tenaris6k.htm
 



 
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 4, 2010



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 ü  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 ü
 


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 Financial Statements for the years ended December 31, 2009, 2008 and 2007.



SIGNATURE




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



Date: March 4, 2010



Tenaris, S.A.




By: /s/ Cecilia Bilesio
Cecilia Bilesio
Corporate Secretary










 
 

 

TENARIS S.A.







CONSOLIDATED
FINANCIAL STATEMENTS



For the years ended December 31, 2009, 2008 and 2007














46a, Avenue John F. Kennedy – 2nd Floor.
L – 1855 Luxembourg

 
 

 

CONSOLIDATED INCOME STATEMENT

(all amounts in thousands of U.S. dollars, unless otherwise stated)
       
Year ended December 31,
 
   
Notes
   
2009
   
2008
   
2007
 
Continuing operations
                       
Net sales
   1       8,149,320       11,987,760       9,874,312  
Cost of sales
 
1 & 2
      (4,864,922 )     (6,698,285 )     (5,408,984 )
Gross profit
            3,284,398       5,289,475       4,465,328  
Selling, general and administrative expenses
 
1 & 3
      (1,473,791 )     (1,787,952 )     (1,551,836 )
Other operating income
   5(i)       7,673       35,140       27,251  
Other operating expenses
 
5 (ii)
      (4,673 )     (411,013 )     (23,771 )
Operating income
            1,813,607       3,125,650       2,916,972  
Interest income
   6       30,831       48,711       92,733  
Interest expense
   6       (118,301 )     (179,885 )     (270,705 )
Other financial results
   6       (64,230 )     (99,850 )     (22,358 )
Income before equity in earnings of associated companies and income tax
            1,661,907       2,894,626       2,716,642  
Equity in earnings of associated companies
   7       87,041       89,423       113,062  
Income before income tax
            1,748,948       2,984,049       2,829,704  
Income tax
   8       (513,211 )     (1,015,334 )     (805,773 )
Income for continuing operations
            1,235,737       1,968,715       2,023,931  
                                 
Discontinued operations
                               
Result for discontinued operations
   29       (28,138 )     306,905       52,128  
                                 
Income for the year
            1,207,599       2,275,620       2,076,059  
                                 
Attributable to:
                               
Equity holders of the Company
            1,161,555       2,124,802       1,923,748  
Minority interest
            46,044       150,818       152,311  
              1,207,599       2,275,620       2,076,059  
                                 
Earnings per share attributable to the equity holders of the Company during year :
                               
Weighted average number of ordinary shares (thousands)
   9       1,180,537       1,180,537       1,180,537  
Continuing and Discontinued operations
                               
Basic and diluted earnings per share (U.S. dollars per share)
   9       0.98       1.80       1.63  
Basic and diluted earnings per ADS (U.S. dollars per ADS)
   9       1.97       3.60       3.26  
Continuing operations
                               
Basic and diluted earnings per share (U.S. dollars per share)
            1.00       1.49       1.58  
Basic and diluted earnings per ADS (U.S. dollars per ADS)
            2.00       2.99       3.17  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
(all amounts in thousands of U.S. dollars)
 
Year ended December 31,
 
   
2009
   
2008
   
2007
 
Income for the year
    1,207,599       2,275,620       2,076,059  
Other comprehensive income:
                       
Currency translation adjustment
    357,511       (486,636 )     306,266  
Cash flow hedges
    1,384       (8,513 )     (10,554 )
Share of other comprehensive income of associates
                       
   Currency translation adjustment
    (1,302 )     (51,004 )     3,595  
   Cash flow hedges
    2,722       (6,044 )     -  
Income tax relating to components of other comprehensive income (*)
    2,089       3,003       -  
Other comprehensive income for the year, net of tax
    362,404       (549,194 )     299,307  
Total comprehensive income for the year
    1,570,003       1,726,426       2,375,366  
                         
Attributable to:
                       
Equity holders of the Company
    1,423,986       1,620,640       2,175,289  
Minority interest
    146,017       105,786       200,077  
      1,570,003       1,726,426       2,375,366  
(*) Relates to Cash flow hedges.
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 


 


 
1

 


CONSOLIDATED STATEMENT OF FINANCIAL POSITION


(all amounts in thousands of U.S. dollars)
       
At December 31, 2009
   
At December 31, 2008
 
   
Notes
             
ASSETS
                             
Non-current assets
                             
  Property, plant and equipment, net
   10       3,254,587             2,982,871        
  Intangible assets, net
   11       3,670,920             3,826,987        
  Investments in associated companies
   12       602,572             527,007        
  Other investments
   13       34,167             38,355        
  Deferred tax assets
   21       197,603             390,323        
  Receivables
   14       101,618       7,861,467       82,752       7,848,295  
Current assets
                                       
  Inventories
   15       1,687,059               3,091,401          
  Receivables and prepayments
   16       220,124               251,481          
  Current tax assets
   17       260,280               201,607          
  Trade receivables
   18       1,310,302               2,123,296          
  Available for sale assets
   32       21,572               -          
  Other investments
   19       579,675               45,863          
  Cash and cash equivalents
   19       1,542,829       5,621,841       1,538,769       7,252,417  
                                         
Total assets
                    13,483,308               15,100,712  
EQUITY
                                       
Capital and reserves attributable to the Company’s equity holders
                    9,092,164               8,176,571  
Minority interest
                    628,672               525,316  
Total equity
                    9,720,836               8,701,887  
LIABILITIES
                                       
Non-current liabilities
                                       
  Borrowings
   20       655,181               1,241,048          
  Deferred tax liabilities
   21       860,787               1,053,838          
  Other liabilities
   22(i)       192,467               223,142          
  Provisions
 
23 (ii)
      80,755               89,526          
  Trade payables
            2,812       1,792,002       1,254       2,608,808  
Current liabilities
                                       
  Borrowings
   20       791,583               1,735,967          
  Current tax liabilities
   17       306,539               610,313          
  Other liabilities
 
22 (ii)
      192,190               242,620          
  Provisions
 
24 (ii)
      28,632               28,511          
  Customer advances
            95,107               275,815          
  Trade payables
            556,419       1,970,470       896,791       3,790,017  
Total liabilities
                    3,762,472               6,398,825  
Total equity and liabilities
                    13,483,308               15,100,712  
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

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
(all amounts in thousands of U.S. dollars)



   
Attributable to equity holders of the Company
                   
   
Share Capital
   
Legal Reserves
   
Share Premium
   
Currency Translation Adjustment
   
Other Reserves
   
Retained Earnings (*)
   
Total
   
Minority Interest
   
Total
 
                                                       
Balance at January 1, 2009
    1,180,537       118,054       609,733       (223,779 )     2,127       6,489,899       8,176,571       525,316       8,701,887  
Income for the year
    -       -       -       -       -       1,161,555       1,161,555       46,044       1,207,599  
Other comprehensive income for the year
    -       -       -       253,312       9,119       -       262,431       99,973       362,404  
Total comprehensive income for the year
    -       -       -       253,312       9,119       1,161,555       1,423,986       146,017       1,570,003  
Acquisition and decrease of minority interest
    -       -       -       -       (783 )     -       (783 )     3,425       2,642  
Change in equity reserves
    -       -       -       -       21       -       21       -       21  
Dividends paid in cash
    -       -       -       -       -       (507,631 )     (507,631 )     (46,086 )     (553,717 )
Balance at
December 31, 2009
    1,180,537       118,054       609,733       29,533       10,484       7,143,823       9,092,164       628,672       9,720,836  



 
(*) The Distributable Reserve and Retained Earnings calculated according to Luxembourg Law are disclosed in Note 26.

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

 


 
3

 


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Cont.)
 
(all amounts in thousands of U.S. dollars)

   
Attributable to equity holders of the Company
                   
   
Share Capital
   
Legal Reserves
   
Share Premium
   
Currency Translation Adjustment
   
Other Reserves
   
Retained Earnings
   
Total
   
Minority Interest
   
Total
 
                                                       
Balance at January 1, 2008
    1,180,537       118,054       609,733       266,049       18,203       4,813,701       7,006,277       523,573       7,529,850  
Income for the year
    -       -       -       -       -       2,124,802       2,124,802       150,818       2,275,620  
Other comprehensive income for the year
    -       -       -       (489,828 )     (14,334 )     -       (504,162 )     (45,032 )     (549,194 )
Total comprehensive income for the year
    -       -       -       (489,828 )     (14,334 )     2,124,802       1,620,640       105,786       1,726,426  
Acquisition and decrease of minority interest
    -       -       -       -       (1,742 )     -       (1,742 )     (16,843 )     (18,585 )
Dividends paid in cash
    -       -       -       -       -       (448,604 )     (448,604 )     (87,200 )     (535,804 )
Balance at
December 31, 2008
    1,180,537       118,054       609,733       (223,779 )     2,127       6,489,899       8,176,571       525,316       8,701,887  
                                                                         
                                                                         
   
Attributable to equity holders of the Company
                         
   
Share Capital
   
Legal Reserves
   
Share Premium
   
Currency Translation Adjustment
   
Other Reserves
   
Retained Earnings
   
Total
   
Minority Interest
   
Total
 
                                                                         
Balance at January 1, 2007
    1,180,537       118,054       609,733       3,954       28,757       3,397,584       5,338,619       363,011       5,701,630  
Income for the year
    -       -       -       -       -       1,923,748       1,923,748       152,311       2,076,059  
Other comprehensive income for the year
    -       -       -       262,095       (10,554 )     -       251,541       47,766       299,307  
Total comprehensive income for the year
    -       -       -       262,095       (10,554 )     1,923,748       2,175,289       200,077       2,375,366  
Acquisition and decrease of minority interest
    -       -       -       -       -       -       -       20,748       20,748  
Dividends paid in cash
    -       -       -       -       -       (507,631 )     (507,631 )     (60,263 )     (567,894 )
Balance at
December 31, 2007
    1,180,537       118,054       609,733       266,049       18,203       4,813,701       7,006,277       523,573       7,529,850  

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

 

 
4

 

CONSOLIDATED STATEMENT OF CASH FLOWS


         
Year ended December 31,
 
(all amounts in thousands of U.S. dollars)
 
Note
   
2009
   
2008
   
2007
 
Cash flows from operating activities
                       
Income for the year
          1,207,599       2,275,620       2,076,059  
Adjustments for:
                             
Depreciation and amortization
 
10 & 11
      504,864       532,934       514,820  
Income tax accruals less payments
 
28 (ii)
      (458,086 )     (225,038 )     (393,055 )
Equity in earnings of associated companies
          (86,179 )     (89,556 )     (94,888 )
Interest accruals less payments, net
 
28 (iii)
      (24,167 )     55,492       (21,302 )
Income from disposal of investment and other
          -       (394,323 )     (18,388 )
Changes in provisions
          (7,268 )     783       (421 )
Impairment charge
   5       -       502,899       -  
Changes in working capital
   28(i)       1,737,348       (1,051,632 )     (110,425 )
Other, including currency translation adjustment
            189,837       (142,174 )     68,224  
Net cash provided by operating activities
            3,063,948       1,465,005       2,020,624  
                                 
Cash flows from investing activities
                               
Capital expenditures
 
10 & 11
      (460,927 )     (443,238 )     (447,917 )
Acquisitions of subsidiaries and minority interest
   27       (73,584 )     (18,585 )     (1,927,262 )
Other disbursements relating to the acquisition of Hydril
            -       -       (71,580 )
Proceeds from the sale of pressure control business (*)
   29       -       1,113,805       -  
Decrease in subsidiaries / associated
            -       -       27,321  
Proceeds from disposal of property, plant and equipment and intangible assets
            16,310       17,161       24,041  
Dividends and distributions received from associated companies
   12       11,420       15,032       12,170  
Changes in restricted bank deposits
            -       -       21  
Investments in short terms securities
            (533,812 )     41,667       96,074  
Other
            -       (3,428 )     -  
Net cash (used in) provided by investing activities
            (1,040,593 )     722,414       (2,287,132 )
                                 
Cash flows from financing activities
                               
Dividends paid
            (507,631 )     (448,604 )     (507,631 )
Dividends paid to minority interest in subsidiaries
            (46,086 )     (87,200 )     (60,263 )
Proceeds from borrowings
            631,544       1,087,649       2,718,264  
Repayments of borrowings
            (2,096,925 )     (2,122,268 )     (2,347,054 )
Net cash used in financing activities
            (2,019,098 )     (1,570,423 )     (196,684 )
                                 
Increase (decrease) in cash and cash equivalents
            4,257       616,996       (463,192 )
Movement in cash and cash equivalents
                               
At the beginning of the period
            1,525,022       954,303       1,365,008  
Effect of exchange rate changes
            9,124       (46,277 )     52,487  
Decrease in cash due to deconsolidation
   32       (9,696 )     -       -  
Increase (decrease) in cash and cash equivalents
            4,257       616,996       (463,192 )
At December 31,
 
28 (iv)
      1,528,707       1,525,022       954,303  


Non-cash financing activity
                 
Conversion of debt to equity in subsidiaries
    -       -       35,140  


(*) Includes $394 million of after-tax gain, $381 million of assets and liabilities held for sale and $339 million of income tax charges and related expenses.

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

-  -


 
5

 

INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
I.
GENERAL INFORMATION
IV.
OTHER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   
1
Segment information
II.
ACCOUNTING POLICIES (“AP”)
2
Cost of sales
A
Basis of presentation
3
Selling, general and administrative expenses
B
Group accounting
4
Labor costs (included in Cost of sales and in Selling, general and administrative expenses)
C
Segment information
5
Other operating items
D
Foreign currency translation
6
Financial results
E
Property, plant and equipment
7
Equity in earnings of associated companies
F
Intangible assets
8
Income tax
G
Impairment of non financial assets
9
Earnings and dividends per share
H
Other investments
10
Property, plant and equipment, net
I
Inventories
11
Intangible assets, net
J
Trade and other receivables
12
Investments in associated companies
K
Cash and cash equivalents
13
Other investments - non current
L
Equity
14
Receivables - non current
M
Borrowings
15
Inventories
N
Current and Deferred income tax
16
Receivables and prepayments
O
Employee benefits
17
Current tax assets and liabilities
P
Employees’ statutory profit sharing
18
Trade receivables
Q
Provisions
19
Cash and cash equivalents, and Other investments
R
Trade payables
20
Borrowings
S
Revenue recognition
21
Deferred income tax
T
Cost of sales and sales expenses
22
Other liabilities
U
Earnings per share
23
Non-current allowances and provisions
V
Financial instruments
24
Current allowances and provisions
   
25
Derivative financial instruments
   
26
Contingencies, commitments and restrictions on the distribution of profits
III.
FINANCIAL RISK MANAGEMENT
27
Business combinations and other acquisitions
   
28
Cash flow disclosures
A
Financial Risk Factors
29
Discontinued operations
B
Financial instruments by category
30
Related party transactions
C
Fair value by hierarchy
31
Principal subsidiaries
D
Fair value estimation
32
Processes in Venezuela
E
Accounting for derivatives financial instruments and hedging activities
33
Subsequent events

 

 
6

 

I. GENERAL INFORMATION
 
Tenaris S.A. (the “Company”), a Luxembourg corporation (societé anonyme holding), was incorporated on December 17, 2001, as a holding company in steel pipe manufacturing and distributing operations. The Company holds, either directly or indirectly, controlling interests in various subsidiaries. References in these financial statements to “Tenaris” refer to Tenaris S.A. and its consolidated subsidiaries.

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

These Consolidated Financial Statements were approved for issue by the Company’s Board of Directors on February 24, 2010.

II. ACCOUNTING POLICIES
 
The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
 
A           Basis of presentation
 
The Consolidated Financial Statements of Tenaris have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union, under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit or loss.  The Consolidated Financial Statements are presented in thousands of U.S. dollars (“$”).

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.

(1)  
New and amended standards effective in 2009 and relevant for Tenaris

§  
IFRS 7, “Financial Instruments – Disclosures (amendment)”

This amendment, effective 1 January 2009, requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on earnings per share.

§  
IFRS 8, “Operating segments”

Tenaris early adopted IFRS 8 “Operating Segments” as from January 1, 2006, which replaces IAS 14 and requires an entity to report financial and descriptive information about its reportable segments (as aggregations of operating segments). Financial information is required to be reported on the same basis used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments also giving certain descriptive information. See Section II C.

§  
IAS 1 Revised, “Presentation of Financial Statements”

IAS 1 has been revised to enhance the usefulness of information presented in the financial statements. The principal changes, among others, are: the introduction of a new statement of comprehensive income; additional disclosures about income tax relating to each component of other comprehensive income and not mandatory introduction of new terminology.

§  
IAS 23 Revised, “Borrowing Costs”

IAS 23 revised, eliminates the option of expensing all borrowing costs and requires borrowing costs to be capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. This amendment has no material effect on the Company’s financial condition or results of operations.
 
 
 
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(2)  
Interpretations and amendments to published standards that are not yet effective and have not been early adopted

§  
IAS 27 Revised, “Consolidated and separate financial statements”

This revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost.  Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognized in profit or loss. The Company will apply IAS 27 revised prospectively to transactions with non-controlling interests from January 1, 2010.

