Upload
trinhtuyen
View
233
Download
2
Embed Size (px)
Citation preview
An
nu
al R
epo
rt20
05
Annual Report
2005
Société Anonyme à Directoire
et à Conseil de Surveillance
Capital: 212 006 640 €
Registered Office: 130, rue de Silly
92100 Boulogne-Billancourt (France)
552 142 200 RCS Nanterre
Tel.: +33 (0)1 49 09 38 24
Fax: +33 (0)1 49 09 36 94
Internet: www.vallourec.com Dire
ctio
n an
d w
ritin
g:Va
llour
ec -
Gav
in A
nder
son
& Co
mpa
ny -
Desig
n an
d pr
oduc
tion:
Phén
ix C
omm
unica
tion
- Pho
tos:
Stud
io P
ons
(Phi
lippe
Stro
ppa)
,Get
ty Im
ages
(M.M
cQue
en,T
.Vin
e,T.
Mar
esch
al,A
.Hol
t),J.P
.Bol
le,V
allo
urec
,X.
2005key figures
Sales
€ 4,307.4million
59.3% in the energy sector(oil & gas, and power generation)
61.3% outside the European Union
30 industrial companies
organized in 6 divisionsby product or by market
45 production units
in10 countries
Approximately18,000 staff
1 Profile
2 Statement by the Chairmen
4 Corporate governance
6 2005, a year of positive momentum
8 Key figures
10 Shareholder information
12 The Group’s markets
21 Reference document
ProductionSales and services
Vallourec has productionfacilities on four continents.These are complementedby a worldwide network ofsales offices and numerousservice centres. The Grouptherefore has the majorcompetitive advantageof being able to offer itscustomers high-quality andlocal services throughoutthe world.
Vallourec, an integrated industrial group, controls the whole of its manufacturing process, from the productionof steel to the manufacture of finished products. It offers a portfolio of high value-added tubular products, originaland unique in its diversity. Indeed, Vallourec has specialized in particular in products for the most complex andhighly-demanding industrial applications (extreme temperature, pressure, corrosion, etc.), notably in the energysector (oil & gas, and power generation).
Thanks to its expertise gained over more than a century, solid industrial partnerships, ongoing R&D efforts anddecentralized organization, the Group has gradually established itself as the supplier of reference throughoutthe world. Vallourec combines the dynamism and flexibility of its various entities, which are strongly rooted intheir local industrial fabric (particularly in France, Germany, Brazil and the United States) with the advantagesassociated with a major Group of nearly 18,000 staff.
In 2005, the acquisition of full control of V & M TUBES represented a major step in the Group’s development.Vallourec is now well placed to continue building on its world leadership position in a buoyant market.
World leader in the productionof seamless steel tubesand specific tubular productsfor industrial applications
1Vallourec 2005 Annual Report
Jean-Paul Parayre Pierre Verluca
Dear Shareholders,
In all regards, 2005 proved to be a remarkable year for
Vallourec and the outlook for 2006 is excellent.
An excellent performance
In a climate that has remained highly favourable, Vallourec
produced a first-class performance in 2005, led by a
remarkable 42% increase in sales to a record €4.3 billion.
Driven in particular by the healthy state of the oil & gas and
power generation markets, demand for seamless steel
tubes remained buoyant. The quality of Vallourec’s
products and services enabled the Group to continue to
benefit from increases in its selling prices. Raw material
prices were generally stable. Moreover, the Group’s
production facilities were operating at full capacity and
Vallourec oriented its production towards high value-
added products.
Volume growth, the improved product mix and selling
price increases had a highly positive impact on the Group’s
operating performance, with EBITDA rising from 15% in
2004 (itself a record) to 25% of sales in 2005. Net income,
Group share has more than tripled.
An eventful year
In addition to the Group’s performance, the major event
of 2005 was undoubtedly the acquisition by Vallourec, for
€545 million, of the minority interest previously held by
Salzgitter/Mannesmann in V & M TUBES. The Group’s
principal subsidiary, formed in 1997 when the seamless
tubes activities of Vallourec and Mannesmann were
merged, V & M TUBES was 55%-held by Vallourec with
Mannesmannröhren-Werke holding the remaining 45%.
The world leader in seamless steel tubes, for eight years
V & M TUBES was not only the main contributor to
Vallourec’s earnings but also the driving force behind
its dynamic acquisition policy. Taking full control of
V & M TUBES therefore represented a considerable step
forward at both operating and financial level. Vallourec
now has sole control over the strategy of V & M TUBES.
Since 1 July 2005, Vallourec has been benefiting from
V & M TUBES’ entire net income, which has had a
positive impact on the Group’s earnings per share from
that date.
Vallourec also continued to manage actively its portfolio
of businesses in 2005. In early January, the Group sold its
non-strategic automotive components activities in South
America. In September, in line with its policy of developing
high value-added products, the Group acquired the assets
of OMSCO, a US company specialized in drill pipes,
thereby enabling Vallourec to become the world no. 2 in
this market.
The year 2005 was also notable for the increase in
production capacity at V & M do BRASIL and the start
of work on the construction of a new facility in China
for the machining of tubes for the power generation
sector.
Lastly, in spring 2006, Vallourec continued its development
in the energy sector with the acquisition of SMFI, a
company specialized in the manufacture of heavy-weight
drill pipes, and of CST, an Indian company manufacturing
stainless steel and titanium tubes for power plants. In
order to focus on its core activities, Vallourec also
announced the disposal of its only subsidiary operating in
the aerospace sector, Spécitubes.
Statement by the Chairmen
2 Vallourec 2005 Annual Report
“Our strategy continued to bear fruit in 2005 in a highlyfavourable market context”
Emphasis on investments
In 2005, despite an 85% increase in capital expenditure
by the Group and a total of €650 million spent on
acquisitions, Vallourec succeeded in maintaining a healthy
financial position and posted gearing (net debt to
shareholders’ equity) of just 13.6% at 31 December 2005.
The Group’s excellent visibility, particularly in the energy
sector, allows Vallourec to continue investing in and
developing high value-added products. This is reflected in
its sustained Research and Development efforts, and in
capital expenditure to increase the Group’s finishing
capacities, particularly in heat treatment.
Sharp increase in the dividend
In line with its pay-out policy, Vallourec wishes its
shareholders to benefit from the Group’s excellent
performance. Following payment of an interim dividend
of €4 per share in October 2005, Vallourec is submitting
a resolution for approval by the Annual General Meeting
on 1 June 2006 for payment of a total dividend in respect
of 2005 of €11.2 per share, 3.5 times higher than the
dividend paid in respect of 2004.
A significant change in the Group profile
Through its acquisitions and capital expenditure in recent
years, Vallourec’s profile has changed significantly. The
Group is now involved mainly in the energy markets
(oil & gas, and power generation), which represented
nearly 60% of sales in 2005 compared with barely 35%
in 2000. At the same time, the Group has expanded very
strongly internationally, with the proportion of sales
outside the European Union rising from a little over 40%
in 2000 to a little over 60% in 2005. Lastly, production
facilities were exclusively based in Europe in 2000 and are
now much better spread over four continents.
Renewed confidence in a buoyant environment
Strengthened by its marked change in profile, Vallourec
is well placed to continue building to the full on its
leadership position: the Group’s financial position is
extremely healthy, it intends to make the capital
expenditure required to continue its development in the
production of high-end products, and is ready to seize
acquisition opportunities enabling it to consolidate its
worldwide presence.
Pierre VerlucaChairman of the
Management Board
Jean-Paul ParayreChairman of the
Supervisory Board
3Vallourec 2005 Annual Report
25Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 5
Contents
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
SECTION 8: SPECIFIC DOCUMENTS FOR THE ORDINARY GENERAL MEETING ON 1 JUNE 2006
8.1 MANAGEMENT BOARD REPORTS 161
8.1.1 Management report of the Management Board to the Ordinary General Meeting on 1 June 2006 161
■ Trends in the Vallourec Group’s markets 163
■ Research and Development 170
■ Information provided in accordance with Article L. 225-102, Section 4,of the French Code de Commerce:
– Information on the social implications of the Group’s activities 171
– Information on the environmental consequences of the Group’s activities 179
■ Consolidated financial statements 181
■ Vallourec (Holding Company) 182
■ Remuneration of Company officers 182
■ Information on the breakdown of capital 183
■ Regulated agreements 183
■ Allocation of net income 184
■ Supervisory Board 185
■ Statutory Auditors 185
■ Attendance fees 185
■ Share buy-back programme 185
■ Appendix to the Management Board’s management report: List of other positions held by Vallourec Company officers 186
8.1.2 Special report of the Management Board on options 203
8.2 REPORT OF THE CHAIRMAN OF THE SUPERVISORY BOARD 204
on the conditions governing the preparation and organization of the Supervisory Board’s work and on the internal control procedures
8.3 STATUTORY AUDITORS’ REPORTS 208
8.3.1 Statutory Auditors’ general report on the annual statutory accounts 208
8.3.2 Statutory Auditors’ special report on certain related party transactions 210
8.3.3 Statutory Auditors’ report on the consolidated financial statements 212
8.3.4 Statutory Auditors’ report on the report of the Chairman of the Supervisory Board on internal control procedures 214
8.4 SUPERVISORY BOARD REPORT 215
8.5 RESOLUTIONS PROPOSED BY THE MANAGEMENT BOARD 216
8.6 SUBSIDIARIES AND PARTICIPATING INTERESTS AS AT 31 DECEMBER 2005 220
8.7 COMPANIES CONTROLLED DIRECTLY OR INDIRECTLY AS AT 31 DECEMBER 2005 221
8.8 EVALUATION OF SECURITIES PORTFOLIO AS AT 31 DECEMBER 2005 222
8.9 FIVE-YEAR FINANCIAL SUMMARY 223
INFORMATION PUBLISHED OR MADE PUBLIC BY THE ISSUER DURING THE LAST 12 MONTHS
CROSS REFERENCES BETWEEN THE VALLOUREC REFERENCE DOCUMENTAND APPENDIX I OF THE EUROPEAN PROSPECTUS REGULATIONS
Since June 1994, Vallourec has been governed by a Management Board and a Supervisory Board, which together provide for balanced management thatsafeguards the shareholders’ best interests.
Corporate governance
Supervisory Board (at 1 January 2006)
Honorary Chairman: Arnaud Leenhardt
Chairman: Other main appointments:Jean-Paul Parayre Member of the Supervisory Board of PSA Peugeot-Citroën
and of the Board of Directors of Stena International
Vice-Chairman: Patrick Boissier Chairman and CEO of Chantiers de l’Atlantique
Members:
Luiz-Olavo Baptista Lawyer and Professor of International Law
Vincent Bolloré Chairman and CEO of Bolloré group
Wolfgang Eging Chairman of the Executive Board of Mannesmannröhren-Werke GmbH
Michel de Fabiani Director of BP France
Heinz Jörg Fuhrmann Member of the Executive Board and CFO of Salzgitter AG
Denis Gautier-Sauvagnac President and Managing Director of UIMM
François Henrot Managing Partner of Rothschild & Cie Banque and Rothschild & Cie
Wolfgang Leese Chairman of the Executive Board of Salzgitter AG
Jean-Claude Verdière Member of the Management Board of Vallourec until 30 June 2001
Société Financière de Sainte Marine,Represented by Thierry Marraud CFO of Bolloré group
Committees
The Supervisory Board has set up two committees: the
Finance Committee and the Appointments and Remuneration
Committee.
