6, 2006
Tenaris, S.A.
By: /s/ Cecilia Bilesio
-----------------------
Cecilia Bilesio
Corporate Secretary