§  
IFRS 3 (revised January 2008), “Business Combinations”

In January 2008, the IASB issued IFRS 3 (revised January 2008), “Business Combinations” (“IFRS 3 - revised”). IFRS 3 revised includes amendments that are meant to provide guidance for applying the acquisition method.

IFRS 3 revised replaces IFRS 3 (as issued in 2004) and comes into effect for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after July 1,  2009.

This standard does not impact the current financial statements, and future impact is dependent on the existence of business combinations.

§  
Amendment to IFRS 5 “Non-current Assets held for sale and Discontinued Operations”

In May 2008, the IASB amended IFRS 5 “Non-current Assets held for sale and Discontinued Operations” by requiring this classification although the entity retains a non-controlling interest.

Entities shall apply these amendments for annual periods beginning on or after July 1, 2009. Earlier application is permitted, provided that IAS 27 – amended is applied at the same time.
 
This standard does not impact the current financial statements, and future impact is dependent on the existence of discontinued operations.

§  
IFRS 9, “Financial Instruments”

In November 2009, the IASB issued IFRS 9 “Financial Instruments” which establishes principles for the financial reporting of financial assets by simplifying their classification and measurement.

This interpretation is applicable for annual periods beginning on or after 1 January 2013. Earlier application is not permitted for entities that prepare financial statements in accordance with IFRS as adopted by the EU, since the interpretation is not yet adopted by the EU.

The Company’s management has not yet assessed the potential impact that the application of IFRS 9 will have on the Company’s financial statements.

§  
Improvements to International Financial Reporting Standards

In April 2009, the IASB issued “Improvements to International Financial Reporting Standards” by which it amended several international accounting and financial reporting standards. Entities shall apply these amendments for annual periods beginning on or after January 1, 2010. Earlier application is not permitted for entities that prepare financial statements in accordance with IFRS as adopted by the EU, since these improved standards are not yet adopted by the EU.

The Company’s management estimates that the application of these amendments will not have a material effect on the Company’s financial condition or results of operations.

Management assessed the relevance of other new standards, amendments or interpretations not yet effective and concluded that they are not relevant to Tenaris.

B           Group accounting
 
 
 
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(1)           Subsidiaries

Subsidiaries are all entities which are controlled by Tenaris as a result of its ability to govern an entity’s financial and operating policies generally accompanying a shareholding of more than 50% of the voting rights. Subsidiaries are consolidated from the date on which control is exercised by the Company and are no longer consolidated from the date control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by Tenaris. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of Tenaris 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 inter-company transactions, balances and unrealized gains (losses) on transactions between Tenaris subsidiaries have been eliminated in consolidation. However, since the functional currency of some subsidiaries is its respective local currency, some financial gains (losses) arising from inter-company transactions are generated. These are included in the Consolidated Income Statement under Other financial results.


See Note 31 for the list of the principal subsidiaries.

(2)           Associates
 
Associates are all entities in which Tenaris has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost.

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 unless the transaction provides evidence of an impairment indicator of the asset transferred. Financial statements of associated companies have been adjusted where necessary to ensure consistency with IFRS.

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

The Company’s investment in Ternium S.A. (“Ternium”) has been accounted for by the equity method, as Tenaris has significant influence as defined by IAS 28, “Investments in Associates”. At December 31, 2009, Tenaris holds 11.46% of Ternium’s common stock. The Company’s investment in Ternium is carried at incorporation 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 was $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 (“IPO”) of its shares on February 1, 2006, listing its ADS on the New York Stock Exchange.

Tenaris review investments in associated companies for impairment whenever events or changes in circumstances indicate that the asset’s balance sheet carrying amount may not be recoverable, such as a significant or prolonged decline in fair value below the carrying value. Tenaris carries its investment in Ternium at its proportional equity value, with no additional goodwill or intangible assets recognized. At December 31, 2009, 2008 and 2007, no impairment provisions were recorded on Tenaris’ investment in Ternium.

C           Segment information
 
The Company is organized in two major business segments: Tubes and Projects.
 
 
 
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The Tubes segment includes the operations that consist of the production and selling of both seamless and welded steel tubular products and related services mainly for energy and industrial applications.

The Projects segment includes the operations that consist of the production and selling of welded steel pipe products mainly used in the construction of major pipeline projects.

The Other segment includes all other business activities and operating segments that are not required to be separately reported, including the operations that consist of the production and selling of sucker rods, welded steel pipes for electric conduits, industrial equipment and raw materials that exceed Tenaris’ internal requirements.

Corporate general and administrative expenses have been allocated to the Tubes segment.

Tenaris groups its geographical information in five areas: North America, South America, Europe, Middle East and Africa, and Far East and Oceania. For purposes of reporting geographical information, net sales are allocated to geographical areas based on the customer’s location; 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 and presentation currency
 
IAS 21 (revised) defines the functional currency as the currency of the primary economic environment in which an entity operates.

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

Generally, the functional currency of the Company’s subsidiaries is the respective local currency. Tenaris 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:

·  
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 exchange rate versus the U.S. dollar;
·  
Prices of critical raw materials and inputs are priced and settled in U.S. dollars;
·  
The exchange rate of the currency of Argentina has long-been affected by recurring and severe economic crises; and
·  
Net financial assets and liabilities are mainly received and maintained in U.S. dollars.

In addition to Siderca, the Colombian subsidiaries and most of the Company’s distributing subsidiaries and intermediate holding subsidiaries have 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 a separate component of equity as currency translation adjustments. In the case of a sale or other disposal of any of such subsidiaries, any accumulated translation difference would be recognized in income as a gain or loss from the sale.

(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 inter-company 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 Other Financial results in the Consolidated Income Statement.
 
E           Property, plant and equipment
 
 
 
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Property, plant and equipment are recognized at historical acquisition or construction cost less accumulated depreciation and impairment losses; historical cost includes expenditure that is directly attributable to the acquisition of the items. Property, plant and equipment acquired through acquisitions accounted for as business combinations have been valued initially at the fair market value of the assets acquired.

Major overhaul and rebuilding expenditures are capitalized as property, plant and equipment only when the investment enhances the condition of assets beyond its original condition. The carrying amount of the replaced part is derecognized.

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(R) (“Borrowing Costs”).  Assets for which borrowing costs are capitalized are those that require a substantial period of time to prepare for their intended use.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to depreciate the cost of each asset to its residual value over its estimated useful life, as follows:

 
Buildings and improvements
30-50 years
 
Plant and production equipment
10-20 years
 
Vehicles, furniture and fixtures, and other equipment
     4-10 years

The asset’s residual values and useful lives of significant plant and production equipment are reviewed, and adjusted if appropriate, at each year-end date.

Management’s re-estimation of assets useful lives, performed in accordance with IAS 16 (“Property plant and equipment”), did not materially affect depreciation expenses for 2009.

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

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

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

Goodwill is allocated to cash-generating units (“CGU’s”) for the purpose of impairment testing, which represents a subsidiary or group of subsidiaries that are expected to benefit from the business combination which generated the goodwill being tested.

(2)           Information systems projects
 
Costs associated with developing or maintaining computer software programs are generally recognized as an expense as incurred. However, costs directly related to the development, acquisition and implementation of information systems are recognized as intangible assets if it is probable they have economic benefits exceeding 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 Consolidated Income Statement.
 
  
 
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(3)           Licenses, patents, trademarks and proprietary technology
 
Licenses, patents, trademarks, and proprietary technology acquired in a business combination are initially recognized at fair value at the acquisition date, and subsequently shown at historical cost.

Expenditures on acquired patents, trademarks, technology transfer and licenses are capitalized and amortized using the straight-line method over their estimated useful lives, not exceeding a period of 10 years.
 
The balance of acquired trademarks amounts to $88.0 million and $85.3 million at December 31, 2009 and 2008 respectively, have indefinite useful lives according to external appraisal. Main factors considered in the determination of the indefinite useful lives, include the years that they have been in service and their recognition among customers in the industry.

 (4)           Research and development

Research expenditures as well as development costs that do not fulfill the criteria for capitalization are recorded as Cost of sales in the Consolidated Income Statement as incurred. Research and development expenditures included in Cost of sales for the years 2009, 2008 and 2007 totaled $62.7 million, $77.3 million and $61.7 million, respectively.

 (5)
Customer relationships

In accordance with IFRS 3 and IAS 38, Tenaris has recognized the value of customer relationships separately from goodwill attributable to the acquisition of Maverick and Hydril.
 
 
Customer relationships acquired in a business combination are recognized at fair value at the acquisition date. Customer relationships acquired in a business combination have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight line method over the expected life of approximately 14 years for Maverick and 10 years for Hydril.

G           Impairment of non financial assets

Long-lived assets including identifiable intangible assets and goodwill are regularly reviewed for impairment.

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the balance sheet carrying amount may not be recoverable.

Intangible assets with indefinite useful life, including goodwill, are subject to at least an annual impairment test.

The recoverable amount is the higher of an asset’s value in use and fair value less cost to sell.

Tenaris uses cash flow projections for a five year period with a terminal value calculated based on perpetuity. Management judgment is required to estimate discounted future cash flows and appropriate discount rates. Accordingly, actual cash flows and values could vary significantly from the forecasted future cash flows and related values derived using discounting techniques.

H           Other investments

Other investments consist primarily of investments in financial debt instruments and time deposits with an original maturity of more than three months.

These investments are classified as financial assets “at fair value through profit or loss”.

Purchases and sales of financial investments are recognized as of the settlement date. The change in fair value of financial investments designated as held at fair value through profit or loss is charged to Financial results in the Consolidated Income Statement.


Results from financial investments are recognized in Financial Results in the Consolidated Income Statement.
 
 
 
 
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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, Tenaris estimates the fair value by using standard valuation techniques (see Section III Financial Risk Management).

I           Inventories
 
Inventories are stated at the lower of cost (calculated principally on the first-in-first-out “FIFO” method) and net realizable value. The cost of finished goods and goods in process is comprised of raw materials, direct labor, other direct costs and related production overhead costs. Tenaris estimates net realizable value of inventories by grouping, where applicable, similar or related items. Net realizable value is the estimated selling price in the ordinary course of business, less any estimated costs of completion and selling expenses. Goods in transit at year end are valued based on supplier’s invoice cost.
 
Tenaris 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 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 and other receivables

Trade and other receivables are recognized initially at fair value, generally the original invoice amount. Tenaris analyzes its trade accounts receivable on a regular basis and, when aware of a specific counterparty’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.

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 three months at the 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 Consolidated Statement of Cash Flows, cash and cash equivalents is comprised of cash, bank accounts and short-term highly liquid investments and overdrafts.

On the Consolidated Statement of Financial Position, bank overdrafts are included in Borrowings in current liabilities.
 
L           Equity
 
(1)           Equity components
 
The Consolidated Statement of Changes in Equity includes:
·  
The value of share capital, legal reserve, share premium and other distributable reserve calculated in accordance with Luxembourg Law;
·  
The currency translation adjustment, other reserves, retained earnings and minority interest calculated in accordance with IFRS.

(2)            Share capital
 
Total ordinary shares issued and outstanding as of December 31, 2009, 2008 and 2007 are 1,180,536,830 with a par value of $1.00 per share with one vote each. All issued shares are fully paid.
 
 (3)            Dividends distribution by the Company to shareholders
 
Dividends distributions are recorded in the Company’s financial statements when Company’s shareholders have the right to receive the payment, or when interim dividends are approved by the Board of Directors in accordance with the by-laws of the Company.

Dividends may be paid by the Company to the extent that it has distributable retained earnings, calculated in accordance with Luxembourg law. As a result, retained earnings included in the Consolidated Financial Statements may not be wholly distributable (see Note 26).
 
 
 
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M           Borrowings
 
Borrowings are recognized initially at fair value net of transaction costs incurred. In subsequent years, borrowings are stated at amortized cost.
 
N           Current and Deferred income tax

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 “1929 Holding Billionaire Company”. Following a previously announced decision by the European Commission, the Grand-Duchy of Luxembourg has terminated its 1929 holding company regime, effective January 1, 2007. However, under the implementing legislation, pre-existing publicly listed companies -including the Company- will be entitled to continue benefiting from their current tax regime until December 31, 2010.

The tax expense for the period comprises current and deferred tax. Tax is recognized in the Consolidated Income Statement, except to the extent that it relates to items recognized in the Consolidated Statement of Other Comprehensive Income. In this case, the tax is also recognized in the Consolidated Statement of Other Comprehensive Income.

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 are subject to interpretation and establishes provisions when appropriate.

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

Deferred tax assets are recognized to the extent it is probable that future taxable income will be available against which the temporary differences can be utilized.

O           Employee benefits
 
(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 Consolidated 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.

As from January 1, 2007 as a consequence of a change in an Italian law, employees were entitled to make contributions to external funds or to maintain the contributions within the company. If the employee chooses to make contributions to the external funds Tenaris’ Italian subsidiary pays every year the matured contribution to the funds and no more obligation will be in charge of it. As a consequence of the abovementioned, the structure of the plan could be changed from a defined benefit plan to a defined contribution plan effective from the date of the choice, but only limited to the contributions of 2007 onwards.

(b)           Defined benefit pension obligations

Defined benefit plans determine an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
 
 
 
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The liability recognized in the Consolidated Statement of Financial Position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting year less the fair value of plan assets together with adjustments for unrecognized past-service costs and unrecognized actuarial gains and losses. Post-retirement obligations are measured at the present value of the estimated future cash outflows. The present value of the defined benefit pension obligation is calculated, at least annually by independent advisors using the projected unit credit method based on actuarial calculations provided by independent advisors.

Certain officers of Tenaris are covered by defined benefit employee retirement plans designed to provide post-retirement and other benefits.

Benefits under this 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 Tenaris’ other assets. As a result, this plan is considered to be “unfunded” under IFRS definitions.

Tenaris sponsors other four funded and unfunded non-contributory defined benefit pension plans in certain subsidiaries. The plans provide defined benefits based on years of service and, in the case of salaried employees, final average salary.
 
All of Tenaris’ plans recognize actuarial gains and losses over the average remaining service lives of employees.

 (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.

 (d) Employee retention and long term incentive program

On January 1, 2007 Tenaris adopted an employee retention and long term incentive program. Pursuant to this program, certain senior executives will be granted with a number of units’ equivalent in value to the equity book value per share (excluding minority interest). The units will be vested over four years period and Tenaris will redeem vested units following a period of seven years from the grant date, or when the employee ceases employment, at the equity book value per share at the time of payment. Beneficiaries will also receive a cash amount per unit equivalent to the dividend paid per share whenever the Company pays a cash dividend to its shareholders.


Annual compensation under this program is not expected to exceed 35% in average of the total annual compensation of the beneficiaries.

The total value of the units granted to date under the program, considering the number of units and the book value per share amounts to $27.6 million and $16.8 million at December 31, 2009 and 2008, respectively. As of December 31, 2009, and 2008 Tenaris has recorded a total liability of $19.6 million and $10.4 million, respectively, based on actuarial calculations provided by independent advisors.
 
P           Employee statutory profit sharing
 
Under Mexican law, the Company’s Mexican subsidiaries are required to pay to their employees an annual benefit calculated on a similar basis 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 in the Consolidated Statement of Financial Position. Because Mexican employee statutory profit sharing is determined on a similar basis to that used for determining local income taxes, Tenaris 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.

Q           Provisions
 
Tenaris is subject to various claims, lawsuits and other legal proceedings, including customer claims, in which a third party is seeking payment for alleged damages, reimbursement for losses or indemnity. Tenaris’ 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 provision is recorded. Accruals for loss contingencies reflect a reasonable estimate of the losses to be incurred based on information available to management as of the date of preparation of the financial statements, and take into consideration Tenaris’ 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.
 
 
 
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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.
 
R           Trade payables
 
Trade payables are recognized initially at fair value and subsequently measured at amortized cost.
 
S           Revenue recognition
 
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of Tenaris’ activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group.

Tenaris’ products and services are sold based upon purchase orders, contracts or upon other persuasive evidence of an arrangement with customers, including that the sales price is known or determinable. Sales are recognized as revenue upon delivery and when collection is reasonably assured. Delivery is defined by the transfer of risk, provision of sales contracts and may include delivery to a storage facility located at one of the Company’s subsidiaries.

Other revenues earned by Tenaris are recognized on the following bases:
·  
Interest income: on the effective yield basis.
·  
Dividend income from investments in other companies: when Tenaris’ right to receive payment is established.
 
T           Cost of sales and sales expenses
 
Cost of sales and sales expenses are recognized in the Consolidated Income Statement on the accrual basis of accounting.

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

U        Earnings per share

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

V        Financial instruments

Non derivative financial instruments comprise investment in equity and debt securities, trade and other receivables, cash and cash equivalents, borrowings, and trade and other payables. Tenaris non derivative financial instruments are classified into the following categories:

·  
Financial instruments at fair value through profit and loss: comprises mainly cash and cash equivalents and investments in debt securities held for trading.
·  
Loans and receivables: measured at amortized cost using the effective interest rate method less any impairment.
·  
Available for sale assets: See Note 32 (b)
·  
Other financial liabilities: measured at amortized cost using the effective interest rate method.