The Finance Committee met four times in 2005. Its main
tasks were to review the financial statements for 2004 and
for the first six months of 2005, the financing of the
acquisition of 45% of V & M TUBES, and the acquisition
of OMSCO.
The Appointments and Remuneration Committee met
twice in 2005.
The Supervisory Board and its Committees
The Supervisory Board met eight times in 2005. The participation rate in meetings was close to 100%. All decisions submitted
to a vote by the Supervisory Board were adopted unanimously in 2005.
4 Vallourec 2005 Annual Report
Management Board (at 1 April 2006)
Since 1 April 2006, the Management Board has comprisedfive members:
Pierre VerlucaChairman of the Management Board
François FabreMember of the Management Board
Bertrand CantegritChairman, Automotive and Industry Division
Marco Antônio Castello BrancoChairman, Hot-Rolled Tubes DivisionChairman, V & M do BRASIL SA
Jean-Pierre MichelVice-President, Controlling, Marketing and PurchasingChairman, Oil & Gas activities
Executive Committee
The Executive Committee comprises the five members ofthe Management Board and the following four members:
Bert BecherChairman of the Management Board, V & M DEUTSCHLAND GmbH,
Vice-President Sales and Marketing, Hot-Rolled Tubes Division
Jean CharpentierVice-President, Human Resources
Alain HonnartChairman, Stainless Steel Division,Vice-President, Industrial Policy
Marc KarakoCFO: Finance, Legal and External Communication
The Executive Committee, from left to right: Alain Honnart, Bert Becher,Marco Antônio Castello Branco, François Fabre, Pierre Verluca, Jean-Pierre Michel, Bertrand Cantegrit, Marc Karako and Jean Charpentier.
Strategy Group
With a view to improving the focus and organization of the
various departments around its strategic objectives,
Vallourec has rounded out its management structure by
creating a Strategy Group comprising four members of the
Executive Committee and six members representing the
Group’s major functional departments. The main objective
of the Strategy Group is to support Vallourec’s decentralized
management approach in order to strengthen its cohesion.
Abderrazak BenyahiaVice-President, Marketing Department
Jean CharpentierVice-President, Human Resources
Alain DieulinVice-President, R&D Department
François FabreMember of the Management Board
Eddy de KerlandVice-President, Controlling Department
Jean-Louis MerveilleVice-President, Purchasing Department
Jean-Pierre MichelMember of the Management Board,Vice-President, Controlling, Marketing and Purchasing,Chairman, Oil & Gas activities
Christophe PrasserVice-President, Technology and Investments
Gérard TerneyreVice-President, Strategy and Development
Pierre VerlucaChairman of the Management Board
Management
Management of the Group is provided by the Management Board and the Executive Committee. At the initiative of the
Management Board, in July 2004 Vallourec established a restricted Executive Committee in order to enhance dialogue
between the Group’s various divisions, improve its flexibility and enable it to better adapt to the economic and geopolitical
climate.
5Vallourec 2005 Annual Report
2005, a year of positive momentum2005 was the year in which Vallourec acquired full control of V & M TUBES, a majorstep forward in changing the Group’s profile. Apart from this transaction, the Groupcontinued to implement a consistent strategy aimed at strengthening Vallourecwhile gaining in clarity: disposing of non-strategic activities, both increasingproduction capacities and making acquisitions in high value-added activities werelandmarks in a particularly dynamic year.
Highlights
January 2005
Disposal of the South American automotivecomponents activities
June 2005
Acquisition of full control of V & M TUBES for€545 million (purchase of Mannesmannröhren-Werke’s 45% holding)
July 2005
€125 million rights offering
July-August 2005
Investment in production capacity in Brazil(+100,000 tonnes)
September 2005
Acquisition of the assets of OMSCO for USD 120 million (oil drilling)
March 2006
Acquisition of SMFI for €40 million (oil drilling)
April 2006
Announcement of the disposal of Spécitubes(aerospace)
April 2006
Establishment of a presence in India (acquisitionof 75% of CST Ltd, power generation)
V & M TUBES at the heart of Vallourec’s development
The key event of 2005 proved to be the acquisition of
the 45% of V & M TUBES not previously held by
Vallourec. To properly understand the importance of
this transaction, one needs to look back eight years.
A fundamental step in the development of the
Vallourec Group was taken in 1997 with the merger
of the seamless tubes activities of Vallourec and
of Mannesmannröhren-Werke (MRW) into a joint
venture named VALLOUREC & MANNESMANN TUBES
(V & M TUBES), held 55% by Vallourec and 45% by
MRW.
V & M TUBES, world leader in seamless steel tubes
At the time of the formation of V & M TUBES in
1997, Vallourec was careful to combine the industrial,
financial and human conditions required for the
merger to be successful.
By creating a genuine “V & M TUBES culture” based
on a shared strategic vision and common ambitions,
the Vallourec and MRW teams were able to respect
their particular skills and implement the sharing of
experiences. Their pride in being involved in the
emergence of a world leader and the absence of
conflict in setting in place management structures
were major factors in this success.
6 Vallourec 2005 Annual Report
Vallourec’s engine of growth
Vallourec made V & M TUBES the engine of its growth,
a strategy that in just a few years profoundly changed
the Group’s profile.
The first stage of this expansion was the purchase in
2000 by V & M TUBES of the Brazilian activities of
MRW, which were renamed V & M do BRASIL. This
made Vallourec the leading producer of seamless
steel tubes in Brazil. V & M do BRASIL employs more
than 5,000 staff and is now extremely profitable.
The second stage came in 2002, when V & M TUBES
bought the assets of North Star Steel for USD 380
million from Cargill and created V & M STAR, a
company in which Sumitomo (a long-standing partner
of Vallourec in the area of tubes for the oil industry)
took 19.5%. Vallourec thus became the no. 2 in the
United States in the production of seamless steel
tubes, reinforcing in a highly complementary manner
its activities in the oil & gas sector and successfully
integrating around 1,000 staff. In V & M STAR,
Vallourec also acquired an outstanding technical
capability and the productivity of the company’s
industrial facilities improved the Group’s margins.
V & M TUBES wholly-owned by Vallourec
At the end of June 2005, Vallourec acquired full
control of V & M TUBES by purchasing MRW’s
45% holding for € 545 million. On a stand-alone
basis, V & M TUBES represented 81% of Vallourec’s
consolidated sales and 86% of its EBITDA in
2004.
The V & M TUBES transaction is a major step in
the Group’s development. Vallourec now has full
control over implementation of its strategy
(acquisitions, capital expenditure, etc.) and the
Group’s structure is much more coherent: as the
sole owner of its industrial assets, Vallourec offers
much-improved clarity and visibility.
The transaction was financed using the Group’s
available cash, a bank loan and a € 125 million
rights offering. Consolidating 100% of the
earnings of V & M TUBES from the second half of
2005 has markedly enhanced Vallourec’s earnings
per share.
Formation of V & M TUBESA 55% Vallourec and 45% MRWjoint venture
A new dimension for Vallourec:world leader in seamless steeltubes
Acquisition of V & M do BRASIL100% owned
International expansion andimproved Group profitability
Acquisition ofV & M STAR80.5% V & M TUBES and 19.5% Sumitomo
Industrial presence in the United States and enhanced offer in oil & gas
Acquisition of the remaining45% interest in V & M TUBES
▲
1997 2000
2002
2005
7Vallourec 2005 Annual Report
Sales by market
Sales generated in the energy sector (tubes for exploration
and production in the oil & gas industry as well as tubes for
use in power plants) continued as the strong driving force
behind the Group’s growth in 2005. In 2005, the energy
sector represented 59.3% of Group sales (2004: 51.8%).
Key figures
Vallourec recorded exceptional growth in sales in 2005,
which rose by 41.8% to a new record of € 4.3 billion.
This strong increase was due essentially to a mix and price
effect. In a buoyant environment, the Group was able to
put through further selling price increases during the
year, particularly in Brazil and the United States, and to
substantially improve its product mix.
Sales by geographic region
Vallourec continued to internationalize its activities in
2005. The relative shares of sales in North America and Asia
increased substantially: sales outside the European Union
now represent 61.3% of the overall total (2004: 57.0%).
4,307
2,376
3,038
2,5502,500
2001 2003 2004 20052002
Oil & gas42.5%
Power generation16.8%
Other5.5%
Automotive11.2%
Chemicals and petrochemicals10.7%
Mechanical engineering13.3%
North America
25.9%
South America
11.6%
Asia and Middle East
19.5%
Germany
14.2%
France
9.5%
Other EU
15.0%
Rest of world
4.3%
(in € million)
• Consolidated data are presented in accordance with French GAAP until 2003and with IFRS from 2004.• The 2005 financial statements reflect the disposal, effective from 1 January 2005,of the automotive components activities in Brazil and Argentina (2004 sales:€71 million) and the inclusion with effect from 1 October 2005 of the assetsof OMSCO (4th quarter 2005 sales: € 28 million).
Consolidated sales
+41.8%
Vallourec posted record results in 2005. This remarkable performance was dueessentially to high levels of demand, ongoing selling price increases and continuingimprovements in the Group’s product mix.
8 Vallourec 2005 Annual Report
SALES
€ 4,307.4 million
+41.8%
EBITDA
€ 1,060.6 million+133.3%
24.6% of sales
TOTAL NET INCOME
€ 632.4 million
+138.5%
14.7% of sales
EBITDA/Sales ratio
24.6%
15.0%
9.3%
13.6%14.0%
2001 2003 2004IFRS
2005IFRS
2002805
371
196251269
2001 2003 2004IFRS
2005IFRS
2002
843
10373
501
144
2001 2003 2004IFRS
2005IFRS
2002
205
73-55-4
106
2001 2003 2004IFRS
2005IFRS
2002
NET INCOME,GROUP SHARE
€ 473.0 million
+226.2%
Cash flow(in € million)
Net debt(in € million)
Investments(in € million)
At 24.6%, the ratio of EBITDA to sales also reached a record level in 2005, reflecting the
improved product mix and the Group’s capacity to pass on the rises in raw material costs
to selling prices.
Price rises and the trend towards higher value-added products enabled Vallourec to
substantially improve its cash flow, which more than doubled between 2004 and 2005
to reach €805 million.
The exceptionally high level of investment expenditure in 2005 resulted both from the
acquisitions made during the year (purchase of 45% of V & M TUBES and the assets of
OMSCO) and the growth in capital expenditure intended, in particular, to increase the
Group’s production capacities. The purchase of 45% of V & M TUBES for €545 million
was financed in part by a €125 million rights offering in July 2005.
Despite the exceptional level of acquisition and capital expenditure in 2005 (€+740 million),
and notwithstanding the payment of €114 million in dividends (including a €42 million interim
dividend payment in respect of 2005), the Group’s net debt rose by just €260 million in 2005,
with the Group moving from holding net cash of €55 million at 31 December 2004 to
having net debt of €205 million at 31 December 2005, representing gearing of 13.6%.
9Vallourec 2005 Annual Report
Shareholder information
Vallourec share
Listed on the Euronext Paris Eurolist (section A)Part of the deferred settlement section (SRD)ISIN code: FR0000120354Indices: Euronext 100, SBF 120 and CAC Mid 100FTSE classification: engineering and machineryMarket capitalization: €11.7 billion on 21 April 2006
Financial calendar
1 June 2006: Annual General Meeting27 July 2006: release of 2006 Q2 sales figures13 September 2006: release of 2006 first-half results25 October 2006: release of 2006 Q3 sales figures1 February 2007: release of 2006 Q4 sales figures
Number of shares at 31 December 2005: 10,600,332Number of identified shareholders: 20,716 (holding 100% of the capital)Number of voting rights published in BALO on 25 January 2006:12,162,388
The breakdown of Vallourec’s capital changed signifi-
cantly in 2005. Between January 2005 and January
2006, the number of shareholders increased by nearly
70%, from 12,300 to over 20,000.