The classification depends on the nature and purpose of the financial instrument and is determined at the time of initial recognition.

Financial assets and liabilities are recognized and derecognized on the settlement date.
 
 
 
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Accounting for derivative financial instruments and hedging activities is included within the Section III, Financial Risk Management.

Tenaris has identified certain embedded derivatives and in accordance with IAS 39 (“Financial Instruments: Recognition and Measurement”) has accounted them separately from their host contracts. This result has been recognized under “Foreign exchange derivatives contracts results”.


III. FINANCIAL RISK MANAGEMENT

The multinational nature of Tenaris’ operations and customer base expose the Company to a variety of risks, mainly related to market risks (including the effects of changes in foreign currency exchange rates and interest rates) and capital risk. To manage the volatility related to these exposures, management evaluates exposures on a consolidated basis to take advantage of logical exposure netting. For the remaining exposures, the Company or its subsidiaries may enter into various derivative transactions in order to manage potential adverse impacts on the Tenaris’ 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)           Capital Risk
 
Tenaris seeks to maintain an adequate debt to total equity ratio considering the industry and the markets where it operates. The year end ratio of debt to total equity (where “debt” comprises financial borrowings and “equity” is the sum of financial borrowings and equity) is 0.13 as of December 31, 2009, in comparison with 0.25 as of December 31, 2008. The Company does not have to comply with regulatory capital adequacy requirements as known in the financial services industry.


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

Tenaris’ exposure to currency fluctuations is reviewed on a periodic basis. A number of derivative transactions are performed in order to achieve an efficient coverage. Almost all of these hedging transactions are forward exchange rates contracts (see Note 25 Derivative financial instruments).

Tenaris does not hold or issue derivative financial instruments for speculative trading purposes.

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

The following table shows a breakdown of Tenaris’ assessed long / (short) balance sheet exposure to currency risk as of December 31, 2009, including the effect of forward exchange rate contracts in place. These balances also include inter-company positions where the intervening parties have different functional currencies.

Monetary position
Functional Currency (in thousand $)
exposure
USD
EUR
MXN
GBP
BRL
JPY
CAD
RON
CNY
USD
(n/a)
(211,143)
(183,143)
(417)
393,521
89,911
211,236
5,369
(34,706)
EUR
(22,113)
(n/a)
32,236
 -
361
(489)
(115)
(11,311)
1
MXN
(1)
 -
(n/a)
 -
 -
 -
 -
 -
 -
GBP
2,291
(2,642)
(18)
(n/a)
 -
(100)
 -
686
 -
BRL
 -
 -
 -
 -
(n/a)
 -
 -
 -
 -
JPY
344
(49)
(3)
 -
 -
(n/a)
 -
 -
(1,782)
CAD
(67,972)
 -
136
 -
1,476
(19)
(n/a)
 -
 -
RON
(4,017)
 -
 -
 -
 -
 -
 -
(n/a)
 -
VEF
(731)
 -
 -
 -
 -
 -
 -
 -
 -
ARS
(74,527)
 -
 -
 -
 -
 -
 -
 -
 -
Other
10,285
(7)
 -
 -
 -
 -
 -
 -
 -
 

 
 
17

 
 
The Company estimates that the impact under IFRS in the net exposure at December 31, 2009 of a simultaneous 1% favorable / unfavorable movement in the main exchange rates would result in a maximum pre-tax gain / loss of approximately $12.6 million as compared with a maximum pre-tax gain / loss of approximately $15.8 million at December 31, 2008.

Considering the above mentioned assumptions the maximum effect in equity originated in monetary assets and liabilities would result in approximately $4.3 million and $7.8 million for 2009 and 2008, respectively.

Additionally, the Company has recognized an embedded derivative in connection to a ten year steel supply agreement signed in 2007 by a Canadian subsidiary which as of December 31, 2009 has an estimated outstanding amount of $275.8 million. The Company estimates that the impact of 1% favorable / unfavorable movement in USD/CAD the exchange rate would result in a maximum pre-tax gain / loss of approximately $2.4 million. See fair value of this embedded derivative in Note 25.



 (iii)
Interest rate risk
 
The following table summarizes the proportions of variable-rate and fixed-rate debt as of each year end (see Note 25 Derivative financial instruments).

   
As of December 31,
 
   
2009
   
2008
 
   
Amount in million of $
   
Percentage
   
Amount in million of $
   
Percentage
 
Fixed rate
    287.7       20 %     222.9       7 %
Variable rate
    1,159.1       80 %     2,754.1       93 %

Considering the above, if interest rates on the aggregate average notional of variable rate borrowings held during 2009, would have been 100 basis points higher with all other variables held constant, total profit for the year ended December 31, 2009 would have been $19.3 million lower.

Tenaris’ financing strategy is to manage interest expense using a mixture of fixed-rate and variable-rate debt.

In order to partially hedge future interest payments related to long-term debt, as well as to convert borrowings from floating to fixed rates, Tenaris has entered into interest rate swaps and swaps with an embedded knock-in option (See Note 25).

(iv)           Credit risk
 
Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Company has established credit guidelines in place to ensure that derivative and treasury counterparties are limited to high credit quality financial institutions.

There is no significant concentration of credit risk from customers. No single customer comprised more than 10% of Tenaris’ net sales in 2009 and 2008.

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

As of December 31, 2009 trade receivables amount to $1,310.3 million. These trade receivables have guarantees under letter of credit and other bank guarantees of $222.6 million, credit insurance of $317.7 million and other guarantees of $48.6 million.

As of December 31, 2009 trade receivables amounting to $274.1 million were past due but not impaired. These relate to a number of customers for whom there is no recent history of default.
 
 
 
18

 

 
The amount of the allowance for doubtful accounts was $40.2 million as of December 31, 2009. This allowance for doubtful accounts and the existing guarantees are sufficient to cover doubtful overdue trade receivables.

(v)           Counterparty risk
 
Tenaris has investments guidelines with specific parameters to limit issuer risk on marketable securities and counterparty risk on financial institutions. Derivative counterparties and cash transactions are limited to high credit quality financial institutions, normally investment grade.

More than 97.5% of Tenaris’ liquid financial assets correspond to Investment Grade-rated instruments as of December 31, 2009, in comparison with 94.9% as of December 31,2008.


(vi)           Liquidity risk
 
Tenaris has a conservative approach to the management of its liquidity, which consists of cash and cash equivalents, comprising cash in banks, short-term money market funds and highly liquid short-term securities with a maturity of no more than three months at the date of purchase.

Tenaris holds primarily liquidity money market investments and variable or fixed-rate securities from investment grade issuers. Tenaris holds its cash and cash equivalents primarily in U.S. dollar. As of December 31, 2009 and 2008, U.S. dollar denominated liquid assets represented around 82% and 70% of total liquid financial assets respectively. Liquid financial assets as a whole (excluding Available for sale assets) were 15.8% of total assets at the end of 2009 compared to 10.2% at the end of 2008.

Tenaris financing strategy is to maintain adequate financial resources and access to additional liquidity. During 2009, Tenaris has counted on cash flows from operations as well as additional bank financing to fund its transactions.

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

B. Financial instruments by category

The accounting policies for financial instruments have been applied to the line items below:

December 31, 2009
 
Assets at fair value through profit and loss
   
Loans and receivables
   
Available for sale
   
Total
 
Assets as per balance sheet
                       
Derivative financial instruments
    16,873       -       -       16,873  
Trade receivables
    -       1,310,302       -       1,310,302  
Other receivables
    -       102,348       -       102,348  
Available for sale assets
    -       -       21,572       21,572  
Other investments
    613,842       -       -       613,842  
Cash and cash equivalents
    1,542,829       -       -       1,542,829  
Total
    2,173,544       1,412,650       21,572       3,607,766  

 
   
Liabilities at fair value through profit and loss
   
Other financial liabilities
   
Total
 
December 31, 2009
                 
Liabilities as per balance sheet
                 
 Borrowings
    -       1,446,764       1,446,764  
 Derivative financial instruments
    23,990       -       23,990  
 Trade and other payables (*)
    -       596,897       596,897  
 Total
    23,990       2,043,661       2,067,651  
 
 
 
 
19

 
 

 
December 31, 2008
 
Assets at fair value through profit and loss
   
Loans and receivables
   
Total
 
Assets as per balance sheet
                 
Derivative financial instruments
    41,509       -       41,509  
Trade receivables
    -       2,123,296       2,123,296  
Other receivables
    -       97,683       97,683  
Other investments
    84,218       -       84,218  
Cash and cash equivalents
    1,538,769       -       1,538,769  
Total
    1,664,496       2,220,979       3,885,475  

 
   
Liabilities at fair value through profit and loss
   
Other financial liabilities
   
Total
 
December 31, 2008
                 
Liabilities as per balance sheet
                 
 Borrowings
    -       2,977,015       2,977,015  
 Derivative financial instruments
    77,792       -       77,792  
 Trade and other payables (*)
    -       952,660       952,660  
 Total
    77,792       3,929,675       4,007,467  

(*) The maturity of trade payables is of one year or less.

C. Fair value by hierarchy

Effective 1 January 2009, Tenaris adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at fair value, which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

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

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

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

Comparative information is not presented for the first year of application, as permitted by the transitional provisions of the standard.

The following table presents the assets and liabilities that are measured at fair value at 31 December 2009.

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Cash and cash equivalents
    1,542,829       -       -       1,542,829  
Other investments
    456,209       155,137       2,496       613,842  
Foreign exchange derivatives contracts
    -       16,873       -       16,873  
Available for sale assets*
    -       -       21,572       21,572  
Total
    1,999,038       172,010       24,068       2,195,116  
Liabilities
                               
Foreign exchange derivatives contracts
    -       3,434       -       3,434  
Interest rate derivatives financial instruments
    -       17,738       -       17,738  
Embedded derivative (See Note 25)
    -       -       2,818       2,818  
Total
    -       21,172       2,818       23,990  

* For further detail regarding Available for sale assets, see Note 32 (b).

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

 
 
20

 

The fair value of financial instruments that are not traded in an active market (such as certain debt securities, certificates of deposits with original maturity of more than three months, forward and interest rate derivative instruments) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to value an instrument are observable, the instrument is included in level 2.

If one or more of the significant inputs is not based on observable market data, the instruments are included in level 3. The following table presents the changes in level 3 assets and liabilities:

   
Year ended December 31, 2009
 
   
Assets
   
Liabilities
 
At the beginning of the year
    12,370       (30,758 )
Available for sale assets
    11,578       -  
Gain for the year
    -       27,940  
Currency translation adjustment
    120       -  
At the end of the year
    24,068       (2,818 )

D. Fair value estimation

The paragraphs below describe the fair value estimation for significant financial instruments included in different categories than those valued at fair value through profit and loss.

The carrying amount of financial assets and liabilities with maturities of less than one year approximates to their fair value.

Since most of the Company’s cash and marketable securities are short-term instruments, a change of 50 basis points in the reference interest rates would not have a significant impact in the fair value of financial assets.

Most borrowings are comprised of variable rate debt with a short term portion where interest has already been fixed. Tenaris estimates that the fair value of its main financial liabilities is approximately 99.0% of its carrying amount including interests accrued in 2009 as compared with 98.9% in 2008. Tenaris estimates that a change of 50 basis points in the reference interest rates would have an estimated impact of less than 0.1% in the fair value of borrowings as of December 31, 2009 and 0.1% in 2008. Fair values were calculated using standard valuation techniques for floating rate instruments and comparable market rates for discounting flows.

Specific derivative instruments are priced using valuation tools in order to obtain market values.

E. Accounting for derivative financial instruments and hedging activities

Derivative financial instruments are initially recognized in the balance sheet at fair value on the date a derivative contract is entered into and are subsequently remeasured at fair value. Specific tools are used for calculation of each instrument’s fair value and these tools are tested for consistency on a quarterly basis. Market rates are used for all pricing operations. These include exchange rates, deposit rates and other discount rates matching the nature of each underlying risk.
As a general rule, Tenaris recognizes the full amount related to the change in fair value of derivative financial instruments in Financial results in the Consolidated Income Statement.
Tenaris designates certain derivatives as hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction. These transactions are classified as cash flow hedges (mainly currency forward contracts on highly probable forecast transactions and interest rate swaps). The effective portion of the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. Amounts accumulated in equity are recognized in the income statement in the same period than offsetting losses and gains on the hedged item. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. The fair value of Tenaris derivative financial instruments (asset or liability) continues to be reflected on the balance sheet.
 
 
 
21

 

 
For transactions designated and qualifying for hedge accounting, Tenaris documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. At December 31, 2009, the effective portion of designated cash flow hedges amounts to $16.7 million, not including tax effect, and is included in Other Reserves in equity (see Note 25 Derivative financial instruments). Tenaris also documents its assessment on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items.

The fair values of various derivative instruments used for hedging purposes are disclosed in Note 25. Movements in the hedging reserve included within Other Reserves in equity are also shown in Note 25. The full fair value of a hedging derivative is classified as a non current asset or liability when the remaining hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.
 

 

 
22

 

IV. OTHER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In the notes all amounts are shown in thousands of U.S. dollars, unless otherwise stated)

1           Segment information
 
Reportable operating segments
 
(all amounts in thousands of U.S. dollars)
 
Tubes
   
Projects
   
Other
   
Unallocated (**)
   
Total Continuing operations
   
Total Discontinued operations (*)
 
Year ended December 31, 2009
                                   
Net sales
    6,670,929       986,548       491,843       -       8,149,320       18,558  
Cost of sales
    (3,769,895 )     (704,238 )     (390,789 )     -       (4,864,922 )     (31,866 )
Gross profit
    2,901,034       282,310       101,054       -       3,284,398       (13,308 )
Selling, general and administrative expenses
    (1,325,441 )     (75,841 )     (72,509 )     -       (1,473,791 )     (9,540 )
Other operating income (expenses), net
    1,249       2,165       (414 )     -       3,000       (179 )
Operating income
    1,576,842       208,634       28,131       -       1,813,607       (23,027 )
Segment assets
    11,365,861       971,783       521,520       624,144       13,483,308       -  
Segment liabilities
    3,463,294       234,549       64,629       -       3,762,472       -  
Capital expenditures
    425,545       30,820       4,562       -       460,927       -  
                                                 
Depreciation  and amortization
    464,841       18,593       21,403       -       504,837       27  
                                                 
Year ended December 31, 2008
                                               
Net sales
    10,010,066       1,270,915       706,779       -       11,987,760       242,464  
Cost of sales
    (5,300,257 )     (883,534 )     (514,494 )     -       (6,698,285 )     (158,616 )
Gross profit
    4,709,809       387,381       192,285       -       5,289,475       83,848  
Selling, general and administrative expenses
    (1,549,466 )     (136,923 )     (101,563 )     -       (1,787,952 )     (44,858 )
Other operating income (expenses), net
    (333,302 )     (1,415 )     (41,156 )     -       (375,873 )     (109,770 )
Operating income
    2,827,041       249,043       49,566       -       3,125,650       (70,780 )
Segment assets
    13,154,333       941,519       477,853       527,007       15,100,712       -  
Segment liabilities
    5,860,736       377,497       160,592       -       6,398,825       -  
Capital expenditures
    412,298       17,284       13,656       -       443,238       3,429  
                                                 
Depreciation  and amortization
    481,953       20,084       22,426       -       524,463       17,436  
Impairment charge
    354,905       -       39,347       -       394,252       108,647  
 
Year ended December 31, 2007
                                               
Net sales
    8,433,166       876,289       564,857       -       9,874,312       405,916  
Cost of sales
    (4,360,781 )     (620,836 )     (427,367 )     -       (5,408,984 )     (264,139 )
Gross profit
    4,072,385       255,453       137,490       -       4,465,328       141,777  
Selling, general and administrative expenses
    (1,373,773 )     (94,702 )     (83,361 )     -       (1,551,836 )     (58,554 )
Other operating income (expenses), net
    (19,611 )     24,089       (998 )     -       3,480       1,022  
Operating income
    2,679,001       184,840       53,131       -       2,916,972       84,245  
Segment assets
    12,453,156       1,085,254       545,663       509,354       14,593,427       651,160  
Segment liabilities
    6,727,523       579,376       140,796       -       7,447,695       267,042  
Capital expenditures
    404,545       17,969       16,822       -       439,336       8,581  
                                                 
Depreciation and amortization
    443,712       19,563       20,956       -       484,231       30,589  


Transactions between segments, which were eliminated in consolidation, include sales of scrap and pipe protectors from the Other segment to the Tubes segment for $113,408, $191,036 and $109,574 in 2009, 2008 and 2007, respectively.

 

 
23

 

1           Segment information (Cont.)
 
Geographical information

(all amounts in thousands of U.S. dollars)
 
North America
   
South America
   
Europe
   
Middle East & Africa
   
Far East & Oceania
   
Unallocated (**)
   
Total Continuing operations
   
Total Discontinued operations (*)
 
Year ended December 31, 2009
                                               
Net sales
    2,891,523       2,285,677       866,692       1,623,541       481,887       -       8,149,320       18,558  
Total assets
    6,722,816       2,790,249       2,469,042       386,242       490,815       624,144       13,483,308       -  
Trade receivables
    344,548       361,976       235,708       327,924       40,146       -       1,310,302       -  
Property, plant and equipment, net
    1,387,146       826,028       864,612       14,357       162,444       -       3,254,587       -  
Capital expenditures
    261,781       99,521       68,394       5,580       25,651       -       460,927       -  
                                                                 
Depreciation and amortization
    272,677       100,089       108,770       1,367       21,934       -       504,837       27  
                                                                 
Year ended December 31, 2008
                                                               
Net sales
    4,809,330       2,815,578       1,824,684       1,810,695       727,473       -       11,987,760       242,464  
Total assets
    7,083,508       3,460,729       3,033,555       436,179       559,734       527,007       15,100,712       -  
Trade receivables
    786,867       432,987       379,794       386,786       136,862       -       2,123,296       -  
Property, plant and equipment, net
    1,180,738       796,009       861,892       10,128       134,104       -       2,982,871       -  
Capital expenditures
    159,990       141,174       101,050       6,705       34,319       -       443,238       3,429  
                                                                 
Depreciation and amortization
    298,240       99,261       111,040       1,246       14,676       -       524,463       17,436  
                                                                 
Year ended December 31, 2007
                                                               
Net sales
    3,187,753       2,185,279       1,707,788       2,093,916       699,576       -       9,874,312       405,916  
Total assets
    7,471,569       3,342,206       2,315,187       507,331       447,780       509,354       14,593,427       651,160  
Trade receivables
    418,081       344,743       435,384       455,965       94,660       -       1,748,833       79,220  
Property, plant and equipment, net
    1,349,863       906,211       913,642       4,672       94,619       -       3,269,007       63,629  
Capital expenditures
    149,434       149,355       112,165       1,879       26,503       -       439,336       8,581  
                                                                 
Depreciation and amortization
    283,358       102,518       87,311       1,139       9,905       -       484,231       30,589  


There are no revenues from external customers attributable to the Company’s country of incorporation (Luxembourg). For geographical information purposes, “North America” comprises Canada, Mexico and the USA; “South America” comprises principally Argentina, Brazil, Colombia, Ecuador and Venezuela; “Europe” comprises principally Italy, Norway, Romania and Russia; “Middle East and Africa” comprises principally Algeria, Angola, Iraq, Lybia, Nigeria and Saudi Arabia; “Far East and Oceania” comprises principally China, Indonesia and Japan.

(*) Corresponds to the Venezuelan Companies (years 2009, 2008 and 2007) and Pressure Control (years 2008 and 2007) operations (See Notes 29 and 32).

(**) Includes Investments in associated companies and Available for sale assets for $21.6 million in 2009 (See Note 32 (b)).



 

 
24

 

2           Cost of sales
 
 
Year ended December 31,
(all amounts in thousands of U.S. dollars)
2009
2008
2007
Inventories at the beginning of the year
3,091,401
2,598,856
2,372,308
       
Plus: Charges of the year
     
Raw materials, energy, consumables and other
1,948,596
5,430,147
4,183,577
Increase in inventory due to business combinations
53,541
 -
152,500
Services and fees
240,346
395,104
392,531
Labor cost
737,883
927,132
766,173
Depreciation of property, plant and equipment
263,634
282,407
263,813
Amortization of intangible assets
2,813
2,170
1,737
Maintenance expenses
145,413
203,207
180,502
Provisions for contingencies
1,984
12
3,191
Allowance for obsolescence
89,041
(2,055)
24,371
Taxes
6,799
8,655
7,651
Other
46,122
102,667
82,453
 
3,536,172
7,349,446
6,058,499
Deconsolidation / Transfer to assets held for sale
(43,726)
 -
(158,828)
Less: Inventories at the end of the year
(1,687,059)
(3,091,401)
(2,598,856)
 
4,896,788
6,856,901
5,673,123
From Discontinued operations
(31,866)
(158,616)
(264,139)
 
4,864,922
6,698,285
5,408,984
 

3           Selling, general and administrative expenses

   
Year ended December 31,
 
(all amounts in thousands of U.S. dollars)
 
2009
   
2008
   
2007
 
Services and fees
    207,202       214,010       193,389  
Labor cost
    407,235       447,150       402,919  
Depreciation of property, plant and equipment
    14,524       12,096       13,272  
Amortization of intangible assets
    223,893       245,226       235,998  
Commissions, freight and other selling expenses
    368,451       571,823       462,640  
Provisions for contingencies
    33,880       37,101       30,738  
Allowances for doubtful accounts
    13,837       13,823       5,035  
Taxes
    114,976       167,686       147,326  
Other
    99,333       123,895       119,073  
      1,483,331       1,832,810       1,610,390  
From Discontinued operations
    (9,540 )     (44,858 )     (58,554 )
      1,473,791       1,787,952       1,551,836  

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

   
Year ended December 31,
 
(all amounts in thousands of U.S. dollars)
 
2009
   
2008
   
2007
 
Wages, salaries and social security costs
    1,113,757       1,347,667       1,139,587  
Employees' severance indemnity
    13,436       19,168       10,931  
Pension benefits - defined benefit plans
    8,734       8,161       7,454  
Employee retention and long term incentive program
    9,191       (714 )     11,120  
      1,145,118       1,374,282       1,169,092  
From Discontinued operations
    (23,024 )     (55,835 )     (57,565 )
      1,122,094       1,318,447       1,111,527  
 

 
 
25

 
 
At the year-end, the number of employees was 22,591 in 2009, 23,873 in 2008 and 23,372 in 2007.

5           Other operating items
 
     
Year ended December 31,
 
 
(all amounts in thousands of U.S. dollars)
 
2009
   
2008
   
2007
 
(i)
Other operating income
                 
 
Reimbursement from insurance companies and other third parties
    76       10,511       2,611  
 
Net income from other sales
    2,130       23,704       21,957  
 
Net rents
    3,538       1,971       2,437  
 
Other
    1,750       -       1,834  
        7,494       36,186       28,839  
 
From Discontinued operations
    179       (1,046 )     (1,588 )
        7,673       35,140       27,251  
(ii)
Other operating expenses
                       
 
Contributions to welfare projects and non-profits organizations
    2,758       2,871       2,283  
 
Provisions for legal claims and contingencies
    -       (22 )     (51 )
 
Loss on fixed assets and material supplies disposed / scrapped
    27       461       5,742  
 
Settlement of outstanding redemptions on Maverick’s 2005 notes
    -       -       10,275  
 
Loss from natural disasters
    -       1,743       5,693  
 
Allowance for doubtful receivables
    1,888       (184 )     395  
 
Losses on prepayment to suppliers
    -       3,830       -  
 
Impairment charge
    -       502,899       -  
 
Other
    -       10,231       -  
        4,673       521,829       24,337  
 
From Discontinued operations
    -       (110,816 )     (566 )
        4,673       411,013       23,771  
 
Impairment charge

Long-lived assets including identifiable intangible assets and goodwill are regularly reviewed for impairment.

Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the balance sheet carrying amount of an asset may not be recoverable. Intangible assets with indefinite useful life, including goodwill are subject to at least an annual impairment test.

The recoverable amount is the higher of the value in use and the fair value less cost to sell.

The present value of future cash flows involves highly sensitive estimates and assumptions specific to the nature of CGU’s activities such as the selected discount rate, the expected changes in market prices and the expected changes in the demand of Tenaris products and services.

Tenaris uses cash flow projections for a five year period with a terminal value calculated based on perpetuity.

The discount rates are the respective weighted average cost of capital (WACC) which is considered to be a good indicator of the capital cost. For each CGU where the assets are allocated a specific WACC was determined taking into account the industry, the country and the size of the business.

In 2008, Tenaris recorded an impairment charge of $502.9 million; of which $394.3 million corresponds to intangible assets originated in the acquisition of Maverick in 2006. This charge impacted the following CGU: OCTG (USA and Colombia), Coiled Tubing, Prudential (Canada) and Electric Conduits.

The pretax rates used in the calculation ranged from 11% to 14% per annum and for the cash flows beyond the fifth year an inflation and growth rate of 2% was considered.

These impairment charges primarily arose in connection with the Company’s operations in the United States and Canada, mainly due to recessionary environment, the abrupt decline in oil and gas prices, and its impact on drilling activity and therefore on demand for OCTG products.
 
 
 
26

 

 
In particular, the main factors that precipitated the impairment charges in the United States and Canada were the steep reduction in the average number of active oil and drilling rigs, or rig count, in these markets, which are sensitive to North American gas prices and the worldwide financial and economic crisis. In 2008, North American gas prices rose rapidly during the first half of the year, peaking in excess of $12 per million BTU, before falling even more steeply to levels below $4 per million BTU. This collapse in North American gas prices had an immediate effect on the U.S. and Canadian rig counts. The rig count in the United States, which is more sensitive to North American gas prices, increased 6% in 2008, compared to 2007, rising steadily in the first part of the year to peak at 2,031 during the month of September and falling in the fourth quarter to end the year at 1,623 (a 20% decrease over that period); by the end of March 2009, rig count in the United States had fallen to 1,039, an additional 36% decrease. This decrease in drilling activity and the high level of inventories put downward pressure on the tubes price.

Accordingly, in December 2008, the Company expected that the current decrease in apparent demand of OCTG products in North America would continue, due to the decline in oil and gas drilling activity and its customers’ efforts to reduce inventories.

Tenaris’ Venezuelan operations, today nationalized and consequently disclosed as discontinued operations, also contributed to this impairment charge of 2008. Although during the first half of 2008 most of the business indicators of the Venezuelan subsidiaries were favorable, in the second half of the year the steep decline in the prices of raw materials affected the operations of Matesi, a hot-briquetted iron producer; and the lower investments in drilling activity in Venezuela led to a decline in the projected sales in Tavsa. Also, the operating disruptions at the production facilities of each of Tenaris former subsidiaries, Matesi and Tavsa, precipitated this impairment charge.

At December 31, 2008, the carrying value of the total remaining assets (in thousand of U.S. dollars) of the impaired businesses was:

   
Total Assets before impairment
   
Impairment
   
Total Assets after impairment (*)
 
Oil Country Tubular Goods ("OCTG")
    2,506,332       (192,707 )     2,313,625  
Prudential
    736,772       (138,466 )     598,306  
Coiled Tubing
    259,722       (23,732 )     235,990  
Electric Conduits
    250,106       (39,347 )     210,759  
Total U.S. and Canadian Operations
    3,752,932       (394,252 )     3,358,680  
Venezuelan Operations
    266,758       (108,647 )     158,111  
Total
    4,019,690       (502,899 )     3,516,791  

(*) These amounts include total assets of the operation (e.g. short and long lived assets), including goodwill and other intangible assets at December 31, 2008.


For the 2009 impairment tests, Tenaris considered that the activity levels will continue to recover, with better competitive conditions, and the rig counts and oil and gas prices in North America higher than those of 2009. Accordingly, no impairment charge was recorded in 2009 financial statements. The discount rates used for these tests were in a range between 10% and 13%, based on Tenaris’ weighted average cost of capital taking into account the industry, the country and the size of the business.

The main factors that could result in additional impairment charges in future periods in connection with the Company’s continuing operations would be an increase in the discount rate used in the Company’s cash flow projections and a further deterioration of the business, competitive and economic factors discussed in 2008, such as the cost of raw materials, oil and gas prices, competitive environment, capital expenditure program of our clients and the evolution of the rig count.

Had the Company used a discount rate 1% higher for its cash flow projections for its continuing operations, it would have suffered an impairment charge of approximately $152 million in 2009 and an additional $291 million in 2008. As there is a significant interaction of the main assumptions made in estimating its cash flow projections, Tenaris believes that any sensitivity analysis considering changes in one assumption at a time could potentially be misleading.
 
 
 
27

 

 
6           Financial results
 
(all amounts in thousands of U.S. dollars)
 
Year ended December 31,
 
   
2009
   
2008
   
2007
 
Interest income
    30,986       49,114       93,458  
Interest expense (*)
    (121,881 )     (185,851 )     (275,763 )
Interest net
    (90,895 )     (136,737 )     (182,305 )
Net foreign exchange transaction results
    (73,015 )     (120,515 )     5,908  
Foreign exchange derivatives contracts results (**)
    10,467       35,993       (16,690 )
Other
    (2,564 )     (19,738 )     (11,969 )
Other financial results
    (65,112 )     (104,260 )     (22,751 )
Net financial results
    (156,007 )     (240,997 )     (205,056 )
From Discontinued operations
    4,307       9,973       4,726  
      (151,700 )     (231,024 )     (200,330 )
 
Each item included in this note differs from its corresponding line in the income statement because it includes discontinued operations’ results.

Net foreign exchange transaction results include those amounts that affect the gross margin of certain subsidiaries which functional currencies are different from the U.S. dollar.

(*) Interest rate swaps included under “Interest expense” for the years 2009, 2008 and 2007 amount to a loss of  $21.7 million, a loss of $9.7 million and a gain of $0.7 million, respectively.

The Company estimates that the impact under IFRS of a decrease of up to 1% in the reference interest rates on the outstanding interest rate derivatives as of December 31, 2009 would result in a maximum pre-tax loss of approximately $3.3 million.

As further described in “Section III.A. Financial Risk Factors”, in order to partially hedge future interest payments related to long-term debt, as well as to convert borrowings from floating to fixed rates, Tenaris has entered into interest rate swaps and swaps with an embedded knock-in options. A total notional amount of $500 million was covered by these instruments which coverage has begun between April and June, 2009 and expires between April and June, 2011. Between September and December 2009, a Tenaris subsidiary partially prepaid the syndicated loan facility entered into to finance the acquisition of Maverick in an aggregate amount of $320 million. Accordingly, Tenaris derecognized the corresponding portion of its hedge reserve designation (notional of $150 million) on interest rate swaps derivatives recording a loss for an amount of $8.2 million, included in the total amount of $21.7 million of interest rate swaps losses for the year ended December 31, 2009.

(**) Tenaris has identified certain embedded derivatives and in accordance with IAS 39 (“Financial Instruments: Recognition and Measurement”) has accounted for them separately from their host contracts. A net gain of $27.9 million, a loss of $40.7 million and a gain of $9.7 million arising from the valuation of these contracts have been recognized for 2009, 2008 and 2007, respectively.
 
7           Equity in earnings of associated companies
 
 
   
Year ended December 31,
 
(all amounts in thousands of U.S. dollars)
 
2009
   
2008
   
2007
 
 From associated companies
    87,159       89,556       94,888  
 (Loss) gain on sale of associated companies and other
    (980 )     -       18,388  
      86,179       89,556       113,276  
From Discontinued operations
    862       (133 )     (214 )
      87,041       89,423       113,062  
 
8           Income tax
 
   
Year ended December 31,
 
(all amounts in thousands of U.S. dollars)
 
2009
   
2008
   
2007
 
Current tax
    541,818       1,255,759       936,831  
Deferred tax
    (32,962 )     (244,331 )     (97,799 )
      508,856       1,011,428       839,032  
Effect of currency translation on tax base (a)
    4,297       10,704       (5,654 )
      513,153       1,022,132       833,378  
From Discontinued operations
    58       (6,798 )     (27,605 )
      513,211       1,015,334       805,773  
 
 
 
28

 
 
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,
 
(all amounts in thousands of U.S. dollars)
 
2009
   
2008
   
2007
 
Income before income tax
    1,748,948       2,984,049       2,829,704  
Tax calculated at the tax rate in each country
    525,844       918,200       835,738  
Non taxable income / Non deductible expenses (*)
    (25,760 )     85,950       (6,838 )
Changes in the tax rates
    837       (4,476 )     (27,479 )
Effect of currency translation on tax base (a)
    4,297       10,704       (5,654 )
Effect of taxable exchange differences
    8,906       8,878       11,660  
Utilization of previously unrecognized tax losses
    (913 )     (3,922 )     (1,654 )
Tax charge
    513,211       1,015,334       805,773  

(*) Includes the effect of the impairment charge for 2008.

(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 for Tenaris that is due and payable in any of the relevant periods.
 
9           Earnings and dividends 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 ordinary shares in issue during the year.

   
Year ended December 31,
 
   
2009
   
2008
   
2007
 
Net income attributable to equity holders
    1,161,555       2,124,802       1,923,748  
Weighted average number of ordinary shares in issue (thousands)
    1,180,537       1,180,537       1,180,537  
Basic and diluted earnings per share ( U.S. dollars per share)
    0.98       1.80       1.63  
Basic and diluted earnings per ADS ( U.S. dollars per ADS) (*)
    1.97       3.60       3.26  
                         
Dividends paid
    (507,631 )     (448,604 )     (507,631 )
Basic and diluted dividends per share (U.S. dollars per share)
    0.43       0.38       0.43  
Basic and diluted dividends per ADS (U.S. dollars per ADS) (*)
    0.86       0.76       0.86  
                         
Result for discontinued operations attributable to equity holders
                       
Basic and diluted earnings per share (U.S. dollars per share)
    (0.01 )     0.31       0.04  
Basic and diluted earnings per ADS (U.S. dollars per ADS) (*)
    (0.03 )     0.61       0.09  

 (*) Each ADS equals to two shares

On November 5, 2009, the Company’s board of directors approved the payment of an interim dividend of $0.13 per share ($0.26 per ADS), or approximately $153 million, on November 26, 2009, with an ex-dividend date of November 23, 2009.