47.6
4.2
14.3
6.79.3
11.2*
1.6 3.22.12.1
2001 2003 2004 20052002
2005 was notable for a further and very sharp rise in the Vallourec share priceand by significant changes in the Group’s shareholder structure.
Employeeshareholders
1.4% (1.2%)
Public71.4% (62.4%)
Bolloré group7.5% (6.5%)
Directly held by Vallourec2.5% (0%)
SalzgitterMannesmann GmbH17.2% (29.9%)
Capital breakdown
Sources: identifiable bearer shares and registered shares at 13 January2006, adjusted for the crossing of a share ownership threshold byBolloré group on 2 February 2006
As a % of capitalAs a % of voting rights
Pay-out ratio 23.1% 31.5% 39.2% 23.3% 25.1%
Group share of net income, per share (under French GAAP to 2004 and IFRS in 2005)Dividend per share
* Proposed dividend (of which, interim dividend of €4.0 paid on 12 October 2005 and acomplement of dividend of €7.2)
Dividend
On the recommendation of the Management Board,
the Supervisory Board has decided to propose to the
Annual General Meeting of 1 June 2006 a dividend of
€11.2 per share in respect of 2005, 3.5 times higher than
the dividend paid in respect of 2004 (€3.2 per share).
Taking into account the interim dividend paid on 12 October
2005 of € 4.0 per share, the final dividend amounts to
€7.2 per share. It will be paid on 5 July 2006.
Earnings per share and dividend(in euros)
10 Vallourec 2005 Annual Report
Division of the nominal valueper share
A proposal will be submitted to the forthcoming Annual
General Meeting for approval to divide the nominal value
of each share by five. This would entail the allotment
of five new shares with a nominal value of €4 each
in exchange for each existing share with a nominal
value of €20. The split will take place from 18 July 2006.
Vallourec's share posted the largest increase in the SRD section in 2005. The share price was multiplied by a factor of
more than four during the year, rising 327% from €108.9 on 3 January 2005 to €465 on 30 December 2005, and
the market capitalization increased from €1.1 billion to €5.0 billion. Over the same period, the SBF index rose by 24%.
Since the start of 2006, the share price has continued to rise and stood at €1,100.5 on 21 April 2006.
0
120
240
360
480
600
720
840
960
1,080
1,200
Vallourec share price in euros
SBF 120 relative to Vallourec share price at 2 January 2004
01/2004
04/2004
07/2004
10/2004
01/2005
04/2005
07/2005
10/200504/2006
01/2006
At 2 January 2004 At 30 December 2005 Change At 21 April 2006
Vallourec: €66.0 Vallourec: €465.0 +604.5% Vallourec: €1,100.5
SBF 120: 2,539.2 SBF 120: 3,399.0 +33.9% SBF 120: 3,822.5
Share price
Shareholder and investorcontact
To better respond to the expectations of both individual
and institutional shareholders, Vallourec is committed to
improving the quality of its financial communications.
Shareholder contactHenri Redig, 130, rue de Silly, 92100 Boulogne-Billancourt, France Tel.: +33 (0)1 49 09 38 28 - Fax: +33 (0)1 49 09 36 94Email: [email protected]
www.vallourec.com
EARNINGS PER SHARE
€ 47.6+233% compared to 2004
DIVIDEND PER SHARE
€ 11.2+250% compared to 2004
SHARE PRICE
+327% in 2005
Vallourec
SBF 120
€1,100.5
11Vallourec 2005 Annual Report
Growth in drilling programmesin the rest of the world
In the rest of the world, oil companies also significantly
expanded their activities and prices were maintained at
a high level. Tube manufacturers extended their delivery
times. To be able to respond to the strong demand, the
Group organized its threading capabilities so that they
were in continuous operation and also used
subcontractors. At the beginning of 2006, the order
book stood at around 9 months.
A number of major contracts were finalized in 2005.
Thus, in Saudi Arabia the Group will deliver a major
order of close to 60,000 tonnes in 2006, virtually all of
which will be premium joints. Similarly, in India, which is
seeing early signs of higher demand for premium
products, Vallourec has recently signed a contract for
25,000 tonnes of high-quality steel tubes, mainly with
premium threads.
Vallourec no. 2 in the world drillpipe marketVallourec made a strategic investment in the drill pipe
sector in 2005 by acquiring OMSCO for USD 120 million,
enabling the Group to strengthen its presence in the high
value-added drill pipe market, particularly in North America
where it was not present at the time. Finalized in September
2005, the acquisition made Vallourec the no. 2 in the world
drill pipe market. This position was further strengthened in
early 2006 with the acquisition for €40 million of SMFI, a
company specialized in the manufacture of heavy weight
drill pipes and high technology products for oil & gas
drilling, and whose sales are generated in the rest of the
world, thus perfectly complementing OMSCO. Vallourec
expects significant synergies from these two acquisitions,
through the sharing of expertise and implementation of a
global marketing policy targeted at major international
drilling customers.
A high level of activity
Vallourec generated sales in the oil & gas sector in 2005
of more than €1.8 billion, representing very strong growth
of 65.4% compared with 2004. Excluding the acquisition
of OMSCO, sales growth would have been 62.8%. This
performance was achieved thanks to high volumes and a
material increase in selling prices, particularly for high
value-added products.
Continuing strong demand in North AmericaIn North America, which represents over 40% of
Vallourec’s oil & gas sales, demand continued to be very
strong throughout 2005. The total number of active
wells rose from around 1,700 in 2004 to 2,000 on
average during 2005, with gas wells forming the majority.
In this region of the world, the Group mainly supplies
independent companies. In this context, V & M STAR
and the threading subsidiaries were able to operate
at full production capacity and significantly increase
the Group’s market share for premium products in
2005.
Oil & gas
The Group’s markets
The tubes that Vallourec designs and develops for the oil & gasindustry are essentially seamless threaded tubes, called OilCountry Tubular Goods (OCTG). These tubes, together with thespecial joints also marketed by Vallourec, are used for drillingoperations and to equip oil and gas wells. Vallourec is theworldwide specialist in products for deep, difficult, corrosiveand deviated wells and especially for gas wells, requiring perfectlysealed casing, tubing and drill pipe. The Group also offers a rangeof related services to oil companies to assist in their explorationand production activities. Oil & gas activities represent more than40% of Group sales.
12 Vallourec 2005 Annual Report
1,829
1,106
865
978
845
2001 2003 2004 20052002
Vallourec’s main products:
Oil Country Tubular Goods (casing and tubing)– API and Buttress threading– VAM® special joints
Drill products (drill collars and heavy weightdrill pipe)
Special line pipes
The integration of OMSCO is proceeding smoothly. The
excellent activity levels of the Group’s customers in the
drilling sector indicate that 2006 sales will be higher than
anticipated at the time of the acquisition. Following the
integration of OMSCO, and subsequently of SMFI, Vallourec’s
sales in the drill pipe sector are expected to represent around
10% of the Group’s oil & gas sales.
Promising outlook
Demand for oil & gas tubes and well equipment is being
sustained by the higher level of exploration and production
expenditure by oil companies and by the increasingly difficult
conditions under which wells are operated (deep, offshore,
deviated, etc. wells). In this context, the prices of products
destined for such markets are expected to remain high, or
even to rise further in the case of high value-added products
such as drill pipes. This trend was confirmed in early 2006,
with good activity levels in a market whose fundamentals
remain highly favourable.
To meet this strong demand, Vallourec decided to increase
its heat treatment and threading capacities.
Share of oil & gas in Vallourec’s 2005 sales
Sales trend: oil & gas (in € million)
42.5%
+65.4%
13Vallourec 2005 Annual Report
Very high activity levels linkedto strong demand
In 2005, sales by the power generation activity reached
€724 million, up 55% compared with 2004. Power
generation, which is now Vallourec’s second largest activity,
represents close to 17% of Group sales whereas in 2000 it
accounted for just 11%. The performance recorded in 2005
reflects the high level of demand, which remains very strong
in China and the rest of Asia and which is rising in Europe.
By way of example, during the year Vallourec delivered
alloy steel tubes for the superheaters and titanium condenser
tubes for the supercritical Waigaoqiao power plant in
Shanghai, the largest capacity and most modern ever built
in China.
Power generation
The Group’s markets
Vallourec supplies tubes capable of withstanding extremeconditions of temperature and pressure used in fossil fuel plants(both conventional and combined cycle) as well as in nuclearpower plants. The Group provides tubes of all sizes and in a rangeof materials: carbon steel, alloy steel, stainless steel, titanium,and nickel alloys.Vallourec is the only supplier in the world capable of providingthe full range of tubes used in a power plant. Present in all phasesof the industry, from the construction of new power plants to theupgrading and maintenance of existing plants, Vallourec is theworld leader in this sector, far ahead of its two main competitors.This activity represents close to 17% of Group sales.
Continued investment in production capacities
To be able to meet market demand, Vallourec is investing
actively in its production capacities.
The capacity of the big pipes Reisholz plant in Germany has
been doubled since 2000. The Group has also increased its
heat treatment capacities in a number of plants to accompany
the increased use of alloy steels in high-technology power
plants. A major modernization programme has been
launched at Valinox Nucléaire and a new production site is
being built at Changzhou, near Shanghai, to meet the
particularly strong demand in China for big pipes. Concerning
small condenser tubes, a plant has been set up in Xi’an for
titanium tubes and the stainless steel tube capacity of
Changzhou Valinox Great Wall has been tripled. Moreover,
in April 2006 Vallourec announced the establishment of a
presence in India through the acquisition of CST Ltd, an Indian
company supplying tubes for power plant condensers.
Innovation at the heart of development
To reduce carbon dioxide emissions into the atmosphere and
to minimize costs, the constructors of fossil-fuel thermal
power plants are developing increasingly efficient boilers.
Vallourec plays a major role in this innovation-led race for
efficiency. The latest innovation patented by the Group is
VM12 steel, a new 12% chrome grade produced exclusively
by Vallourec.
The first industrial order for this new steel was received in
early 2006, for the two new ultra supercritical 1,100 MW
units at the Neurath power plant in Germany, the largest
lignite units in the world which will be brought online in
2010. Several hundreds of tonnes of VM12 steel tubes
will be delivered by Vallourec between end-2006 and
mid-2007, in addition to the range of other steel tubes
required in the construction of this power plant that will also
be delivered by Vallourec.
14 Vallourec 2005 Annual Report
724
467
281338315
2001 2003 2004 20052002
Vallourec’s main products:
Carbon, alloy and stainless steel tubes for fossil fuel and nuclear power plants– Boilers– Feedwater heaters– Steam piping
Nickel alloy tubes for nuclear-powered steamgenerators
Welded titanium tubes for condensers
Finned stainless steel tubes for nuclear MSR(Moisters Separators Reheaters)
A buoyant market and positiveoutlook
Demand should remain buoyant in 2006. Volumes
produced are expected to exceed those of 2005, and
the Group should benefit from the full effect of the latest
round of selling price increases.