On June 3, 2009, the Company’s shareholders approved an annual dividend in the amount of $0.43 per share ($0.86 per ADS). The amount approved included the interim dividend previously paid in November 2008, in the amount of $0.13 per share ($0.26 per ADS). The balance, amounting to $0.30 per share ($0.60 per ADS), was paid on June 25, 2009. In the aggregate, the interim dividend paid in November 2008 and the balance paid in June 2009 amounted to approximately $507 million.

 
 
29

 
 
On November 6, 2008 Tenaris’ board of directors approved the payment of an interim dividend of $0.13 per share ($0.26 per ADS), or approximately $153 million, on November 27, 2008 (or, only in those jurisdictions where such date is not a business day, on November 28, 2008), with an ex-dividend date of November 24.

On June 4, 2008, the Company’s shareholders approved an annual dividend in the amount of $0.38 per share ($0.76 per ADS) of common stock currently issued and outstanding. This amount approved included the interim dividend previously paid in November 2007, in the amount of $0.13 per share ($0.26 per ADS). The balance, amounting to $0.25 per share ($0.50 per ADS), was paid on June 26, 2008. In the aggregate, the interim dividend paid in November 2007 and the balance paid in June 2008 amounted to approximately $449 million.

On November 7, 2007, the Company’s board of directors approved the payment of an interim dividend of $0.13 per share ($0.26 per ADS), or approximately $153 million, on November 22, 2007, with an ex-dividend date of November 19.

On June 6, 2007, the Company’s shareholders approved an annual dividend in the amount of $0.30 per share of common stock currently issued and outstanding, which in the aggregate amounted to approximately $354 million. The cash dividend was paid on June 21, 2007.


10           Property, plant and equipment, net


Year ended December 31, 2009
 
Land, building and improvements
   
Plant and production equipment
   
Vehicles, furniture and fixtures
   
Work in progress
   
Spare parts and equipment
   
Total
 
                                     
Cost
                                   
Values at the beginning of the year
    689,173       6,238,423       195,628       235,857       38,450       7,397,531  
Translation differences
    30,682       155,286       8,091       13,967       1,795       209,821  
Additions
    2,741       3,613       1,194       427,170       5,749       440,467  
Disposals / Consumptions
    (3,358 )     (10,591 )     (3,750 )     -       (7,850 )     (25,549 )
Increase due to business acquisitions
    12,083       11,507       46       487       -       24,123  
Transfers / Reclassifications
    31,603       194,760       (12,859 )     (218,954 )     2,886       (2,564 )
Deconsolidation / Transfers to Available for sale assets
    (4,435 )     (137,874 )     (793 )     (7,508 )     (5,237 )     (155,847 )
Values at the end of the year
    758,489       6,455,124       187,557       451,019       35,793       7,887,982  
                                                 
Depreciation and impairment
                                               
Accumulated at the beginning of the year
    158,443       4,136,038       99,113       7,200       13,866       4,414,660  
Translation differences
    9,419       84,364       6,684       -       252       100,719  
Depreciation charge
    19,350       232,927       24,529       -       1,352       278,158  
Transfers / Reclassifications
    194       1,183       (1,377 )     -       -       -  
Disposals / Consumptions
    (33 )     (7,884 )     (2,420 )     -       (18 )     (10,355 )
Deconsolidation / Transfers to Available for sale assets
    (3,550 )     (135,809 )     (584 )     (7,200 )     (2,644 )     (149,787 )
Accumulated at the end of the year
    183,823       4,310,819       125,945       -       12,808       4,633,395  
At December 31, 2009
    574,666       2,144,305       61,612       451,019       22,985       3,254,587  
 
 
 
 
30

 

 
Year ended December 31, 2008
 
Land, building and improvements
   
Plant and production equipment
   
Vehicles, furniture and fixtures
   
Work in progress
   
Spare parts and equipment
   
Total
 
Cost
                                   
Values at the beginning of the year
    642,269       6,570,777       196,538       327,019       35,818       7,772,421  
Translation differences
    (87,144 )     (436,811 )     (9,720 )     (26,315 )     (2,008 )     (561,998 )
Additions
    16,125       7,769       2,110       381,375       4,603       411,982  
Disposals / Consumptions
    (7,986 )     (161,804 )     (49,958 )     -       (3,796 )     (223,544 )
Transfers / Reclassifications
    125,909       258,492       56,658       (446,222 )     3,833       (1,330 )
Values at the end of the year
    689,173       6,238,423       195,628       235,857       38,450       7,397,531  
                                                 
Depreciation and impairment
                                               
Accumulated at the beginning of the year
    163,919       4,196,295       132,729       -       10,471       4,503,414  
Translation differences
    (25,416 )     (249,212 )     (6,729 )     -       (339 )     (281,696 )
Depreciation charge
    19,431       239,990       31,622       -       1,206       292,249  
Transfers / Reclassifications
    558       10,186       (10,744 )     -       -       -  
Disposals / Consumptions
    (2,628 )     (157,296 )     (47,914 )     -       (116 )     (207,954 )
Impairment charge (see Note 5)
    2,579       96,075       149       7,200       2,644       108,647  
Accumulated at the end of the year
    158,443       4,136,038       99,113       7,200       13,866       4,414,660  
At December 31, 2008
    530,730       2,102,385       96,515       228,657       24,584       2,982,871  

Property, plant and equipment include capitalized interests for net amounts at December 31, 2009 and 2008 of $3,371 (out of which $975 were capitalized during the year 2009) and $2,548, respectively.



11           Intangible assets, net
 
Year ended December 31, 2009
 
Information system projects
   
Licenses, patents and trademarks (*)
   
Goodwill (**)
   
Customer relationships
   
Total
 
                               
Cost
                             
Values at the beginning of the year
    203,612       495,657       2,130,799       1,975,254       4,805,322  
Translation differences
    6,679       3,170       11,963       70,418       92,230  
Additions
    20,385       75       -       -       20,460  
Deconsolidation / Transfers to Available for sale assets
    (430 )     -       -       -       (430 )
Transfers / Reclassifications
    2,564       -       -       -       2,564  
Disposals
    (626 )     (583 )     -       -       (1,209 )
Values at the end of the year
    232,184       498,319       2,142,762       2,045,672       4,918,937  
                                         
Amortization and impairment
                                       
Accumulated at the beginning of the year
    133,974       130,167       325,440       388,754       978,335  
Translation differences
    5,713       204       12,652       24,500       43,069  
Amortization charge
    20,815       54,736       -       151,155       226,706  
Disposals
    (56 )     (37 )     -       -       (93 )
Accumulated at the end of the year
    160,446       185,070       338,092       564,409       1,248,017  
At December 31, 2009
    71,738       313,249       1,804,670       1,481,263       3,670,920  
 
 
Year ended December 31, 2008
 
Information system projects
   
Licenses, patents and trademarks (*)
   
Goodwill (**)
   
Customer relationships
   
Total
 
                               
Cost
                             
Values at the beginning of the year
    186,073       500,523       2,149,037       2,072,006       4,907,639  
Translation differences
    (9,906 )     (7,469 )     (16,836 )     (100,264 )     (134,475 )
Additions
    26,970       4,286       -       -       31,256  
Transfers / Reclassifications
    635       (1,606 )     -       3,512       2,541  
Disposals
    (160 )     (77 )     (1,402 )     -       (1,639 )
Values at the end of the year
    203,612       495,657       2,130,799       1,975,254       4,805,322  
                                         
Amortization and impairment
                                       
Accumulated at the beginning of the year
    124,164       67,200       -       173,923       365,287  
Translation differences
    (8,041 )     (163 )     (684 )     (14,144 )     (23,032 )
Amortization charge
    17,851       63,198       -       159,636       240,685  
Transfers / Reclassifications
    -       -       -       1,211       1,211  
Impairment charge (see Note 5)
    -       -       326,124       68,128       394,252  
Disposals
    -       (68 )     -       -       (68 )
Accumulated at the end of the year
    133,974       130,167       325,440       388,754       978,335  
At December 31, 2008
    69,638       365,490       1,805,359       1,586,500       3,826,987  

(*)   Includes Proprietary Technology.
(**) Goodwill at December 31, 2009 and December 31, 2008 corresponds principally to the Tubes segment.

 
 
 
31

 

 
The geographical allocation of goodwill is presented below.

   
Year ended December 31,
 
   
2009
   
2008
 
South America
    189,376       189,376  
Europe
    769       769  
North America
    1,614,525       1,615,214  
      1,804,670       1,805,359  

Out of $1,804.7 million of goodwill, $771.3 million and $919.9 million correspond to the acquisitions of Maverick and Hydril, respectively. For the purpose of the impairment test, goodwill is allocated to each of the Tenaris’ CGU’s that are expected to benefit from the synergies of the combination.
 
12           Investments in associated companies
 
   
Year ended December 31,
 
   
2009
   
2008
 
At the beginning of the year
    527,007       509,354  
Translation differences
    (1,302 )     (51,004 )
Equity in earnings of associated companies
    87,159       89,556  
Dividends and distributions received
    (11,420 )     (15,032 )
Transfer to Available for sale assets
    (1,615 )     -  
Increase in equity reserves in Ternium and other
    2,743       (5,867 )
At the end of the year
    602,572       527,007  

The principal associated companies are:

         
Percentage of ownership and voting rights at December 31,
   
Value at December 31,
 
   Company
 
Country of incorporation
   
2009
   
2008
   
2009
   
2008
 
Ternium S.A.
 
Luxembourg
      11.46 %     11.46 %     584,389       504,288  
Others
   -       -       -       18,183       22,719  
                              602,572       527,007  
 
Summarized selected financial information of Ternium, including the aggregated amounts of assets, liabilities, revenues and profit or loss is as follows:

   
Ternium S.A.
 
   
2009
   
2008
 
Non-current assets
    5,250,135       5,491,408  
Current assets
    5,042,538       5,179,839  
Total assets
    10,292,673       10,671,247  
Non-current liabilities
    2,872,667       3,374,964  
Current liabilities
    1,158,767       1,734,819  
Total liabilities
    4,031,434       5,109,783  
Minority interest
    964,897       964,094  
Revenues
    4,958,983       8,464,885  
Gross profit
    848,613       2,336,858  
Income from discontinued operations
    428,023       157,095  
Net income for the period attributable to equity holders of the company
    717,400       715,418  
 
 
 
32

 

 
13           Other investments – non current

   
Year ended December 31,
 
   
2009
   
2008
 
Deposits with insurance companies
    23,482       18,487  
Investments in other companies
    2,496       12,370  
Others
    8,189       7,498  
      34,167       38,355  

14           Receivables – non current

   
Year ended December 31,
 
   
2009
   
2008
 
Government entities
    4,666       5,138  
Employee advances and loans
    13,682       13,512  
Tax credits
    17,575       10,013  
Trade receivables
    298       208  
Receivables from related parties
    375       495  
Receivables on off- take contract
    104       114  
Legal deposits
    22,545       15,812  
Advances to suppliers and other advances
    25,181       38,862  
Other
    21,917       3,615  
      106,343       87,769  
Allowances for doubtful accounts (see Note 23 (i))
    (4,725 )     (5,017 )
      101,618       82,752  

15Inventories

   
Year ended December 31,
 
   
2009
   
2008
 
Finished goods
    715,906       1,122,147  
Goods in process
    353,367       665,982  
Raw materials
    297,834       659,973  
Supplies
    378,876       430,488  
Goods in transit
    125,847       306,155  
      1,871,830       3,184,745  
Allowance for obsolescence (See Note 24 (i))
    (184,771 )     (93,344 )
      1,687,059       3,091,401  
 
 
 
 
33

 

 
16           Receivables and prepayments
 
   
Year ended December 31,
 
   
2009
   
2008
 
Prepaid expenses and other receivables
    55,473       41,244  
Government entities
    11,739       3,793  
Employee advances and loans
    14,380       14,552  
Advances to suppliers and other advances
    15,894       33,063  
Government tax refunds on exports
    35,379       35,319  
Receivables from related parties
    16,561       45,735  
Derivative financial instruments
    16,873       41,509  
Miscellaneous
    60,769       41,513  
      227,068       256,728  
Allowance for other doubtful accounts (see Note 24 (i))
    (6,944 )     (5,247 )
      220,124       251,481  

 

 
34

 

17           Current tax assets and liabilities

   
Year ended December 31,
 
 Current tax assets
 
2009
   
2008
 
V.A.T. credits
    78,925       167,691  
Prepaid taxes
    146,524       33,916  
Carry-backs
    34,831       -  
      260,280       201,607  

   
Year ended December 31,
 
Current tax liabilities
 
2009
   
2008
 
Income tax liabilities
    202,111       474,640  
V.A.T. liabilities
    33,382       28,274  
Other taxes
    71,046       107,399  
      306,539       610,313  
 
18           Trade receivables

   
Year ended December 31,
 
   
2009
   
2008
 
Current accounts
    1,341,942       2,138,146  
Receivables from related parties
    8,532       19,278  
      1,350,474       2,157,424  
Allowance for doubtful accounts (see Note 24 (i))
    (40,172 )     (34,128 )
      1,310,302       2,123,296  

The following table sets forth details of the age of trade receivables:
 
 
Trade Receivables
Not Due
Past due
 
1 - 180 days
> 180 days
At December 31, 2009
       
Guaranteed
588,935
479,352
98,074
11,509
Not guaranteed
761,539
556,805
163,344
41,390
Guaranteed and not guaranteed
1,350,474
1,036,157
261,418
52,899
Allowance for doubtful accounts
(40,172)
 -
(183)
(39,989)
Net Value
1,310,302
1,036,157
261,235
12,910
         
At December 31, 2008
       
Guaranteed
929,566
742,854
173,687
13,025
Not guaranteed
1,227,858
914,784
281,946
31,128
Guaranteed and not guaranteed
2,157,424
1,657,638
455,633
44,153
Allowance for doubtful accounts
(34,128)
(246)
(2,997)
(30,885)
Net Value
2,123,296
1,657,392
452,636
13,268
 
No material financial assets that are fully performing have been renegotiated in the last year.
19           Cash and cash equivalents, and Other investments

   
Year ended December 31,
 
   
2009
   
2008
 
Other investments
           
Fixed income instruments and certificates of deposit
    579,675       45,863  
                 
Cash and cash equivalents
               
Cash at banks, liquidity funds and short - term investments
    1,542,829       1,538,769  

 

 
35

 

20           Borrowings

   
Year ended December 31,
 
   
2009
   
2008
 
Non-Current
           
Bank borrowings
    663,256       1,225,267  
Other loans
    220       22,803  
Finance lease liabilities
    407       564  
Costs of issue of debt
    (8,702 )     (7,586 )
      655,181       1,241,048  
Current
               
Bank Borrowings
    771,024       1,608,467  
Other loans
    9,074       119,135  
Bank Overdrafts
    14,122       13,747  
Finance lease liabilities
    179       368  
Costs of issue of debt
    (2,816 )     (5,750 )
      791,583       1,735,967  
Total Borrowings
    1,446,764       2,977,015  

The maturity of borrowings is as follows:

   
1 year or less
   
1 - 2 years
   
2 – 3 years
   
3 - 4 years
   
4 - 5 years
   
Over 5 years
   
Total
 
At December 31, 2009
                                         
Financial lease
    179       324       83       -       -       -       586  
Other borrowings
    791,404       390,638       186,625       32,700       7,579       37,232       1,446,178  
Total borrowings
    791,583       390,962       186,708       32,700       7,579       37,232       1,446,764  
                                                         
Interest to be accrued
    39,056       13,246       8,199       3,532       2,719       7,357       74,109  
Interest rate derivatives contract
    12,452       5,286       -       -       -       -       17,738  
Total
    843,091       409,494       194,907       36,232       10,298       44,589       1,538,611  

Significant borrowings include:
     
In million of $
 
Disbursement date
Borrower
Type
Original
Outstanding
Final maturity
October 2006
Tamsa
Syndicated
700.0
311.1
October 2011 (**)
May 2007
Tenaris
Syndicated
1,000.0
178.6
May 2012 (*) 
May 2007
Hydril
Syndicated
300.0
166.7
May 2012
June 2008
Dalmine
Bilateral
150.0
150.0
June 2013
October 2006
Dalmine
Syndicated
150.0
66.7
October 2011 (**)
March 2005
Tamsa
Syndicated
300.0
60.0
March 2010 
 
(*) In May 2009, the Company has elected the option to extend the loan until May 2012.

(**) The main covenants on these loan agreements are limitations on liens and encumbrances, limitations on the sale of certain assets, certain restrictions on capital expenditures, restrictions on investments and compliance with financial ratios (e.g., leverage ratio and interest coverage ratio).

The main covenants on Hydril’s loan agreement are stated in Note 27 b).

As of December 31, 2009, Tenaris was in compliance with all of its covenants.

The weighted average interest rates before tax shown below were calculated using the rates set for each instrument in its corresponding currency as of December 31, 2009 and 2008.  The changes in interest rate are basically due to changes in floating interest rate.
 