The Group sees no sign of a slowdown in the power
generation market over the medium term. On the contrary,
at the end of 2004 the IEA* raised its forecast for the
construction of new power plants in the period 2002 to
2030 and estimated that, worldwide, the replacement of
existing power plants and construction of new plants to
meet growing demand would represent capacity of around
4,800 GW over the period (current world capacity is
around 4,000 GW).
This potential in the power plant market represents a
genuine opportunity for Vallourec, particularly as the
demand is spread worldwide. Although China remains an
important market, it is expected to stabilize over the
medium term and its relative weight should decline as
strong growth will be experienced worldwide, driven in
particular by Europe and the United States. This growth
is expected to be reflected in a relative equilibrium
between the construction of conventional and combined
cycle power plants.
* International Energy Agency
Share of power generation in Vallourec’s 2005 sales
Sales trend: power generation (in € million)
16.8%
+55.0%
15Vallourec 2005 Annual Report
The Group’s markets
Sales by the mechanical engineering activity rose from
€428 million in 2004 to €573 million in 2005,
corresponding to growth of nearly 34%.
This performance was due mainly to changes in the
product mix favouring higher value-added products and
to higher selling prices.
Vallourec focuses on mechanical engineering products
with a high technical content, for which demand is
growing strongly from specialized industries and which
enable the Group to differentiate itself at the technical
level.
World growth is creating strong demand for raw
materials and energy, which is highly favourable to
Vallourec’s applications in the mechanical engineering
sector: mining industry, heavy-vehicle axles, mining
exploration tubes, offshore platforms, cranes and lifting
equipment.
In the lifting equipment field, Vallourec has perfected
new steel grades that allow for a substantial increase in
the lifting capacity of cranes without increasing the
weight of the equipment.
The Group intends to continue its R&D efforts in the
coming years in order to further accentuate its
technological lead in the mechanical engineering sector.
Demand in 2006, in terms of both volumes and prices,
remains buoyant.
Mechanical engineering
Vallourec is the world leader for all steel tube applications in themechanical engineering sector: machine tools, agriculturalmachinery, lifting equipment, etc. These applications are aspeciality of the European market, which represents 80% ofsales. Vallourec’s customers are world leaders who export alarge portion of their production.
Vallourec’s main products:Tubes in standard or specific grades, and standard or customized sizes– Hot-rolled– Cold-drawn
ApplicationsHigh-pressure hydraulic line tubingHollows for machiningTubes for hydraulicsParts and shafts for mechanical units and machinesDrill rodsCranes, lifting equipmentMining industry accessories
428
328344362
2001 2003 2004 20052002
573
13.3%
+33.9%
Share of mechanicalengineering in Vallourec’s2005 sales
Sales trend: mechanical engineering (in € million)
16 Vallourec 2005 Annual Report
Following the disposal in January 2005 of the South
American automotive components businesses that were
considered to be non-strategic, Vallourec generated
sales of automotive products of €483 million in 2005.
At constant consolidation scope, this represents growth
of 12% compared with 2004.
Demand declined in the second half of the year as a result
of the lower number of new vehicle registrations in
Europe and a relatively poorer performance by the
Group’s main customers.
Nevertheless, the trend is for the increased use of tubes
in vehicles, notably influenced by changes in passive
safety standards, for which the tubes developed by
Vallourec are ideally suited.
For this reason, Vallourec’s activities in tubular
components with smart crash behaviour, which absorb
energy in the event of a frontal collision, continue to
develop well. A number of vehicles produced by PSA
Peugeot-Citroën are already equipped with this type of
product and another major carmaker has recently chosen
Vallourec to equip one of its flagship models with this
type of highly technical product.
At the same time, Vallourec is continuing to develop
speciality products such as tubes for airbags, with which
an ever increasing number of vehicles are being fitted,
and tubes for high pressure fuel injection lines. A number
of capital expenditure programmes are planned for
2006 to strengthen the Group’s positions in these rapidly
growing markets.
Automotive industry
Vallourec supplies automotive tubes to the main carmakers andparts manufacturers in Europe. The Group works with customers’research units to develop innovative and customized solutions.This activity represents 11% of Group sales.
501437
487
2001 2003 2004 20052002
Vallourec’s main products:Seamless tubesWelded tubesRings and components
ApplicationsChassis, suspension and transmission partsStructural and passive safety partsShock absorbersBearingsAirbagsHGV axles
+12.3%at constant consolidation scope
11.2%
483452
Sales trend: automotive products (in € million)
Share of automotiveproducts in Vallourec’s2005 sales
17Vallourec 2005 Annual Report
Sales recorded by the chemicals and petrochemicalsactivity rose by 38% to €461 million, compared with€334 million in 2004. This change was due mainly toselling price increases and to the sale of higher value-added products.
The recovery in capital expenditure in refining and thewidespread exploitation of gas fields lie behind thestrong growth in this market. Half of the sales by thechemicals and petrochemicals activity are made in theAmericas.
Demand remains buoyant for 2006, with a number ofmajor projects programmed in several geographic regions.Refineries, gas treatment plants and complementarypetrochemical units are being built in the Middle East.Canada is investing in processing bituminous schist. TheUnited States and Europe are modernizing refineriesthat no longer meet market requirements.
Vallourec is one of the rare players in the world capableof meeting this diversified demand by offering a fulland reliable range of tubular products. For this reason,the Group has recently been selected to equip a gascomplex in Iran, representing an order for nearly 15,000tonnes.
Moreover, the Group’s plants in Europe, the UnitedStates and Brazil, as well as its partnerships withspecialized distributors and engineering firms ensure itseffective global presence.
2006 is expected to continue along the same lines as2005, in terms of both volumes delivered and sellingprices.
Chemicals and petrochemicals
The Group’s markets
Vallourec develops an extensive range of products in carbon, alloyand stainless steel as well as in titanium. These products aremostly used in pipework in chemical and petrochemicalinstallations, particularly refineries. They are used worldwidefor both new plants and the maintenance of existing plants. Thisactivity represents nearly 11% of Group sales.
Vallourec’s main products:
Line-pipes for refineriesFurnace tubesHeat exchanger tubesFittingsDished ends
Sales trend: chemicals and petrochemicals(in € million)
334301327
2001 2003 2004 20052002
461
273
Share of chemicals andpetrochemicals in Vallourec’s2005 sales
10.7%
+38.0%
18 Vallourec 2005 Annual Report
237201178153165
2001 2003 2004 20052002
Vallourec recorded 18% growth in its other marketssales in 2005, from €201 million in 2004 to €237million.
In the construction sector, Vallourec supplies high-endtubular structures under the MSH brand for use in arange of architectural projects.
By way of example, the Group supplied tubes for twonew stadiums in Germany that will host the footballWorld Cup in 2006, the Allianz Arena stadium in Munichand the Schalke Arena stadium in Gelsenkirchen.Vallourec is also well known as a supplier of steel tubingfor roofs and columns in buildings such as airportterminals and stations. In 2005, the Group completed thedelivery of nearly 40,000 tonnes of tubes for the newBangkok international airport, one of the most modernin the world.
In close collaboration with architects and specializedengineers, the Group is currently working to develop fire-resistant steel. This new development is expected torepresent a major step forward in fire protection forbuildings.
In the context of strong demand in the oil & gas industry,Vallourec has also become the world leader in the supplyof specific fine-grained tubular products used in theconstruction of jack-up rigs and offshore platforms.
Other markets
Vallourec offers a wide range of specific products for variousindustrial applications. In the fields of architecture andconstruction, the steel solutions proposed by the Group helparchitects to realize increasingly audacious and aestheticallyappealing projects. In the desalination market, Vallourecproduces welded titanium tubes that are resistant to corrosionand extreme temperatures. These activities represent nearly 6%of Group sales.
Vallourec’s main products:
Architecture and constructionStructural tubesMicro-pilesMSH structural hollow sectionsCentral heating booster linings
Desalination productsWelded titanium tubes
Schalke Arena stadium in Gelsenkirchen
Sales trend: other markets (in € million)
Share of other markets in Vallourec’s 2005 sales
5.5%
+17.9%
19Vallourec 2005 Annual Report
21Vallourec 2005 Annual Report
Ordinary General Meeting on 1 June 2006
The original version of this Reference Document (document de référence) in French was deposited
with the French financial markets authority (Autorité des Marchés Financiers - AMF)
on 27 April 2006
in accordance with Article 212-13 of its general regulations.
It may be used in connection with a financial transaction if completed by an Information notice authorized by the AMF.
VALLOUREC GROUP
This document is a translation of the Annual Report of the Vallourec Group for the year ended 31 December 2005.
Its purpose is to assist English speaking readers. The greatest attention has been paid to its preparation.
However, the only official document is the 2005 Annual Report in French,
filed with the French financial markets authority (Autorité des Marchés Financiers - AMF) on 27 April 2006.
Reference DocumentYear ended 31 December 2005
22 Vallourec 2005 Annual Report
SECTION 1: PERSONS RESPONSIBLE FOR THE REFERENCE DOCUMENT AND FOR THE AUDIT
1.1 PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT 26
1.2 ATTESTATION BY THE PERSON RESPONSIBLEFOR THE REFERENCE DOCUMENT 26
1.3 PERSONS RESPONSIBLE FOR THE AUDIT 27
1.4 PERSON RESPONSIBLE FOR THE INFORMATION 27
SECTION 2: NOT APPLICABLE
SECTION 3: GENERAL INFORMATION ON VALLOUREC AND ITS CAPITAL
3.1 GENERAL INFORMATION ON VALLOUREC 28
3.1.0 Company name and registered office 28
3.1.1 Legal status 28
3.1.2 Applicable laws 28
3.1.3 Date of formation and dissolution 28
3.1.4 Objects 28
3.1.5 Trade and Companies Registry 28
3.1.6 Consultation of legal documents 28
3.1.7 Financial year 28
3.1.8 Mandatory allocation of net income 28
3.1.9 General Meetings 29
3.2 GENERAL INFORMATION CONCERNING THE CAPITAL 29
3.2.0 By-laws concerning changes to the capital and rights attached to shares 29
3.2.1 Share capital 29
3.2.2 Authorized capital not yet issued 29
3.2.3 Securities not representing capital 30
3.2.4 Securities giving access to capital: Share subscription options 30
3.2.5 Changes in capital over the last five years 31
Contents
23Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 5
3.3 BREAKDOWN OF CAPITAL AND VOTING RIGHTS 31
3.3.1 Company’s shareholders 31
3.3.1.1 – Own shares held 32
3.3.2 Changes in breakdown of capital in the last three financial years 33
3.3.3 Other persons exercising control over Vallourec 33
3.3.4 Description of the Vallourec Group (Organization chart) 34
3.4 MARKET FOR THE COMPANY’S SHARES 35
3.4.1 Listing market 35
3.4.2 Other regulated markets 35
3.4.3 Volumes traded and share price performance 35
3.4.4 Pledging of shares of the Issuer 36
3.5 DIVIDENDS 37
SECTION 4: INFORMATION ON THE ACTIVITIES OF THE VALLOUREC GROUP
4.1 PRESENTATION OF VALLOUREC - COMPANY AND GROUP 38
4.1.0 Changes in the Vallourec Group’s structure in recent years 39
4.1.1 Description of main business activities 41
4.1.2 Production and production volumes 45
4.1.3 Sales by markets and geographic regions 46
4.1.4 Location of main establishments 47
4.1.5 Not applicable 47
4.1.6 Exceptional events influencing the information given in paragraphs 4.1.0 to 4.1.5 47
4.2 DEPENDENCY ON THE ECONOMIC, INDUSTRIAL AND FINANCIAL ENVIRONMENT 47
4.2.1 Breakdown of raw materials and consumable supplies 47
4.2.2 Main customers 47
4.3 CHANGE IN AVERAGE NUMBER OF GROUP EMPLOYEES 48
4.4 INVESTMENT POLICY 48
4.4.0 Research and Development 48
4.4.1 Main investments made 49
4.5 NOT APPLICABLE 50
4.6 NOT APPLICABLE 50
Contents
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
24 Vallourec 2005 Annual Report
4.7 RISKS 51
4.7.1 Market risks (interest-rate, exchange-rate, share-price, credit risk) 51
4.7.2 Legal risks 53
4.7.3 Industrial and environmental risks 53
4.7.4 Insurance - risk coverage 53
4.7.5 Other specific risks 54
SECTION 5: FINANCIAL STATEMENTS
5.1 CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS 56
5.1.0 Consolidated financial statements of the Vallourec Group 56
5.1.1 Company financial statements of Vallourec SA 136
5.1.2 Total earnings per share 149
5.2 AUDITORS’ REMUNERATION 149
SECTION 6: CORPORATE GOVERNANCE
6.1 COMPOSITION AND OPERATION OF ADMINISTRATION,MANAGEMENT AND SUPERVISORY BODIES 150
6.1.0 Composition of Administration, Management and Supervisory bodies 150
6.1.0.1 – Management Board 150
6.1.0.2 – Supervisory Board 151
6.1.0.3 – Executive Committee 152
6.1.1 Operation of Administration, Management and Supervisory bodies 152
6.1.1.1 – Internal regulations of the Supervisory Board 152
6.1.1.2 – Meetings of the Supervisory Board during the year ended 31 December 2005 153
6.1.1.3 – Independent members and members associated with the Company 153
6.1.1.4 – Committees set up within the Supervisory Board 154
6.1.1.5 – Remuneration principles 155
6.1.1.6 – Corporate governance 155
6.2 MANAGERS’ INTERESTS 156
6.2.0 Remuneration and benefits in kind 156
6.2.1 Options granted over Vallourec shares 156
6.2.2 Transactions with members of the Administration, Management and Supervisory bodies 156
6.2.3 Loans and guarantees 156
6.3 EMPLOYEE PROFIT SHARING 156
6.3.1 Profit sharing and incentive plans 156
6.3.2 Options 157
6.3.3 Employee shareholding 157
SECTION 7: INFORMATION ON RECENT DEVELOPMENTS AND OUTLOOK 158
7.1 RECENT DEVELOPMENTS AND OUTLOOK 158
7.2 STATUTORY AUDITORS’ REPORT ON THE PROFIT FORECASTS 159
26 Vallourec 2005 Annual Report
1.1 Person responsible for the Reference Document
Mr Pierre Verluca,
Chairman of the Management Board.
1.2 Attestation by the person responsible for the Reference Document
I attest, having taken all reasonable steps to ensure that such is the case, that the information given in this Reference Document is, to the
best of my knowledge, correct and that there are no omissions likely to change its import.
We have obtained from our Statutory Auditors an assignment completion letter in which they indicate that they have verified the
information relating to the Group’s financial situation and the financial statements included in this Reference Document and read the Reference
Document in its entirety.
Boulogne-Billancourt, 26 April 2006
Pierre Verluca
Chairman of the Management Board
Section 1Persons responsible for the Reference Documentand for the audit
Sect
ion
5
1.3 Persons responsible for the audit
■ Until the Ordinary General Meeting on 1 June 2006. ■ As from the Ordinary General Meeting on 1 June 2006, subject
to adoption of the 11th, 12th, 13th and 14th resolutions.
STATUTORY AUDITORS:
Barbier Frinault & Autres (Ernst & Young network) KPMG SA
Represented by Mrs Christine Staub and Mr Philippe Hontarrède Represented by Messrs Jean-Paul Vellutini and Philippe Grandclerc
41, rue Ybry 1, cours Valmy
92200 Neuilly-sur-Seine 92923 Paris-La Défense Cedex
Cabinet Calan, Ramolino et Associés (Deloitte network) Deloitte & Associés
Represented by Mr Bertrand de Florival Represented by Messrs Bertrand de Florival and Jean-Paul Picard
191, avenue Charles-de-Gaulle 185, avenue Charles-de-Gaulle
92200 Neuilly-sur-Seine 92524 Neuilly-sur-Seine
ALTERNATIVE AUDITORS:
Mr Jean-Marc Besnier SCP Jean-Claude André et Autres
41, rue Ybry Les hauts de Villiers - 2 bis, rue de Villiers
92200 Neuilly-sur-Seine 92300 Levallois-Perret
Alternative for Barbier Frinault & Autres Alternative for KPMG
Société BEAS Société BEAS
7-9, villa Houssaye 7-9, villa Houssaye
92524 Neuilly-sur-Seine Cedex 92524 Neuilly-sur-Seine Cedex
Alternative for Cabinet Calan, Ramolino et Associés Alternative for Deloitte & Associés
For a term of six years ending with the General Meeting called
to approve the financial statements for the financial year 2011.
1.4 Person responsible for the information
Mr Henri Redig
Corporate Secretary / Investor relations
VALLOUREC
130, rue de Silly
92100 Boulogne-Billancourt
Tel.: +33 (0) 1 49 09 38 24 / +33 (0) 1 49 09 38 15
Fax: +33 (0) 1 49 09 36 94
E-mail: [email protected]
Persons responsible for the Reference Document and for the audit
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1
27Vallourec 2005 Annual Report
3.1 General information on Vallourec
3.1.0 Company name and registered office
VALLOUREC
130, rue de Silly
92100 Boulogne-Billancourt
3.1.1 Legal status
A French limited liability company (Société Anonyme) having opted
on 14 June 1994 for a management structure comprising a
Management Board and a Supervisory Board.
3.1.2 Applicable laws
French.
3.1.3 Date of formation and dissolution
The Company was formed in 1899.
It will be dissolved on 17 June 2067, unless its life is extended or
dissolved early.
3.1.4 Objects (Article 3 of the By-laws)
The Company’s object, in any country either on its own account or
for a third party or directly or indirectly in partnership with third
parties, is to carry out all industrial and commercial transactions
relating to all methods of the preparation and manufacture, by all
processes known or that could be discovered subsequently, of
metals and any materials that may replace them in all their
applications, and, in general, all commercial, industrial and financial
transactions, and transactions in movable and fixed property, directly
or indirectly associated with the above object.
3.1.5 Trade and Companies Registry
The Company is registered with the Nanterre (Hauts-de-Seine)
Trade and Companies Registry under no. 552 142 200 - APE 741 J.
3.1.6 Consultation of legal documents
The By-laws, minutes of General Meetings and other Company
documents can be consulted at the registered office.
3.1.7 Financial year
The Company’s financial year covers a period of twelve months
from 1 January to 31 December.
3.1.8 Mandatory allocation of netincome (Article 15 of the By-laws)
The distributable net income, as defined by law, is allocated by a
General Meeting of shareholders.
Unless there is an exception resulting from legal requirements, it is
for the General Meeting to decide on how the net income should be
allocated.
A General Meeting may also decide to grant to each shareholder the
right to choose, for all or part of the dividend to be distributed,
between payment of the dividend in cash or in shares, in accordance
with the legal and regulatory requirements at the time.
Section 3General information on Vallourec and its capital
28 Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 5
3.1.9 General Meetings
Shareholders’ meetings are called in accordance with the conditions
provided for by law. A General Meeting is open to all shareholders,
irrespective of the number of shares held. Each shareholder attending
the General Meeting has as many votes as shares owned or
represented, unless there are legal requirements to the contrary.
However, fully paid-up shares duly registered in the name of the same
shareholder for four years have double the voting right conferred on
other shares (Article 12 paragraph 4 of the By-laws).
The object of the third resolution submitted to the Extraordinary
General Meeting on 1 June 2006 is to supplement Article 8 of the
By-laws by introducing an additional requirement to provide
information when thresholds are crossed other than those already
provided by the prevailing legislation.
“In addition to the declarations of crossing thresholds expressly
provided by Articles L. 233-7-I and II of the French Code de Commerce,
any shareholder (individual or corporate body) that acquires, directly
or indirectly by means of companies controlled by the shareholder
within the meaning of Article L. 233-3 of the French Code de
Commerce, acting singly or jointly, a number of the Company’s
bearer shares equal to or greater than three (3), four (4), six (6),
seven (7), eight (8), nine (9) and twelve and a half (12.5) per cent of
the total number of shares making up the share capital must, within
five (5) trading days of crossing said threshold, inform the Company
of the total number of shares it holds, by letter sent by recorded
delivery with advice of receipt to the Company’s registered office.
The information specified in the preceding clause must also be
given within the same timescale and under the same terms when a
shareholding falls under the thresholds referred to in said clause.”
The Company has the right to request the identification of holders
of securities granting an immediate or future right to vote in its
General Meetings and evidence of the quantities held, under the
provisions of current legislation (Article 8 of the By-laws).
General information on Vallourec and its capital
Sect
ion
2Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 3
29Vallourec 2005 Annual Report
3.2 General information concerning the capital
3.2.0 By-laws concerning changesto the capital and rightsattached to shares
An Extraordinary General Meeting may, within the provisions of the
law, increase or reduce the share capital or delegate to the
Management Board the necessary powers to do so (Article 7 of the
By-laws).
However, on the basis of the Company’s internal organization
(Article 9 section 3 of the By-laws), the Management Board may not
carry out the following transactions without previous authorization
from the Supervisory Board:
– any capital increase in cash or by incorporation of reserves
authorized by a General Meeting,
– any other issue of securities that could later give access to the
capital, authorized by a General Meeting.
The shares are freely tradable and transferable in accordance with
legislative and regulatory provisions.
3.2.1 Share capital
The fully paid-up subscribed capital amounted to € 212,006,640
as at 31 December 2005, divided into 10,600,332 shares of
€ 20 par value.
The object of the first resolution submitted to the Extraordinary
General Meeting on 1 June 2006 is to divide the nominal value of
the share by five (5), thereby reducing the nominal value to four (4)
euros. This division will be effective as from 18 July 2006.
The amount of the share capital will remain unchanged but be
divided into 53,001,660 shares.
3.2.2 Authorized capital not yet issued
The Extraordinary General Meeting held on 25 February 2005 (first
resolution) delegated to the Management Board, subject to prior
approval of the Supervisory Board (see 3.2.0 above), the powers
required to increase the share capital by issuing ordinary shares or
any other securities giving access to the Company’s capital, retaining
shareholders’ preferential subscription rights.
30 Vallourec 2005 Annual Report
The maximum nominal value of shares that may be issued in this way
is limited to € 60 million and that of securities representing the
Company’s debt is limited to € 150 million. This authorization
was granted for a duration of 26 months ending on 24 June 2007.
It renders null and void the previous delegation resulting from the
first resolution of the Ordinary and Extraordinary General Meeting
held on 11 June 2003 which related to similar issues.
On 15 June 2005 the Management Board, with the prior authorization
of the Supervisory Board given on 20 January 2005, decided to
partially use this authorization and to increase the share capital in
cash by a nominal amount of € 14,126,240 (706,312 new shares)
and an issue premium of € 110,855,668.40 (€ 156.95 per share),
i.e. a total capital increase of € 124,981,908.40 on 13 July 2005.