 
 
36

 


   
2009
   
2008
 
Bank borrowings
    3.97 %     5.23 %
Other loans
    4.00 %     4.99 %
Finance lease liabilities
    8.02 %     7.74 %

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

Non current bank borrowings
 
     
Year ended December 31,
 
Currency
  Interest rates
 
2009
   
2008
 
USD
Variable
    1,026,288       2,268,381  
USD
Fixed
    20       20  
EUR
Variable
    12,525       14,310  
EUR
Fixed
    4,525       5,133  
BRL
Fixed
    52,979       -  
BRL
Variable
    -       11,397  
        1,096,337       2,299,241  
Less: Current portion of medium and long - term loans
      (433,081 )     (1,073,974 )
Total non current bank borrowings
      663,256       1,225,267  
 
Non current other loans

     
Year ended December 31,
 
Currency
  Interest rates
 
2009
   
2008
 
USD
Variable
    -       28,032  
AED
Variable
    220       -  
        220       28,032  
Less: Current portion of medium and long - term loans
      -       (5,229 )
Total non current other loans
      220       22,803  

Non current finance lease liabilities

     
Year ended December 31,
 
Currency
  Interest rates
 
2009
   
2008
 
EUR
Fixed
    10       195  
USD
Fixed
    572       737  
        582       932  
Less: Current portion of medium and long - term loans
      (175 )     (368 )
Total non current finance leases
      407       564  

The carrying amounts of Tenaris’ assets pledged as collateral of liabilities are as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Property, plant and equipment mortgages
    167,357       247,143  

Tenaris’ consolidated debt includes $35.9 million of Dalmine secured by certain of its properties.




 
37

 


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

Current bank borrowings

     
Year ended December 31,
 
Currency
  Interest rates
 
2009
   
2008
 
USD
Variable
    463,370       1,134,416  
USD
Fixed
    674       76,472  
EUR
Variable
    75,001       251,138  
EUR
Fixed
    878       837  
CNY
Variable
    -       3,951  
BRL
Variable
    291       5,370  
NGN
Fixed
    669       -  
ARS
Fixed
    230,141       115,541  
VEB
Variable
    -       20,509  
VEB
Fixed
    -       233  
Total current bank borrowings
      771,024       1,608,467  

Bank overdrafts

   
Year ended December 31,
 
Currency
 
2009
   
2008
 
USD
    7,121       51  
EUR
    762       24  
ARS
    896       8,871  
VEB
    -       44  
NGN
    5,152       4,051  
NOK
    6       -  
COP
    157       706  
RON
    28       -  
Total current bank overdrafts
    14,122       13,747  

Current other loans

     
Year ended December 31,
 
Currency
  Interest rates
 
2009
   
2008
 
EUR
Variable
    265       111,448  
USD
Variable
    2,733       2,186  
USD
Fixed
    5,610       5,229  
CAD
Variable
    -       1  
AED
Variable
    466       271  
Total Current other loans
      9,074       119,135  

Current finance lease liabilities
 
     
Year ended December 31,
 
Currency
  Interest rates
 
2009
   
2008
 
EUR
Fixed
    14       189  
USD
Fixed
    165       179  
Total current finance leases
      179       368  
 

 

 
38

 

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.

The movement on the deferred income tax account is as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
At the beginning of the year
    663,515       923,246  
Translation differences
    9,991       (49,022 )
Deconsolidation / Transfer to held for sale
    24,250       (464 )
Charged directly to Other Comprehensive Income
    (5,684 )     2,421  
Income statement credit
    (32,962 )     (240,754 )
Effect of currency translation on tax base
    4,297       10,704  
Deferred employees' statutory profit sharing charge
    (223 )     17,384  
At the end of the year
    663,184       663,515  

The evolution of deferred tax assets and liabilities during the year are as follows:
 
                  Deferred tax liabilities
 
   
Fixed assets
   
Inventories
   
Intangible and Other (a)
   
Total
 
At the beginning of the year
    242,426       49,176       762,236       1,053,838  
Translation differences
    11,247       577       11,619       23,443  
Deconsolidation / Transfer to held for sale
    -       -       (149 )     (149 )
Charged directly to Other Comprehensive Income
    -       -       (1,265 )     (1,265 )
Income statement charge / (credit)
    (2,499 )     (11,017 )     (63,800 )     (77,316 )
At December 31,2009
    251,174       38,736       708,641       998,551  
 
   
Fixed assets
   
Inventories
   
Intangible and Other (a)
   
Total
 
At the beginning of the year
    300,459       39,620       893,757       1,233,836  
Translation differences
    (37,609 )     (5,137 )     (22,281 )     (65,027 )
Deconsolidation / Transfer to held for sale
    -       -       (464 )     (464 )
Income statement charge / (credit)
    (20,424 )     14,693       (108,776 )     (114,507 )
At December 31,2008
    242,426       49,176       762,236       1,053,838  
 
(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 the beginning of the year
    (59,063 )     (218,969 )     (1,744 )     (110,547 )     (390,323 )
Translation differences
    (8,663 )     (1,500 )     (352 )     (2,937 )     (13,452 )
Deconsolidation / Transfer to held for sale
    2,809       10,260       -       11,330       24,399  
Charged directly to Other Comprehensive Income
    -       -       -       (4,419 )     (4,419 )
Income statement charge / (credit)
    13,760       70,238       (33,676 )     (1,894 )     48,428  
At December 31, 2009
    (51,157 )     (139,971 )     (35,772 )     (108,467 )     (335,367 )
 

 

 
39

 

21           Deferred income tax (Cont.)
 
                Deferred tax assets (Cont.)

   
Provisions and allowances
   
Inventories
   
Tax losses
   
Other
   
Total
 
At the beginning of the year
    (46,737 )     (143,652 )     (1,396 )     (118,805 )     (310,590 )
Translation differences
    5,243       211       46       10,505       16,005  
Charged directly to Other Comprehensive Income
    -       -       -       2,421       2,421  
Income statement charge / (credit)
    (17,569 )     (75,528 )     (394 )     (4,668 )     (98,159 )
At December 31, 2008
    (59,063 )     (218,969 )     (1,744 )     (110,547 )     (390,323 )


Deferred income tax assets and liabilities are offset when (1) there is a legally enforceable right to set off current tax assets against current tax liabilities and (2) 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,
 
   
2009
   
2008
 
Deferred tax assets
    (197,603 )     (390,323 )
Deferred tax liabilities
    860,787       1,053,838  
      663,184       663,515  

The amounts shown in the balance sheet include the following:
 
 
 
Year ended December 31,
 
   
2009
   
2008
 
Deferred tax assets to be recovered after 12 months
    (106,862 )     (71,849 )
Deferred tax liabilities to be recovered after 12 months
    936,732       1,002,325  
 
 
22           Other liabilities
 
(i)           Other liabilities – Non current
 
   
Year ended December 31,
 
   
2009
   
2008
 
Employee liabilities
           
     Employee's statutory profit sharing
    26,369       26,381  
     Employee severance indemnity (a)
    52,725       56,939  
     Pension benefits (b)
    46,473       39,130  
     Employee retention and long term incentive program
    19,597       10,406  
      145,164       132,856  
                 
Taxes payable
    3,360       12,605  
Derivative financial instruments
    20,533       55,926  
Miscellaneous
    23,410       21,755  
      47,303       90,286  
      192,467       223,142  


 

 
40

 

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

 (a) Employees’ severance indemnity
 
The amounts recognized in the balance sheet are as follows:

 
   
Year ended December 31,
 
   
2009
   
2008
 
Total included in non - current Employee liabilities
    52,725       56,939  


The amounts recognized in the income statement are as follows:


   
Year ended December 31,
 
   
2009
   
2008
 
Current service cost
    10,809       16,343  
Interest cost
    2,627       2,825  
Total included in Labor costs
    13,436       19,168  


The principal actuarial assumptions used were as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Discount rate
    4% - 8 %     4% - 5 %
Rate of compensation increase
    3% - 6 %     2% - 4 %


(b) Pension benefits
 
§  
Unfunded
 
The amounts recognized in the balance sheet are determined as follows:
 
   
Year ended December 31,
 
   
2009
   
2008
 
Present value of unfunded obligations
    44,261       40,339  
Unrecognized past service cost
    -       (68 )
Unrecognized actuarial losses
    (11,235 )     (14,512 )
Liability in the balance sheet
    33,026       25,759  
 
The amounts recognized in the income statement are as follows:
 
   
Year ended December 31,
 
   
2009
   
2008
 
Current service cost
    1,356       1,342  
Interest cost
    2,855       2,319  
Net actuarial losses (gains) recognized in the year
    681       405  
Past service cost recognized
    189       30  
Curtailments and settlements
    -       170  
Total included in Labor costs
    5,081       4,266  
 

 

 
41

 

22           Other liabilities (Cont.)

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

(b) Pension benefits (Cont.)
 
Movement in the present value of unfunded obligation:
 
   
Year ended December 31,
 
   
2009
   
2008
 
At the beginning of the year
    40,339       37,329  
Translation differences
    1,146       (1,669 )
Transfers, reclassifications and new participants of the plan
    2,662       605  
Total expense
    4,211       3,831  
Actuarial (gains) losses
    (2,482 )     2,104  
Contributions paid
    -       (791 )
Benefits paid
    (1,615 )     (1,070 )
At the end of the year
    44,261       40,339  


The principal actuarial assumptions used were as follows:
   
Year ended December 31,
 
   
2009
   
2008
 
Discount rate
    6% - 7 %     6% - 7 %
Rate of compensation increase
    2% - 3 %     2% - 3 %
 
§  
Funded
 
The amounts recognized in the balance sheet are as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Present value of funded obligations
    144,005       117,463  
Unrecognized actuarial losses
    (10,053 )     (4,581 )
Fair value of plan assets (*)
    (120,505 )     (99,511 )
Liability in the balance sheet
    13,447       13,371  

(*) Mainly balanced strategy through mutual funds and money markets.

The amounts recognized in the income statement are as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Current service cost
    1,775       2,329  
Interest cost
    7,640       7,682  
Net actuarial (gains) losses recognized in the year
    (168 )     1,156  
Expected return on plan assets
    (5,594 )     (7,232 )
Past service cost recognized
    -       291  
Curtailments and settlements
    -       (331 )
Total included in Labor costs
    3,653       3,895  


 

 
42

 

22           Other liabilities (Cont.)

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

(b) Pension benefits (Cont.)
 
§  
Funded (Cont.)

 
Movement in the present value of funded obligations:
 
   
Year ended December 31,
 
   
2009
   
2008
 
At the beginning of the year
    117,463       138,736  
Translation differences
    14,204       (21,672 )
Transfers, reclassifications and new participants of the plan
    -       8,250  
Total expense
    9,415       9,680  
Actuarial losses (gains)
    11,827       (11,787 )
Benefits paid
    (8,817 )     (5,709 )
Other
    (87 )     (35 )
At the end of the year
    144,005       117,463  

Movement in the fair value of plan assets:

   
Year ended December 31,
 
   
2009
   
2008
 
At the beginning of the year
    (99,511 )     (122,196 )
Translation differences
    (10,762 )     18,209  
Transfers, reclassifications and new participants of the plan
    -       (6,531 )
Expected return on plan assets
    (5,594 )     (7,232 )
Actuarial (gains) losses
    (7,694 )     18,820  
Contributions paid
    (5,845 )     (6,405 )
Benefits paid
    8,817       5,709  
Other
    84       115  
At the end of the year
    (120,505 )     (99,511 )

The principal actuarial assumptions used were as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Discount rate
    6 %     6% - 7 %
Rate of compensation increase
    3% - 4 %     2% - 3 %
 
(ii)       Other liabilities – current

 
   
Year ended December 31,
 
   
2009
   
2008
 
Payroll and social security payable
    151,067       166,139  
Liabilities with related parties
    1,142       1,424  
Derivative financial instruments
    3,457       21,866  
Miscellaneous
    36,524       53,191  
      192,190       242,620  


 

 
43

 

23           Non-current allowances and provisions

(i)           Deducted from non current receivables

   
Year ended December 31,
 
   
2009
   
2008
 
Values at the beginning of the year
    (5,017 )     (10,583 )
Translation differences
    276       1,157  
Reversals / Additional allowances
    (2 )     (71 )
Reclassifications
    -       (551 )
Used
    18       5,031  
At December 31,
    (4,725 )     (5,017 )

 (ii)           Liabilities

   
Year ended December 31,
 
   
2009
   
2008
 
Values at the beginning of the year
    89,526       97,912  
Translation differences
    9,805       (12,636 )
Deconsolidation / Transfer to held for sale
    (1,380 )     -  
Reversals / Additional provisions
    (7,170 )     25,604  
Reclassifications
    129       (8,408 )
Used
    (10,155 )     (12,946 )
At December 31,
    80,755       89,526  

24           Current allowances and provisions
 
(i)           Deducted from assets
 
Year ended December 31, 2009
 
Allowance for doubtful accounts - Trade receivables
   
Allowance for other doubtful accounts - Other receivables
   
Allowance for inventory obsolescence
 
                   
Values at the beginning of the year
    (34,128 )     (5,247 )     (93,344 )
Translation differences
    (333 )     (238 )     (4,186 )
Reversals / Additional allowances
    (13,960 )     (1,763 )     (89,041 )
Used
    3,756       304       218  
Deconsolidation / Transfer to held for sale
    4,493       -       1,582  
At December 31, 2009
    (40,172 )     (6,944 )     (184,771 )
                         
Year ended December 31, 2008
                       
Values at the beginning of the year
    (24,530 )     (7,284 )     (102,211 )
Translation differences
    709       208       6,552  
Reversals / Additional allowances
    (13,901 )     238       2,355  
Reclassifications
    -       551       -  
Used
    3,594       1,040       (40 )
At December 31, 2008
    (34,128 )     (5,247 )     (93,344 )
 

 

 
44

 

24           Current allowances and provisions (Cont.)
 
(ii)           Liabilities
 
Year ended December 31, 2009
 
Sales risks
   
Other claims and contingencies
   
Total
 
                   
Values at the beginning of the year
    9,318       19,193       28,511  
Translation differences
    722       871       1,593  
Reversals / Additional allowances
    20,586       19,158       39,744  
Reclassifications
    -       (129 )     (129 )
Used
    (23,603 )     (17,484 )     (41,087 )
At December 31, 2009
    7,023       21,609       28,632  
                         
Year ended December 31, 2008
                       
Values at the beginning of the year
    9,136       10,206       19,342  
Translation differences
    3       (1,369 )     (1,366 )
Reversals / Additional allowances
    5,222       6,667       11,889  
Reclassifications
    -       8,408       8,408  
Used
    (5,043 )     (4,719 )     (9,762 )
At December 31, 2008
    9,318       19,193       28,511  
 
 
25           Derivative financial instruments
 
Net fair values of derivative financial instruments
 
The net fair values of derivative financial instruments disclosed within Other liabilities and Receivables at the balance sheet date, in accordance with IAS 39, are:
 
 
   
Year ended December 31,
 
 
 
2009
   
2008
 
Contracts with positive fair values
           
Foreign exchange derivatives contracts
    16,873       41,509  
Contracts with negative fair values
               
Interest rate derivatives contracts
    (17,738 )     (29,220 )
Foreign exchange derivatives contracts
    (3,434 )     (17,814 )
Embedded Canadian Dollar forward purchases
    (2,818 )     (30,758 )
 

 

 
45

 

25           Derivative financial instruments (Cont.)
 
Foreign exchange derivatives contracts

The net fair values of exchange rate derivatives, including embedded derivatives, were as follows:

Currencies
Contract
Term
Fair Value at Dec-09
Fair Value at Dec-08
USD/JPY
Japanese Yen Purchases
2009
 -
217
KWD/USD
Kuwaiti Dinar Sales
2009
 -
857
BRL/EUR
Euro Purchases
2009
 -
4,901
RON/USD
Romanian Leu Sales
2010
6
(984)
GBP/USD
Great Britain Pound Sales
2010
19
 -
USD/MXN
Mexican Peso Purchases
2010
(305)
 -
CAD/USD
Canadian Dollar Sales
2010
(398)
(1,631)
COP/USD
Colombian Peso Sales
2010
589
 -
BRL/USD
Brazilian Real Sales
2010
(585)
11,109
MXN/EUR
Euro Purchases
2010
(674)
8,186
USD/EUR
Euro Purchases
2010
1,186
11,320
USD/ARS
Argentine Peso Purchases
2010
13,601
(10,280)
Subtotal
   
13,439
23,695
USD/CAD
Embedded Canadian Dollar  Purchases
2017
(2,818)
(30,758)
Total
   
10,621
(7,063)


Interest rate derivatives contracts
 
In order to minimize the volatility effect of floating rates on future interest rate payments, Tenaris has entered into a number of swaps with knock in, partially hedging the outstanding debt. A knock-in swap is a type of barrier option, which is activated if the reference rate reaches a set level (“knock in”) at the end of certain period. A total notional amount of $500 million was covered by these instruments out of which $350 million are outstanding as of December 31, 2009.
 