Given this use of the authorization, the Management Board, subject
to prior approval of the Supervisory Board, is still authorized to
increase the nominal value of the share capital by € 45,873,760.
The authorization to issue securities representing the Company’s debt,
up to a maximum nominal value of € 150 million, has not as yet been
used.
The Management Board does not have any powers to implement
capital increases reserved for employees since the resolutions to this
effect submitted, in accordance with the prevailing legislation, to the
Ordinary and Extraordinary General Meeting held on 10 June 2004
(tenth resolution) and the Extraordinary General Meeting held on
25 February 2005 (second resolution) were rejected by the shareholders.
3.2.3 Securities not representing capital
At present there are no securities that do not represent capital
(such as founder’s shares, voting right certificates, etc.).
3.2.4 Securities giving access to capital:Share subscription options
The first resolution of the Extraordinary General Meeting held on
15 June 2000 authorized the Management Board to grant share
subscription options to certain Group employees, managers or
Company officers, if required, and up to a limit of 4% of the share
capital.
Under this authorization, which expired on 14 June 2005, a tranche
of options was granted on 15 June 2000 at a price of € 38 per share,
corresponding to 95% of the average of the last 20 prices quoted
during the 20 trading sessions before the date of granting the options,
for a total of 178,500 options, each giving the right to subscribe for
one Vallourec share, i.e. in total 1.92% of the total number of shares
making up the capital at that date (see 6.3.2 below).
These options, which cannot be exercised until after the end of a
holding period of four years, may be exercised during a period of three
years from 15 June 2004 to 14 June 2007 inclusive.
After taking into account the options cancelled (6,750) since the date
they were granted (the holders having left the Group), and options
exercised as from 15 June 2004, the number of share subscription
options outstanding at 31 December 2005 amounted to 8,174, i.e.
0.08% of the share capital at that date.This number of options takes
into account the adjustment (218 additional options) made in
accordance with the regulations of the plan to take into account the
dilution resulting from the capital increase in cash on 13 July 2005
(see 3.2.2 above). The exercise price was also adjusted accordingly
and is now set at € 37.43 per option.
In addition, a tranche of 193,000 share purchase options was granted
on 11 June 2003 at a price of € 53.65 per share, corresponding to
the average of the last 20 prices quoted during the 20 trading
sessions before the date of granting the options, not discounted, each
giving the right to purchase one Vallourec share (see 6.3.2. below).
These options, which cannot be exercised until after the end of a
holding period of four years, may be exercised during a period of three
years from 11 June 2007 to 10 June 2010 inclusive.After taking into
account the options cancelled (2,750) since the date they were
granted (the holders having left the Group), and the adjustment
(2,896 additional options) made to take into account the dilution
resulting from the capital increase in cash on 13 July 2005, the
number of share purchase options outstanding at 31 December 2005
amounted to 193,146, i.e. 1.82% of the share capital at that date.
The exercise price was also adjusted accordingly and is now set at
€ 52.85 per option.
Sect
ion
1Se
ctio
n 5
3.2.5 Changes in capital over the last five years
Transaction New shares created by: in euros Total dates Exercise of Subscriptions Capital Issue Share number
subscription options in cash increase premium capital of shares
01/01/2001 185,360,620 9,268,031
05/07/2001 (1) 462,195 9,243,900 10,450,229 194,604,520 9,730,226
31/12/2002 194,604,520 9,730,226
31/12/2003 194,604,520 9,730,226
31/12/2004 (2) 139,730 2,794,600 2,515,140 197,399,120 9,869,956
14/06/2005 (2) 18,415 368,300 331,470 197,767,420 9,888,371
13/07/2005 (3) 706,312 14,126,240 110,855,668 211,893,660 10,594,683
31/12/2005 (2) 5,649 112,980 98,462 212,006,640 10,600,332
(1) Transaction reserved for employees of the Group’s French and German subsidiaries (see 6.3.3 below).
(2) Exercise of subscription options (see 3.2.4.1 above).
(3) Capital increase in cash.
3.3 Breakdown of capital and voting rights
3.3.1 Company’s shareholders
A TPI (titres au porteur identifiable) identifiable bearer shares identification procedure was carried out on 13 January 2006. This enabled
20,894 shareholders, representing 100% of the share capital, to be identified.At that date, the breakdown of share capital and voting rights
was as follows:
Shareholders Shares Voting rightsNumber % Number %
Salzgitter Mannesmann GmbH 1,820,358 17.17 3,640,527 29.93
Bolloré group 1,674,402 15.80 1,674,402 13.77
Free float 6,684,163 63.06 6,695,799 55.05
Group employees 151,660 1.43 151,660 1.25
Directly held by Vallourec 269,749 2.54 - -
Total 10,600,332 100 12,162,388 100
The percentages of voting rights are calculated by reference to the number of voting rights published in the BALO dated 25 January 2006.
By means of a declaration of crossing a threshold on 2 February 2006, published on 7 February 2006, the Bolloré group declared that it
now holds only 7.47% of the share capital.
The analysis of identifiable bearer shares did not reveal any shareholders other than Salzgitter Mannesmann GmbH (formerly Mannesmannröhren-
Werke) and the Bolloré group with holdings in excess of 5% of the share capital or voting rights.
No shareholders’ pact has been declared to the French financial markets authority (Autorité des Marchés Financiers - AMF).
The holdings of Group employees have arisen as a result of a capital increase reserved for employees of the French and German
subsidiaries that took place on 5 July 2001 (see 6.3.3 below).
General information on Vallourec and its capital
Sect
ion
2Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 3
31Vallourec 2005 Annual Report
32 Vallourec 2005 Annual Report
The Company is not aware of any other holding that may be held
indirectly by employees.
As far as the Company is aware, at 31 December 2005:
■ Mr Jean-Paul Parayre, Chairman of the Supervisory Board, held
39,937 Vallourec shares (including 50 qualifying shares).
■ The other members of the Supervisory Board did not hold any
shares other than the 50 shares they must hold for the duration of
their appointment, in accordance with the provisions of Article 10
of the By-laws.
■ Messrs Pierre Verluca, Chairman of the Management Board, and
François Fabre, member of the Management Board, did not hold any
Vallourec shares. However, each is the holder of 15,227 Vallourec
share purchase options (one option = one share), which were
granted to them on 11 June 2003 and will be exercisable as from
11 June 2007 at the price of € 52.85 per option.
The list of attendees at the Ordinary and Extraordinary General
Meeting dated 7 June 2005 shows that 217 shareholders were
present or represented, or voted by correspondence; they owned
6,555,201 shares out of a total of 9,884,951 (66.31%), and
7,885,205 voting rights out of the total of 10,947,607 (72.03%).
This breakdown includes:
■ Salzgitter Mannesmann GmbH, which owned 2,235,490 shares,
representing 3,555,980 voting rights, i.e. respectively 34.10% of the
capital represented and 45.10% of the voting rights exercised.
■ The Bolloré group, which owned 2,482,527 shares, representing
the same number of voting rights, i.e. respectively 37.87% of the
capital represented and 31.48% of the voting rights exercised.
■ Other shareholders, which owned 1,837,184 shares, representing
1,846,698 voting rights, i.e. respectively 28.03% of the capital
represented and 23.42% of the voting rights exercised.
3.3.1.1 Own shares held
At 31 December 2005 and on the date on which the Reference
Document was prepared,Vallourec held directly 269,749 of its own
shares, which represented 2.54% of the share capital.
These shares were acquired on 5 July 2001 at a price of € 53.256
per share, representing a total cost of € 14,365,752.74. The shares
were acquired from Crédit Agricole Indosuez Cheuvreux (CAIC) in
accordance with a repurchase commitment given by Vallourec to CAIC
in connection with the offer, also made on 5 July 2001 (see 6.3.3 below)
to the Group’s employees in France and Germany of an employee
savings plan invested in Vallourec shares. Part of this transaction
involved a subscription formula enabling employees to benefit from
a leverage effect and a capital guarantee thanks to a financial
arrangement made with the assistance of CAIC.
Vallourec considered it was in its interest to act as the counterparty
for CAIC in the acquisition of the shares necessary for arranging the
coverage required, under conditions that ensured perfect neutrality
for the market in Vallourec shares. The average acquisition price of
€ 53.256 per share corresponds to the average of the opening share
prices listed during the 20 trading days prior to 30 January 2001,
the date of the Management Board’s decision to proceed with the
transaction.
No other shares have been purchased by Vallourec since 5 July 2001
within the context of the share buy-back authorizations respectively
approved by the Annual General Meetings held on 12 June 2001
(seventh resolution / information memorandum under COB certificate
no. 01-571), 11 June 2002 (ninth resolution / information memorandum
under COB certificate no. 02-593), 11 June 2003 (fifth resolution /
information memorandum under COB certificate no. 03-464),
10 June 2004 (ninth resolution / information memorandum under
AMF certificate no. 04-392) and 7 June 2005 (eighth resolution /
information memorandum under AMF certificate no. 05-396).
None of the shares has been cancelled.
In accordance with the new regulations that came into force on
13 October 2004 concerning share buy-back programmes, the
Management Board decided to allocate the 269,749 shares held by
the Company to cover share purchase options granted under the
option plan dated 11 June 2003 (i.e. 193,146 shares at 31 December
2005) and to allocate the remaining shares to cover future allocations
to certain Group employees, managers or Company officers, in
accordance with the procedures to be defined jointly by the
Management Board and the Supervisory Board and, in particular, an
allocation of free shares on 16 January 2006, the definitive quantity
of which will not be known until early in 2008.
Sect
ion
1Se
ctio
n 5
3.3.2 Changes in breakdown of capital in the last three financial years
Shareholders 31/12/2003 31/12/2004 31/12/2005shares % voting % shares % voting % shares % voting %
rights rights rights
Salzgitter Mannesmann GmbH 2,210,666 22.72 3,581,156 33.02 2,235,666 22.65 3,556,156 32.53 1,820,358 17.17 3,640,527 29.93
Bolloré group 2,176,429 22.37 2,176,429 20.07 2,482,527 25.15 2,482,527 22.71 1,874,402 17.69 1,874,402 15.41
Free float 4,896,051 50.32 4,911,405 45.28 4,716,849 47.79 4,728,747 43.25 6,484,011 61.17 6,495,647 53.41
Group employees 177,331 1.82 177,331 1.63 165,165 1.67 165,165 1.51 151,812 1.43 151,812 1.25
Directly held by Vallourec 269,749 2.77 - - 269,749 2.73 - - 269,749 2.54 - -
Total 9,730,226 100 10,846,321 100 9,869,956 100 10,932,595 100 10,600,332 100 12,162,388 100
The number of shares shown as held by Salzgitter Mannesmann GmbH was notified to us by that company.
The number of shares shown as held by the Bolloré group corresponds:
– at 31 December 2003, to the shares registered in Vallourec’s records,
– at 31 December 2004 and 31 December 2005, to the number of shares notified by Bolloré group.
3.3.3 Other persons exercising control over Vallourec
None.
General information on Vallourec and its capital
Sect
ion
2Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 3
33Vallourec 2005 Annual Report
34 Vallourec 2005 Annual Report
3.3.4 Description of the Vallourec Group (Organization chart as at 31/12/2005)
The percentage holdings shown represent the percentage of the capital held.
VALLOUREC
VALLOUREC & MANNESMANN TUBES ValTubes100100
Automotive and Industry
100 Vallourec Précision Etirage (France)
100 Vallourec Précision Soudage(France)
100 Vallourec ComposantsAutomobiles Vitry(France)
100 Escofier Technologie(France)
100 Interfit(France)
100 Valti(France)
Valti GmbH(Germany)
Stainless Steel
100 Spécitubes(France)
100 Valinox Nucléaire(France)
51 Valtimet(France)
Valtimet Inc.(USA)
Valinox Asia (France)
Changzhou Valinox(China)
Poongsan Valinox(Korea)
100 Cerec (France)
OCTG Europe
100 VALLOUREC MANNESMANNOIL & GAS FRANCE(France)
100 VALLOUREC MANNESMANNOIL & GAS GERMANY GmbH(Germany)
100 VALLOUREC MANNESMANNOIL & GAS UK Ltd (UK)
51 VAM Far East(Singapore)
25 P.T. Citra Tubindo (Indonesia)
7 Vietubes(Vietnam)
OCTG North America
100 OMSCO Inc.(USA)
100 Prinver(Mexico)
100 VAM P.C. Inc.(Canada)
81 V & M STAR(USA)
51 VAM PTS(USA)
Hot-rolled Seamless Tubes
100 V & M DEUTSCHLAND GmbH(Germany)
100 V & M FRANCE(France)
100 V & M CHANGZHOU(China)
20 Hüttenwerke KruppMannesmann GmbH(Germany)
Brazil
99 V & M do BRASIL SA(Brazil)
V & M FLORESTAL Ltda (Brazil)
V & M MINERAÇAO Ltda(Brazil)
TSA(Brazil)
100 V & M TUBES CORPORATION(USA)
100
21
100
100
21
Setval100
50
66
100
100
35Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 5
3.4 Market for the Company’s shares
3.4.1 Listing market
The Company’s shares are part of the deferred settlement section of
the Euronext Paris Eurolist (ISIN code: FR0000120354-VK).
Vallourec’s shares form part of the SBF 120, CAC Mid 100 and
Euronext 100 indices. FTSE classification: engineering and machinery.
3.4.2 Other regulated markets
Not applicable.
3.4.3 Volumes traded and share priceperformance
General information on Vallourec and its capital
Sect
ion
2Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 3
2001 2002 2003 2004 2005 20060
100
200
300
400
500
600
700
800
Vallourec share (in €) SBF 120 index
0
8,000
16,000
24,000
32,000
40,000
48,000
56,000
64,000
2001 2002 2003 2004 2005 20060
20,000
40,000
60,000
80,000
100,000
120,000
0
20,000
40,000
60,000
80,000
100,000
120,000
Vallourec share
SBF 120 index
Performance of the Vallourec share
compared to the SBF 120 index
at 31/03/2006
Source: Vallourec, based on Euronext data
Monthly average of volumes
traded per day
Source: Vallourec, based on Euronext data
36 Vallourec 2005 Annual Report
In € 2001 2002 2003 2004 2005
Number of shares (at 31 December) 9,730,226 9,730,226 9,730,226 9,869,956 10,600,332
Highest price 74.00 71.40 66.30 112.10 465.00
Lowest price 38.15 43.80 43.45 63.60 99.01
Average (closing) price for the year 57.08 57.99 56.49 81.96 266.78
Year-end price 53.25 55.95 66.00 110.00 465.00
Market capitalization (at year-end price) 518,134,534 544,406,145 642,194,916 1,085,695,160 4,929,154,380
Source: Euronext.
VALLOUREC SHARESISIN Code: FR0000120354
Volume of transactionsPrice (in €) Monthly total Daily average
Highest Lowest Month end Number Capital Number Capitalof shares in € million of shares in € million
2004
October 99.50 93.80 96.90 424,563 41.17 20,217 1.96
November 105.00 96.70 104.00 267,940 27.18 12,179 1.24
December 112.10 103.50 110.00 341,744 36.95 14,858 1.61
2005
January 147.60 100.20 144.30 938,379 118.68 44,685 5.65
February 169.50 142.70 164.10 483,146 75.38 24,157 3.77
March 176.40 161.30 163.10 565,033 95.43 26,906 4.54
April 172.20 160.40 163.00 553,311 92.90 26,348 4.42
May 187.16 161.07 185.97 672,075 117.28 30,549 5.33
June 243.90 184.29 237.80 958,653 208.71 43,575 9.49
July 313.00 234.80 299.80 933,169 246.46 44,437 11.74
August 347.90 284.00 340.00 1,395,153 430.14 60,659 18.70
September 414.80 337.00 405.50 1,257,079 480.90 57,140 21.86
October 430.00 347.70 375.00 2,112,681 825.57 100,604 39.31
November 421.00 375.00 405.00 1,134,142 460.64 51,552 20.94
December 465.00 404.50 465.00 1,100,368 483.20 52,398 23.01
2006
January 590.50 454.80 577.00 1,980,538 996.15 90,024 45.28
February 679.00 567.50 656.50 2,009,468 1,235.15 100,473 61.76
March 809.00 650.50 797.00 2,030,063 1,522.45 88,264 66.19
Source: Euronext.
3.4.4 Pledging of shares of the Issuer
None.
Sect
ion
1Se
ctio
n 5
3.5 Dividends
The distributable net income is allocated by a General Meeting of shareholders, unless there is a requirement in the By-laws specifying the
distribution of a specific dividend.
The Ordinary and Extraordinary General Meeting held on 14 June 1994 introduced the possibility of paying the dividend in shares.
Dividends not claimed in the five-year period from the date of payment are forfeited to the State.
Over the past five financial years, dividends paid were:
In €/share Gross Tax credit* Net dividend
2000 1.95 0.65 1.30
2001 3.15 1.05 2.10
2002 3.15 1.05 2.10
2003 2.40 0.80 1.60
2004 3.20 néant 3.20
*For those shareholders not benefiting from the 50% tax credit in accordance with the tax regime in force during the years covered by the above table,in 2000 the gross dividend was € 1.63 with a tax credit (25%) of € 0.33, in 2001 the gross dividend was € 2.42 with a tax credit (15%) of € 0.32, in2002 the gross dividend was € 2.31 with a tax credit (10%) of € 0.21 and in 2003 the gross dividend was € 1.76 with a tax credit (10%) of € 0.16.
Vallourec’s dividend policy, as approved by the Supervisory Board at
its meeting on 17 April 2003, is, over the long-term, to distribute on
average 33% of its consolidated net income, Group share.
At the General Meeting held on 1 June 2006 (fourth resolution),
shareholders will be asked to approve the payment of a net dividend
of € 11.20 per share, corresponding to a payout ratio of 25.1% in
respect of the year ended 31 December 2005 and to an average
payout ratio of 25.8% in respect of the last five financial years.After
taking into account the interim dividend of € 4 per share paid on
12 October 2005, the balance of € 7.20 per share will be paid on
5 July 2006.
General information on Vallourec and its capital
Sect
ion
2Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 3
37Vallourec 2005 Annual Report
4.1 Presentation of Vallourec - Company and Group
The Vallourec Group is over 100 years old, some of the companies
at the origins of the Group having been formed in the last decade
of the 19th century.The Group originated in two areas in France, both
with long industrial traditions, and in which the Group still has a signi-
ficant presence – the French northern region around Valenciennes and
Maubeuge and the Burgundy region around Montbard, in Côte-d’Or.
Since the formation of VALLOUREC & MANNESMANN TUBES
(V & M TUBES) in 1997 (infra, 4.1.0), and the acquisition of
V & M do BRASIL SA in 2000, the Group also has extensive
operations in the Düsseldorf area in North Rhineland-Westphalia
(Germany) and in the region of Belo Horizonte in the Brazilian
State Minas Gerais. The acquisition at the beginning of July 2002 by
V & M TUBES of the seamless steel tubes business of North Star Steel
Company, now named V & M STAR, supplemented in 2005 by the
acquisition of OMSCO Inc., significantly strengthened the Group’s
presence in the United States.
Although the name Vallourec first appeared in 1930 to designate a
company operating tube mills in VALenciennes and Denain, LOUvroil
and RECquignies, the present Vallourec Group has other much earlier
roots. The Group originated in Société Métallurgique de Montbard
formed in 1899 to take over Société Française de Fabrication des Corps
Creux, which had been operating a plant in Montbard since 1895.
Listed on the Paris Stock Exchange since its formation in 1899, in 1907
it was named Société Métallurgique de Montbard-Aulnoye and in
1937 Louvroil Montbard Aulnoye after the takeover of the company
Louvroil et Recquignies, itself a result of the merger between Société
Française pour la Fabrication des Tubes à Louvroil, formed in 1890,
and Société des Forges de Recquignies, founded in 1907.
In 1947, the name Vallourec was registered as a product name, but
it was not until 1957, when the Valenciennes plant was bought from
the company Denain Anzin, that Louvroil Montbard Aulnoye adopted
the name Vallourec (the company formed under that name in 1930
was renamed Sogestra).
The major events that took place between 1957 and 1996 were:
1967: Contribution by Usinor of the tubes business of Lorraine-
Escaut – a company Usinor had just taken over.
1975: Takeover of Compagnie des Tubes de Normandie.
1979: Contribution of the “small welded tubes” business to the
company Tubes de la Providence, which took the name of
Valexy (Vallourec 64%, Usinor 36%).
1982: Takeover of Entrepose, a 90%-owned subsidiary of Vallourec,
by Grands Travaux de Marseille, renamed GTM-Entrepose;
Vallourec, with a 41% holding in GTM-Entrepose, became
its main shareholder.
1985: Contribution to GTS Industries of the “large welded tubes”
business.
Withdrawal of Vallourec from the small welded tubes business
(Valexy) and large welded tubes business (GTS Industries) in
favour of Usinor, with Vallourec concentrating on seamless
tube production and downstream processing activities.
Sale of Société Industrielle de Banque (SIB).
1986: Vallourec, until then both a holding company and an industrial
company with many production units, became a pure holding
company, covering three business areas:
– the tubes businesses:Vallourec Industries, renamed Valtubes
in 1987,
– the other metallurgical businesses: Sopretac,
– the businesses associated with construction and civil
engineering, especially the participating interest in
GTM-Entrepose: Valinco.
Section 4Information on the activities of the Vallourec Group
38 Vallourec 2005 Annual Report
Sect
ion
3Se
ctio
n 1
Sect
ion
5
1988: Transfer of control of Valinco to the Dumez group, as activities
associated with construction and civil engineering were no
longer considered to be one of the Group’s main development
axes.
1991: Sale of the residual holding in Valinco to the Dumez group.
4.1.0 Changes in the Vallourec Group’sstructure in recent years
One of the major events in recent years was the formation
on 1 October 1997 of VALLOUREC & MANNESMANN TUBES
(V & M TUBES), a joint subsidiary of Vallourec (55%) and the
German company Mannesmannröhren-Werke (45%).As provided by
the initial agreement, this merger was completed in May 2000 by
V & M TUBES acquiring the Brazilian subsidiary Mannesmann SA, then
listed on the São Paulo Stock Exchange, in which Mannesmannröhren-
Werke held 76%. Thereafter named V & M do BRASIL SA, this
subsidiary is now almost wholly-owned by V & M TUBES after the
successful minority buy-out offer in October 2000.