 
Derivative financial instruments breakdown is as follows:
 
Type of derivative
Receive Reference rate
Term
 
Notional amount
   
Fair Value at Dec-09
   
Fair Value at Dec-08
 
Pay fixed/Receive variable
Euribor
2010
    911       (22 )     (82 )
Swaps with KI (2.50%)
Libor 6M
2011
    150,000       -       (8,852 )
Swaps with KI (2.50%)
Libor 6M
2011
    350,000       (17,716 )     (20,286 )
          500,911       (17,738 )     (29,220 )
 
 

 

 
46

 

25           Derivative financial instruments (Cont.)
 
Hedge Accounting
 
Tenaris applies hedge acccounting for certain cash flow hedges of highly probable forecast transactions. The following are the derivatives that were designated for hedge accounting as of December 31, 2009 and 2008.
 
·  
Foreign Exchange Hedge
 
       
Fair Value
   
Hedge Accounting Reserve
 
       
Year ended December 31,
   
Year ended December 31,
 
Currencies
Contract
Term
 
2009
   
2008
   
2009
   
2008
 
USD/EUR
Euro Forward Purchases
2010
    (506 )     -       (506 )     -  
BRL/EUR
Euro Forward Purchases
2009
    -       4,901       -       6,716  
BRL/USD
Brazilian Real Forward Sales
2008
    -       -       -       362  
MXN/EUR
Euro Forward Purchases
2010
    (674 )     5,432       1,511       5,671  
          (1,180 )     10,333       1,005       12,749  
 
·  
Interest Rate Hedge

                   
Fair Value
   
Hedge Accounting Reserve
 
Type of
           
Notional
   
Year ended December 31,
   
Year ended December 31,
 
Derivative
Rate
Term
 
Rate
   
Amount
   
2009
   
2008
   
2009
   
2008
 
Pay fixed / Receive variable
Euribor
2010
    5.72 %     911       (22 )     (82 )     -       (106 )
Swaps with KI (2.50%)
Libor 6M
2011
    4.79% - 5.01 %     150,000       -       (8,852 )     -       (8,852 )
Swaps with KI (2.50%)
Libor 6M
2011
    4.60% - 5.08 %     350,000       (17,716 )     (20,286 )     (17,716 )     (20,779 )
                          (17,738 )     (29,220 )     (17,716 )     (29,737 )

The following is a summary of the hedge reserve evolution not including tax effect:


   
Equity Reserve Dec-07
   
Movements 2008
   
Equity Reserve Dec-08
   
Movements 2009
   
Equity Reserve Dec-09
 
Foreign Exchange
    (5,462 )     18,211       12,749       (11,744 )     1,005  
Interest Rate (Euribor)
    (91 )     (15 )     (106 )     106       -  
Interest Rate Collars
    (2,922 )     2,922       -       -       -  
Interest Rate (swaps with KI – notional $150 million)
    -       (8,852 )     (8,852 )     8,852       -  
Interest Rate (swaps with KI – notional $350 million)
    -       (20,779 )     (20,779 )     3,063       (17,716 )
Total Cash flow Hedge
    (8,475 )     (8,513 )     (16,988 )     277       (16,711 )


26           Contingencies, commitments and restrictions to the distribution of profits

Contingencies

Tenaris is involved in litigations 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 23 and 24) that would be material to Tenaris’ consolidated financial position or results of operations.
 
 

 

 
47

 

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

Contingencies (Cont.)

Asbestos-related litigation

Dalmine S.p.A. (“Dalmine”), a Tenaris subsidiary organized in Italy is currently subject to 13 civil proceedings for work-related injuries arising from the use of asbestos in its manufacturing processes during the period from 1960 to 1980. In addition, another 32 asbestos related out-of-court claims have been forwarded to Dalmine.

As of December 31, 2009, the total claims pending against Dalmine were 45 (of which, none are covered by insurance): during 2009, 12 new claims were filed, no claims were adjudicated, 6 claims were settled all of which were paid, 3 claims were rejected and 13 claims were dismissed.

Aggregate settlement costs to date for Tenaris are Euro 8.5 million ($12.3 million). Dalmine estimates that its potential liability in connection with the claims not yet settled is approximately Euro 12.8 million ($18.4 million).

Accruals for Dalmine’s potential liability are based on the average of the amounts paid by Dalmine for asbestos-related claims plus an additional amount related to some reimbursements requested by the social security authority. The maximum potential liability is not determinable as in some cases the requests for damages do not specify amounts, and instead is to be determined by the court. The timing of payment of the amounts claimed is not presently determinable.

U.S. income tax return

The U.S. Internal Revenue Service (the “IRS”) is currently conducting its field examination of the Maverick Tube Corporation (“Maverick”) 2005 and 2006 U.S. tax returns.  In connection with such field examination, the IRS has issued several Notices of Proposed Adjustment (NOPAs), which reflect the IRS’s opening position considering the facts and law as the IRS has developed them to date. The NOPAs seek to disallow, in full or in part, certain interest expense deductions taken in 2005 and 2006 of $1.0 million and $87.3 million, respectively, and to assess interest on any resulting underpayment of income tax. In particular, the NOPAs relating to the 2006 tax return propose an upward adjustment to Maverick’s income ranging from $23.2 million to $87.3 million, based on three alternative arguments.  The Company believes that the Maverick 2005 and 2006 tax returns comply with applicable tax law and will vigorously defend its tax returns with IRS appeal and litigate the matter if necessary.

Maverick litigation

On November 22, 2006, Maverick Tube Corporation (“Maverick”) received a letter from The Bank of New York as trustee (“the Trustee”) for the holders of 2004 4% Convertible Senior Subordinated Notes due 2033 issued by Maverick (“the 2004 Notes”), concerning an alleged breach of the indenture entered into on December 30, 2004, between Maverick and the Trustee, and governing the 2004 Notes (as amended, the “Indenture”). The alleged breach of the Indenture was based on Maverick’s refusal to grant the holders of the 2004 Notes conversion rights provided by the “Public Acquirer Change of Control” provision of the Indenture.

On December 11, 2006, the Trustee filed a complaint against Maverick and Tenaris in the United States District Court for the Southern District of New York. The complaint alleged that Tenaris’ acquisition of Maverick triggered the “Public Acquirer Change of Control” provision and asserted a breach of contract claim against Maverick for refusing to accept the 2004 Notes for conversion for the consideration specified in the “Public Acquirer Change of Control” provision. The complaint also seeks a declaratory judgment that Tenaris’ acquisition of Maverick was a “Public Acquirer Change of Control” under the Indenture, and therefore triggers the above mentioned conversion rights, and asserts claims for tortious interference with contract and unjust enrichment against Tenaris.

Defendants filed a motion to dismiss the complaint, or in the alternative, for summary judgment on March 13, 2007. Plaintiff filed a motion for partial summary judgment on the same date. On January 25, 2008, Law Debenture Trust Company of New York (as successor to BNY as trustee under the Indenture) was substituted for The Bank of New York as plaintiff.  On October 15, 2008, the court denied Law Debenture’s motion for partial summary judgment and granted defendants’ motion for summary judgment dismissing the complaint in its entirety.
On February 19, 2010, the United States Court of Appeals for the Second Circuit affirmed the District Court's judgment. The plaintiff is entitled to file a motion for rehearing, or rehearing en banc, with the Court of Appeals, or a petition for certiorari with the U.S. Supreme Court. The Company believes that the plaintiff's chances of prevailing on further appeal are remote.
 
 
 
48

 
 
Conversion of tax loss carry-forwards
On December 18, 2000, the Argentine tax authorities notified Siderca S.A.I.C., a Tenaris subsidiary organized in Argentina (“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 ARS 91.0 million (approximately $24.1 million) at December 31, 2009, in taxes and penalties. Based on the views of Siderca’s tax advisors, Tenaris believes that it is not probable that the ultimate resolution of the matter will result in an obligation. Accordingly, no provision was recorded in these Consolidated Financial Statements.
Customer Claim

A lawsuit was filed on September 6, 2007, against three Tenaris’ subsidiaries, alleging negligence, gross negligence and intentional acts characterized as fraudulent inducement concerning allegedly defective well casing. Plaintiff alleged the complete loss of one natural gas production well and formation damage that precludes further exploration and production at the well site and sought compensatory and punitive damages of $25 million. The lawsuit was subsequently amended to add the Company and other of its subsidiaries as defendants and to change the claims to be breach of contract and fraud. On October 22, 2008, the Plaintiff again amended its petition to add new counts (including strict liability) and increase its prayer for damages to $245 million, plus punitive damages, treble damages and attorney fees. Each petition was tendered to a Tenaris subsidiary insurer, and the Tenaris subsidiary received the insurer’s agreement to provide a defense. The insurer reserved its rights with respect to its indemnity obligations. On July 20, 2009 the lawsuit was settled for an amount of $15 million and thus a Tenaris subsidiary recorded a loss of $12.7 million in addition to the previously recorded of $2.3 million. As of the date of these Consolidated Financial Statements, the insurer is not participating in this settlement. On September 11, 2009 certain Tenaris subsidiaries initiated legal proceedings against the insurer.  According to IAS 37, no expected reimbursement from the insurer has been registered yet.
Ongoing investigation
 
 

The Company has learned from one of its customers in Central Asia that certain sales agency payments made by one of the Company’s subsidiaries may have improperly benefited employees of the customer and other persons. These payments may have violated certain applicable laws, including the U.S. FCPA (“Foreign corrupt practices act”). The Audit Committee of the Company’s Board of Directors has engaged external counsel in connection with a review of these payments and related matters, and the Company has voluntarily notified the U.S. Securities and Exchange Commission and the U.S. Department of Justice. The Company will share the results of this review with the appropriate regulatory agencies, and will cooperate with any investigations that may be conducted by such agencies. At this time, the Company cannot predict the outcome of these matters or estimate the range of potential loss or extent of risk, if any, to the Company’s business that may result from resolution of these matters.

Commitments

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

·  
A Tenaris company is a party to a five-year contract with Nucor Corporation, under which it committed to purchase from Nucor steel coils, with deliveries starting in January 2007 on a monthly basis. The Tenaris company has negotiated and obtained from Nucor a waiver of the monthly committed volumes. The Company is reviewing its steel purchasing requirements with Nucor each quarter, therefore, the current waiver of monthly commitments is valid until March 31, 2010.

·  
A Tenaris company is a party to a ten year raw material purchase contract with QIT, under which it committed to purchase steel bars, with deliveries starting in July 2007. The estimated aggregate amount of the remaining commitments on the contract at current prices is approximately $275.8 million. The contract allows the Tenaris company to claim lower commitments in market downturns and severe market downturns subject to certain limitations.
 
·  
A Tenaris company is a party to a contract with Siderar for the supply of steam generated at the power generation facility owned by Tenaris in San Nicolas, Argentina. Under this contract, the Tenaris company is required to provide 250 tn/hour of steam and Siderar has the obligation to take or pay this volume. The contract is due to terminate in 2018.

 
Restrictions to the distribution of profits and payment of dividends

As of December 31, 2009, equity as defined under Luxembourg law and regulations consisted of:
(all amounts in thousands of U.S. dollars)
 
 
 
49

 
 
Share capital
    1,180,537  
Legal reserve
    118,054  
Share premium
    609,733  
Retained earnings including net income for the year ended December 31, 2009
    3,916,482  
Total equity in accordance with Luxembourg law
    5,824,806  
 
 
At least 5% of the Company’s net income per year, as calculated in accordance with Luxembourg law and regulations, must be allocated to the creation of a legal reserve equivalent to 10% of the Company’s share capital. As of December 31, 2009, this reserve is fully allocated and additional allocations to the reserve are not required under Luxembourg law. Dividends may not be paid out of the legal reserve.
The Company may pay dividends to the extent, among other conditions, that it has distributable retained earnings calculated in accordance with Luxembourg law and regulations.

At December 31, 2009, distributable amount for the financial period of Tenaris under Luxembourg law totals $4.5 billion, as detailed below.

(all amounts in thousands of U.S. dollars)
Retained earnings at December 31, 2008 under Luxembourg law
    3,174,932  
Dividends received
    1,265,460  
Other income and expenses for the year ended December 31, 2009
    (16,279 )
Dividends paid
    (507,631 )
Retained earnings at December 31, 2009 under Luxembourg law
    3,916,482  
Share premium
    609,733  
Distributable amount at December 31, 2009 under Luxembourg law
    4,526,215  

27           Business combinations and other acquisitions

(a) Tenaris acquired control of Seamless Pipe Indonesia Jaya

In April 2009, Tenaris completed the acquisition from Bakrie & Brothers TbK, Green Pipe International Limited and Cakrawala Baru of a 77.45% holding in Seamless Pipe Indonesia Jaya (“SPIJ”), an Indonesian OCTG processing business with heat treatment and premium connection threading facilities, for a purchase price of $69.5 million, with $21.9 million being payable as consideration for SPIJ's equity and $47.6 million as consideration for the assignment of certain sellers' loan to SPIJ. Tenaris began consolidating SPIJ’s balance sheet and results of operations since April 2009.

Pro forma data including acquisitions for all of 2009

Had the SPIJ transaction been consummated on January 1, 2009, then Tenaris’ unaudited pro forma net sales and net income from continuing operations would not have changed materially.

(b) Acquisition of Hydril Company (“Hydril”)

On May 7, 2007, Tenaris paid $2.0 billion to acquire Hydril, a North American manufacturer of premium connections and pressure control products for the oil and gas industry. To finance the acquisition, Tenaris entered into syndicated loans in the amount of $2.0 billion, of which $0.5 billion were used to refinance an existing loan in the Company. The balance of the acquisition cost was paid out of cash on hand. Of the loan amount, $1.7 billion was allocated to the Company and the balance to Hydril.

The main covenants on these loan agreements are limitations on liens and encumbrances, limitations on the sale of certain assets, restrictions on investments and compliance with financial ratios (e.g., leverage ratio and interest coverage ratio in Hydril’s syndicated loan agreement, and leverage ratio and debt service coverage ratio in the Company’s syndicated loan agreement). In addition, Hydril’s syndicated loan agreement has certain restrictions in capital expenditures.

In November 2007, the Company prepaid loans under the Company’s syndicated loan agreement in a principal amount of $0.7 billion plus accrued interest thereon to such date. In May and July 2008, the Company prepaid loans under the Company’s syndicated loan agreement in a principal amount of $0.75 billion plus accrued interest thereon. In May 2009, the Company has elected to extend until May 2012 the due date of the $250 million outstanding principal amount of the Tranche A loans under the Company’s syndicated loan agreement.
 
 
 
50

 

 
Tenaris began consolidating Hydril’s balance sheet and results of operations as from May, 2007.

(c) Minority Interest

During the year ended December 31, 2009, 2008 and 2007 additional shares of certain Tenaris subsidiaries were acquired from minority shareholders for approximately $ 9.5 million, $18.6 million and $3.3 million respectively.
 
The assets and liabilities determined arising from the acquisitions are as follows:
 
   
Year ended December 31, 2009
 
       
Other assets and liabilities (net)
    (1,309 )
Property, plant and equipment
    24,123  
Net assets acquired
    22,814  
Minority interest
    3,170  
Sub-total
    25,984  
Assumed liabilities
    47,600  
Sub-total
    73,584  
Cash acquired
    5,501  
Purchase consideration
    79,085  

The businesses acquired during the year ended December 31, 2009 contributed revenues of $92.5 million and an operating income of $0.9 million.
 
 
28           Cash flow disclosures
 
 
 
 (i)
Changes in working capital
 
Year ended December 31,
 
     
2009
   
2008
   
2007
 
 
Inventories
    1,414,157       (492,545 )     (252,810 )
 
Receivables and prepayments
    (52,395 )     12,079       2,080  
 
Trade receivables
    792,345       (374,463 )     (115,838 )
 
Other liabilities
    80,696       (71,638 )     127,434  
 
Customer advances
    (180,531 )     (174,014 )     113,548  
 
Trade payables
    (316,924 )     48,949       15,161  
        1,737,348       (1,051,632 )     (110,425 )
  
 
 
 
       
 (ii)
Income tax accruals less payments
                 
 
Tax accrued (*)
    513,153       1,011,675       833,378  
 
Taxes paid
    (971,239 )     (1,236,713 )     (1,226,433 )
        (458,086 )     (225,038 )     (393,055 )
 
 
(*) Does not include tax accrued on the sale of Pressure Control disclosed as discontinued operations.
 
  (iii)
Interest accruals less payments, net
                       
 
Interest accrued
    90,896       136,737       183,995  
 
Interest received
    26,900       83,241       62,697  
 
Interest paid
    (141,963 )     (164,486 )     (267,994 )
        (24,167 )     55,492       (21,302 )
 
 (iv)
Cash and cash equivalents
                 
 
Cash at banks, liquidity funds and
short - term investments
    1,542,829       1,538,769       962,497  
 
Bank overdrafts
    (14,122 )     (13,747 )     (8,194 )
        1,528,707       1,525,022       954,303  
 
 
 
 
51

 
 
 
29           Discontinued operations
  
 
Nationalization of Venezuelan Subsidiaries

The results of operations and cash flows generated by the Venezuelan Companies (as defined in Note 32 (b)) are presented as discontinued operations in these Consolidated Financial Statements. For further information see Note 32 (b).
 
Sale of Hydril pressure control business
 
On April 1, 2008, Tenaris sold to General Electric Company (GE) the pressure control business included as part of the acquisition of Hydril Company undertaken on May 2007. The pressure control business was sold, for an amount equivalent on a debt-free basis to $1,114 million. The result of this transaction was an after-tax gain of $394.3 million, calculated as the net proceeds of the sale less the book value of net assets held for sale, the corresponding tax effect and related expenses. 


Book value of the Assets and Liabilities disposed:

   
At March 31, 2008
 
       
Property, plant and equipment, net
    64,556  
Intangible assets, net
    295,371  
Inventories
    173,110  
Trade receivables
    78,018  
Other assets
    39,643  
Total current and non current assets held for sale
    650,698  
         
Deferred tax liabilities
    71,434  
Customer advances
    128,975  
Trade payables
    54,175  
Other liabilities
    15,291  
Liabilities associated with current and non-current assets held for sale
    269,875  

Analysis of the result of discontinued operations:

(i) Result for discontinued operations

(all amounts in thousands of U.S. dollars)
 
(*) Year ended December 31,
 
   
2009
   
2008
   
2007
 
(Loss) income for discontinued operations
    (28,138 )     (87,418 )     52,128  
After tax gain on disposal of operations
    -       394,323       -  
Net (loss) income for discontinued operations
    (28,138 )     306,905       52,128  


 (*) Corresponds to the Venezuelan Companies (years 2009, 2008 and 2007) and Pressure Control (years 2008 and 2007) operations.
 
(ii) Net cash flows attributable to discontinued operations
 
   
(*) Year ended December 31,
 
   
2009
   
2008
   
2007
 
Net cash provided by operating activities
    1,788       20,786       41,678  
Net cash used in investing activities
    (801 )     (7,330 )     (21,854 )
Net cash provided by (used in) financing activities
    5,306       9,046       (10,796 )

(*) Corresponds to the Venezuelan Companies (years 2009, 2008 and 2007) and Pressure Control (years 2008 and 2007) operations.
 
 
 
52

 

 
All amounts were estimated only for disclosure purposes, as cash flows from these discontinued operations were not managed separately from other cash flows.
 
30           Related party transactions
 
Based on the information most recently available to the Company, as of December 31, 2009:  
 
·  
San Faustin N.V. owned 713,605,187 shares in the Company, representing 60.45% of the Company’s capital and voting rights.
 
 
·  
San Faustin N.V. owned all of its shares in the Company through its wholly-owned subsidiary I.I.I. Industrial Investments Inc.
 
 
·  
Rocca & Partners S.A. controlled a significant portion of the voting power of San Faustín N.V. and had the ability to influence matters affecting, or submitted to a vote of the shareholders of San Faustín N.V., such as the election of directors, the approval of certain corporate transactions and other matters concerning the company’s policies.
 
 
·  
There were no controlling shareholders for Rocca & Partners S.A.
 
 
Based on the information most recently available to the Company, as of December 31, 2009 Tenaris’ directors and senior management as a group owned 0.14% of the Company’s outstanding shares, while the remaining 39.41% were publicly traded.
 
At December 31, 2009, the closing price of Ternium’s ADSs as quoted on the New York Stock Exchange was $35.42 per ADS, giving Tenaris’ ownership stake a market value of approximately $813.6 million. At December 31, 2009, the carrying value of Tenaris’ ownership stake in Ternium, based on Ternium’s IFRS financial statements, was approximately $584.4 million. See Section II.B.2.

Transactions and balances disclosed as with “Associated” companies are those with companies over which Tenaris exerts significant influence or joint control in accordance with IFRS, but does not have control. All other transactions and balances with related parties which are not Associated and which are not consolidated are disclosed as “Other”. The following transactions were carried out with related parties:
 
 
 
 
Year ended December 31, 2009
                 
     
Associated (1)
   
Other
   
Total
 
 (i)
Transactions (2)
                 
 
(a) Sales of goods and services
                 
 
Sales of goods
    25,561       75,097       100,658  
 
Sales of services
    12,752       4,352       17,103  
        38,313       79,449       117,762  
                           
 
(b) Purchases of goods and services
                       
 
Purchases of goods
    40,171       9,705       49,877  
 
Purchases of services
    89,023       71,541       160,564  
        129,194       81,247       210,441  
 
 
 
Year ended December 31, 2008
                 
     
Associated (1)
   
Other
   
Total
 
(i)
Transactions (3)
                 
 
(a) Sales of goods and services
                 
 
Sales of goods
    74,420       37,636       112,056  
 
Sales of services
    19,444       4,205       23,649  
        93,864       41,841       135,705  
                           
 
(b) Purchases of goods and services
                       
 
Purchases of goods
    123,704       24,161       147,865  
 
Purchases of services
    125,161       79,037       204,198  
        248,865       103,198       352,063  
 
 
 
53

 
 
 
 
 
Year ended December 31, 2007
                 
     
Associated (4)
   
Other
   
Total
 
(i)
Transactions (5)
                 
 
(a) Sales of goods and services
                 
 
Sales of goods
    98,141       39,307       137,448  
 
Sales of services
    18,712       5,110       23,822  
        116,853       44,417       161,270  
                           
 
(b) Purchases of goods and services
                       
 
Purchases of goods
    254,063       27,277       281,340  
 
Purchases of services
    94,152       70,205       164,357  
        348,215       97,482       445,697  
 
 
 
At December 31, 2009
                 
     
Associated (1)
   
Other
   
Total
 
(ii)
Year-end balances
                 
                     
 
(a) Arising from sales / purchases of goods / services
                 
 
Receivables from related parties
    18,273       7,093       25,366  
 
Payables to related parties
    (23,898 )     (5,856 )     (29,754 )
        (5,625 )     1,237       (4,388 )
                           
 
(b) Financial debt
                       
 
Borrowings
    (2,907 )     -       (2,907 )
 
 
 
At December 31, 2008
                 
     
Associated (1)
   
Other
   
Total
 
(ii)
Year-end balances
                 
                     
 
(a) Arising from sales / purchases of goods / services
                 
 
Receivables from related parties
    50,137       15,504       65,641  
 
Payables to related parties
    (44,470 )     (5,974 )     (50,444 )
        5,667       9,530       15,197  
                           
 
(b) Financial debt
                       
 
Borrowings
    (2,294 )     -       (2,294 )
 
 
At December 31, 2007
                 
     
Associated (1)
   
Other
   
Total
 
(ii)
Year-end balances
                 
                     
 
(a) Arising from sales / purchases of goods / services
                 
 
Receivables from related parties
    45,773       8,015       53,788  
 
Payables to related parties
    (61,597 )     (7,379 )     (68,976 )
        (15,824 )     636       (15,188 )
                           
 
(b) Financial debt
                       
 
Borrowings (6)
    (27,482 )     -       (27,482 )
  
 
(1) Includes Ternium S.A. and its subsidiaries (“Ternium”), Condusid C.A. (“Condusid”), Finma S.A.I.F (“Finma”), Lomond Holdings B.V. group (“Lomond”), Socotherm Brasil S.A. (“Socotherm”) and Hydril Jindal International Private Ltd.
(2) Includes $2.5 million of purchases of nationalized Venezuelan subsidiaries.
(3) Includes $12.9 million of sales and $9.5 million of purchases of nationalized Venezuelan subsidiaries.
(4) Includes Ternium, Condusid, Finma, Lomond, Dalmine Energie S.p.A. (“Dalmine Energie”) (until October 2007), Socotherm, Hydril Jindal International Private Ltd. and TMK – Hydril JV.
(5) Includes $52.5 million of sales and $56.1 million of purchases of nationalized Venezuelan subsidiaries.
(6) Includes loan from Sidor to Matesi of $26.4 million at December 31, 2007.
 
 
 
54

 

 
Directors’ and senior management compensation
 
The aggregate compensation earned by directors and senior management during 2009, 2008 and 2007 amounts to $18.2 million, $22.5 million and $20.0 million respectively.
 
 
 
 
 
 

 

 
55

 

31           Principal subsidiaries

The following is a list of Tenaris principal subsidiaries and its direct and indirect percentage of ownership of each controlled company at December 31, 2009.


Company
Country of Organization
Main activity
Percentage of ownership at  December 31, (*)
     
2009
2008
2007
ALGOMA TUBES INC.
Canada
Manufacturing of seamless steel pipes
100%
100%
100%
CONFAB INDUSTRIAL S.A. and subsidiaries (a)
Brazil
Manufacturing of welded steel pipes and capital goods
40%
40%
39%
DALMINE S.p.A.
Italy
Manufacturing of seamless steel pipes
99%
99%
99%
HYDRIL COMPANY and subsidiaries (except detailed) (b)
USA
Manufacture and marketing of premium connections
100%
100%
100%
HYDRIL U.K. LTD.
United Kingdom
Manufacturing of steel products
100%
100%
100%
INVERSIONES BERNA S.A.
Chile
Financial Company
100%
100%
100%
MAVERICK TUBE CORPORATION and subsidiaries (except detailed)
USA
Manufacturing of welded steel pipes
100%
100%
100%
MAVERICK TUBE, LLC
USA
Manufacturing of welded steel pipes
100%
100%
100%
NKKTUBES
Japan
Manufacturing of seamless steel pipes
51%
51%
51%
PRUDENTIAL STEEL ULC
Canada
Manufacturing of welded steel pipes
100%
100%
100%
S.C. SILCOTUB S.A.
Romania
Manufacturing of seamless steel pipes
100%
100%
99%
SIAT S.A.
Argentina
Manufacturing of welded and seamless steel pipes
82%
82%
82%
SIDERCA S.A.I.C. and subsidiaries (except detailed) (c)
Argentina
Manufacturing of seamless steel pipes
100%
100%
100%
SIDTAM LTD.
British Virgin Islands
Holding Company
100%
100%
100%
TALTA - TRADING E MARKETING SOCIEDADE UNIPESSOAL LDA.
Madeira
Holding Company
100%
100%
100%
TENARIS CONNECTION Limited and subsidiaries (except detailed)
St. Vincent & the Grenadines
Ownership and licensing of steel technology
100%
100%
100%
TENARIS FINANCIAL SERVICES S.A.
Uruguay
Financial Company
100%
100%
100%
TENARIS GLOBAL SERVICES (CANADA) INC.
Canada
Marketing of steel products
100%
100%
100%
TENARIS GLOBAL SERVICES (PANAMA) S.A. - Suc. Colombia
Colombia
Marketing of steel products
100%
100%
100%
TENARIS GLOBAL SERVICES (U.S.A.) CORPORATION
USA
Marketing of steel products
100%
100%
100%
TENARIS GLOBAL SERVICES NORWAY A.S.
Norway
Marketing of steel products
100%
100%
100%
TENARIS GLOBAL SERVICES S.A. and subsidiaries (except detailed) (d)
Uruguay
Holding company and marketing of steel products
100%
100%
100%
TENARIS INVESTMENTS LTD and subsidiaries (except detailed)
Ireland
Holding company and financial services
100%
100%
100%
TUBOS DE ACERO DE MEXICO SA
Mexico
Manufacturing of seamless steel pipes
100%
100%
100%
TUBOS DEL CARIBE LTDA.
Colombia
Manufacturing of welded steel pipes
100%
100%
100%
 
 
 
 
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(*) All percentages rounded.
(a) Tenaris holds 99% of the voting shares of Confab Industrial S.A. Tenaris holds 40% of Confab’s subsidiaries except for Tenaris Confab Hastes de Bombeio S.A.where it holds 70%.
(b) Tenaris holds 100% of Hydril’s subsidiaries except for Technical Drilling & Production Services Nigeria Ltd. where it holds 60%.
(c) Tenaris holds 100% of Siderca’s subsidiaries, except for Scrapservice S.A. where it holds 75%.
(d) Tenaris holds 95% of Tenaris Supply Chain S.A and 95% of Tenaris Saudi Arabia Limited.

32           Processes in Venezuela

(a) Investment in Ternium: Sidor nationalization process
 
On May 7, 2009, Ternium completed the transfer of its entire 59.7% interest in Sidor to CVG. The transfer was effected as a result of Venezuela’s Decree Law 6058, which ordered that Sidor and its subsidiaries and associated companies be transformed into state-owned enterprises and declared the activities of such companies of public and social interest. While CVG had assumed operational control of Sidor on July 12, 2008, Ternium had retained formal title over the shares until May 7, 2009. Ternium agreed to receive an aggregate amount of $1.97 billion as compensation for its Sidor shares. Of that amount, CVG paid $400 million in cash on May 7, 2009. The balance was divided in two tranches: the first tranche, of $945 million, is being paid in six equal quarterly installments, while the second tranche will be paid at maturity in November 2010, subject to quarterly mandatory prepayment events based on the increase of the WTI crude oil price over its May 6, 2009 level.

As of the date of these financial statements, Ternium has not yet received the Sidor compensation payments required to be made by CVG on February 8, 2010. These payments consist of a $157.5 million principal installment, plus interest, due under the first tranche, and a $141.4 million mandatory prepayment, plus interest, due under the second tranche. The total balance of the Sidor compensation payments outstanding as of December 31, 2009 amounted to $1.02 billion, plus interest.

(b) Nationalization of Venezuelan Subsidiaries

Within the framework of Decree Law 6058, on May 22, 2009, Venezuela’s President Hugo Chávez announced the nationalization of, among other companies, the Company’s majority-owned subsidiaries TAVSA – Tubos de Acero de Venezuela S.A. (“Tavsa”) and, Matesi, Materiales Siderurgicos S.A (“Matesi”), and Complejo Siderurgico de Guayana, C.A (“Comsigua”), in which the Company has a minority interest (collectively, “the Venezuelan Companies”). On May 25, 2009, the Minister of Basic Industries and Mines of Venezuela (“MIBAM”) issued official communications N°230/09 and 231/09, appointing the MIBAM’s representatives to the transition committees charged with overseeing the nationalization processes of Tavsa and Matesi. On May 29, 2009, the Company sent response letters to the MIBAM acknowledging the Venezuelan government’s decision to nationalize Tavsa and Matesi, appointing its representatives to the transition committees, and reserving all of its rights under contracts, investment treaties and Venezuelan and international law and the right to submit any controversy between the Company or its subsidiaries and Venezuela relating to Tavsa and Matesi’s nationalization to international arbitration, including arbitration administered by ICSID.

On July 14, 2009, President Chávez issued Decree 6796, which orders the acquisition of the Venezuelan Companies’ assets and provides that Tavsa’s assets will be held by the Ministry of Energy and Oil, while Matesi and Comsigua’s assets will be held by MIBAM. Decree 6796 also requires the Venezuelan government to create certain committees at each of the Venezuelan Companies; each transition committee must ensure the nationalization of each Venezuelan Company and the continuity of its operations, and each technical committee (to be composed of representatives of Venezuela and the private sector) must negotiate over a 60-day period (extendable by mutual agreement) a fair price for each Venezuelan Company to be transferred to Venezuela. In the event the parties fail to reach agreement by the expiration of the 60-day period (or any extension thereof), the applicable Ministry will assume control and exclusive operation of the relevant Venezuelan Company, and the Executive Branch will order their expropriation in accordance with the Venezuelan Expropriation Law. The Decree also specifies that all facts and activities there under are subject to Venezuelan law and any disputes relating thereto must be submitted to Venezuelan courts.

On August 19, 2009, the Company announced that Venezuela, acting through the transition committee appointed by the MIBAM, unilaterally assumed exclusive operational control over Matesi.

On November 17, 2009, the Company announced that Venezuela acting through PDVSA Industrial S.A. (a subsidiary of Petroleos de Venezuela S.A.), formally assumed exclusive operational control over the assets of Tavsa. Following this formal change in operational control, PDVSA Industrial has assumed complete responsibility over Tavsa’s operations and management and since then Tavsa’s operations are being managed by the transition committee previously appointed by Venezuela. The Company’s representatives in Tavsa’s board of directors have ceased in their functions.
 
 
 
57

 

 
The Company’s investments in Tavsa, Matesi and Comsigua are protected under applicable bilateral investment treaties, including the bilateral investment treaty between Venezuela and the Belgian-Luxembourgish Union, and, as noted above, Tenaris continues to reserve all of its rights under contracts, investment treaties and Venezuelan and international law, and to consent to the jurisdiction of the ICSID in connection with the nationalization process.

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

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

Tenaris subsidiaries have also net receivables with the Venezuelan Companies as of December 31, 2009 for a total amount of $27.7 million.

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

33           Subsequent events

 
Annual Dividend Proposal

On February 24, 2010 the Company’s board of directors proposed, for the approval of the annual general shareholders' meeting to be held on June 2, 2010, the payment of an annual dividend of $0.34 per share ($0.68 per ADS), or approximately $401 million, which includes the interim dividend of $0.13 per share ($0.26 per ADS) paid on November 26, 2009. If the annual dividend is approved by the shareholders, a dividend of $0.21 per share ($0.42 per ADS), or approximately $248 million will be paid on June 24, 2010, with an ex-dividend date of June 21, 2010. These Consolidated Financial Statements do not reflect this dividend payable.








 
Ricardo Soler
 
 
Chief Financial Officer
 


 
 
 
 
 
 
 
 
58