The acquisition by V & M TUBES of the seamless steel tubes business
of North Star Steel Company (North Star Tubes) at the beginning of
July 2002 increased Vallourec’s share in the buoyant market for tubes
in the energy sector and significantly strengthened its presence in
the United States, the market of reference for tubes for oil & gas well
equipment. This asset purchase, for a total of USD 380 million
(€ 393.6 million), was carried out by a new entity created for
this purpose, called V & M STAR, which is 80.5%-controlled by
V & M TUBES and 19.5%-controlled by Sumitomo.
On 23 June 2005, Vallourec acquired full control of V & M TUBES
as a result of the acquisition, for € 545 million, of the 45% stake
held by Mannesmannröhren-Werke. This major transaction has
given Vallourec:
– full control over the implementation of V & M TUBES’s strategy
(acquisitions, capital expenditure, etc.),
– a more cohesive and clearer Group structure,
– full access to its subsidiary’s results and cash flow.
As a result of these acquisitions, the Vallourec Group is now the world
leader in seamless steel tubes (source: in-house and external
statistical data). 90.5% of 2005 consolidated sales were made
outside France.
In order to control its supplies,V & M TUBES operates three steel mills
(in France, Brazil and the United States) and owns a 20% stake
(at 31 December 2005) in the German steel mill HKM, as well as a
supply contract entitling it to a portion of this mill’s steel production.
With a view to continuing its expansion in the production of tubes
for the power generation market, in 2005 V & M TUBES created a
subsidiary,V & M CHANGZHOU Co. Ltd, located in Changzhou, China,
specializing in the cold finishing of large-diameter seamless alloy steel
tubes produced in Germany for power generation plants. This plant
is expected to produce its first tubes in the middle of 2006.
On 30 September 2005, V & M TUBES acquired the assets of the
Omsco division of ShawCor Ltd (Canada) and created OMSCO Inc.,
a company based in Houston, USA, which specializes in the
manufacture of drill pipes, drill collars and heavy weight drill pipes.
This acquisition enabled V & M TUBES to become the number two
in the world oil & gas drill pipe market.
Finally, in 2005, the subsidiary V & M do BRASIL SA acquired a stake
in the Brazilian company Tubos Soldados Atlântico (TSA), created to
produce large-diameter welded tubes and carry out the coating and
lining process. Europipe GmbH has a controlling interest in TSA.
The other acquisitions made in recent years have concerned the
Valtimet sub-group, a joint venture created in 1997, the same year
as V & M TUBES, in which Vallourec has a controlling (51.3%)
interest and is currently partnered by the US group Timet (43.7%)
and Sumitomo (5%). Details of these acquisitions are as follows:
■ In December 2002, Valtimet Inc., a wholly-owned subsidiary of
Valtimet, acquired the assets of the US company International
Tubular Products (ITP), the main US specialist in stainless steel
tubes for condensers.
■ In May 2004 Valtimet entered into a joint venture with the South
Korean company Poongsan to manufacture, in Bupyung, Incheon,
South Korea, welded stainless steel and titanium tubes designed
mainly for the power generation and seawater desalination
markets.
■ In November 2005,Valtimet entered into a joint venture agreement
with the Chinese company Baoti to create Xi’an Baotimet Valinox
Tubes Co. Ltd, in Xi’an, in the Chinese province of Shaan’xi.
During 2006, this company will start producing welded titanium
tubes for the Chinese electricity and chemicals markets.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
39Vallourec 2005 Annual Report
40 Vallourec 2005 Annual Report
The following acquisitions of note have also been made since
January 2006:
■ The acquisition on 21 March 2006 by V & M TUBES of SMFI
(Société de Matériel de Forage International), located in Cosne-
sur-Loire, France, and specialized in the manufacture of heavy-
weight drill pipes and high-tech products for oil & gas drilling.
■ The acquisition by VALLOUREC MANNESMANN OIL & GAS FRANCE
on 1 February 2006 of a machine shop for these same products,
located in Tarbes, France.The machine shop was previously owned
by GIAT.
■ The acquisition by Valtimet, at the beginning of April 2006, of 75%
of CST Ltd.This Indian company, which was renamed CST Valinox Ltd,
is located in Hyderabad and specializes in the production of
tubes for power plant condensers for the Indian market.
As regards divestments, the main transactions in recent years have
been carried out by the two sub-holding companies Valtubes and
Sopretac and, as from 2005, by ValTubes, created as a result of the
merger of these two sub-holding companies.
■ The Industrial Parts division of Sopretac, made up of the companies
Métal Déployé SA, Krieg et Zivy Industries and their subsidiaries
Métal Déployé Belge, Cablofil Inc., Cablofil Ibérica and Cablofil
Italia, was sold in the first half of 2001 to the managers of this
division in association with investment funds Atria Capital
Partenaires and U.I. of the Crédit Agricole Indosuez group.
■ Jacot, part of Sopretac’s Automotive Components division and
specialized in manufacturing engine system tubes and parts for
power steering assemblies, was sold on 31 May 2002 to the
German company Schmitter Group AG for a nominal amount.
■ Having taken a majority (51%) shareholding in 1999 in Cefival,
a company in the Stainless Steel Tubes division specializing in the
extrusion of bars and sectioned shapes, the Italian company
Metallurgica Calvi bought a further 20% of the company’s shares
from Valtubes at the end of 2002.Valtubes’s holding subsequently
declined to 16.7% after a capital increase by Cefival in which
Valtubes did not participate.
■ TCVAL is a company specialized in marketing, in France and
elsewhere in Europe, stainless steel tubes and fittings for industrial
piping, in which Sopretac held 45%. The other 55% was owned
by Trouvay-Cauvin, which went into liquidation in December
2002. TCVAL itself went into liquidation in February 2003.
■ Sopretac’s 44% stake in NO-SAG, which specializes in the
manufacture of springs for car seats, was sold in July 2003 to a
company specializing in the same type of activity.
■ Valtubes’s participating interest (1/3) in D.M.V. Stainless B.V.
was sold in December 2003 for a nominal amount to its majority
(2/3) shareholder Mannesmannröhren-Werke, which already
assumed full responsibility for its management. This participating
interest, previously consolidated by the equity method, had been
deconsolidated as from 1 January 2002.
■ The subsidiary Vallourec do Brasil Autopeças Ltda, which specializes
in the assembly of rear axle units for Renault do Brasil and
Peugeot Citroën do Brasil, was sold to the German group Benteler
on 31 January 2005. In 2004, the company achieved sales of
BRL 203 million.
The subsidiary Vallourec Argentina, which specializes in the
machining of automotive parts and the assembly of rear axle units
for Renault Argentina, was sold to the local management on
8 February 2005 for a nominal price. In 2004 it achieved sales of
ARP 62 million.
These assembly activities were not part of Vallourec’s core business,
had not achieved the necessary critical size and no longer
presented any real strategic interest.
■ In addition, during the first half of 2006,ValTubes announced the
sale of its subsidiary Spécitubes, the only company in the Vallourec
Group operating in the aerospace sector, to one of Spécitubes’s
important customers, the German company Pfalz-Flugzeugwerke
GmbH (PFW). Spécitubes has two plants in France, employs about
160 staff and generated sales of € 27 million in 2005.The affiliation
with its new shareholder will enable Spécitubes to strengthen its
position, whilst developing complementary activities for major
aerospace customers.
Following the absorption in December 2004 of the sub-holding
company Valtubes (tubes businesses – other than those of
V & M TUBES – and the finishing of tube products) by the sub-holding
company Sopretac (other industrial metallurgical activities), which
changed its name to ValTubes, the organization of the Vallourec Group
is henceforth based on two sub-holding companies: V & M TUBES
on the one hand and ValTubes on the other.
■ V & M TUBES, now wholly-owned, groups the production of
carbon and alloy steel seamless tubes and the threading of these
products for the oil & gas industry.
Sect
ion
3Se
ctio
n 1
Sect
ion
5
■ ValTubes, 100%-owned, groups the tubes activities (other than
those of V & M TUBES), the finishing of tube products and other
industrial metallurgical lines of business.
The Group organization chart shown in section 3.3.4 of this Reference
Document shows the detailed organization, including around
30 industrial companies grouped into six Divisions. The workforce at
31 December 2005 totalled 17,542 employees.
A certain number of marketing companies are also part of either
V & M TUBES (V & M TUBES CORPORATION) or ValTubes (various
trading and sales companies).
Central services and those common to the Group are grouped into
a company called Setval, held directly by Vallourec.
Parent company-subsidiary organization
■ Vallourec is a mixed holding company that:
– Manages its participating interests. Its income is mainly financial,
such as dividends, interest on long-term loans to subsidiaries and
investment income from cash and cash equivalents. It also bears the
cost of its debt;
– Bears operating and brand protection costs. In accordance with
the general Group policy, the image of the Group belongs to
Vallourec and ownership has not been transferred to the subsidiaries.
Vallourec charges royalties in exchange for the use of its brand by
its industrial subsidiaries and V & M TUBES.
– Does not carry out any industrial activity.
■ V & M TUBES is a mixed sub-holding company that manages its
participating interests and does not carry out any industrial
activity. Its income is mainly financial, such as dividends, interest
on long-term loans to subsidiaries and investment income from
cash and cash equivalents.
In addition, V & M TUBES bears the operating costs linked to its
brand. V & M TUBES charges royalties in exchange for the use of
its brand by its industrial subsidiaries.
■ ValTubes is a financial sub-holding company that does not carry
out any industrial activity.
■ Setval is the Vallourec Group’s analysis and management services
company. Its responsibilities are to make specialist expertise
available or provide know-how to Group companies through its
high level of professionalism. It works in a broad, varied sphere
and has considerable resources that often exceed the capacity of
a single company.
Setval has three sites in France: Boulogne (Hauts-de-Seine), which
provides Group management and administrative services, Saint-
Saulve (Nord), which provides IT services, and Aulnoye (Nord), the
Group’s research centre. Setval charges Group subsidiaries in France
and abroad for the services it provides.
Goods and services are provided at arm’s length between Group
companies and, consequently, are not affected by the provisions of
Article L. 225-86 of the French Code de Commerce.
4.1.1 Description of main business activities
V & M TUBES (100%)
The subsidiaries of the holding company V & M TUBES are organized
into four Divisions, plus a marketing company:
■ Hot-rolled tubes,
■ OCTG Europe,
■ OCTG North America,
■ Brazil,
■ A marketing company in the United States.
HOT-ROLLED TUBES DIVISION
This Division groups three subsidiaries:
■ V & M FRANCE - France
Comprising an electric steel mill at Saint-Saulve (Nord) and four tube
mills at Aulnoye-Aymeries (Nord), Déville-lès-Rouen (Seine-Maritime),
Montbard (Côte-d’Or) and Saint-Saulve (Nord), covering a wide range
of diameters and thicknesses produced on continuous process
rolling mills, Transval and Stiefel.
■ V & M DEUTSCHLAND GmbH - Germany
Comprising four tube mills in Mülheim, Düsseldorf-Rath, Düsseldorf-
Reisholz (North Rhineland-Westphalia) and Zeithain (Saxony). The
tube mills are equipped with continuous process rolling mills, Stiefel,
push bench, Erhardt press and Pilger rolling mills, making it possible
to cover the widest range of products in the world, both in terms of
diameter/thickness and grade.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
41Vallourec 2005 Annual Report
42 Vallourec 2005 Annual Report
Most of the raw materials for the French and German tube mills are
supplied by the Saint-Saulve steel mill and the German steel mill
at Huckingen owned by Hüttenwerke Krupp Mannesmann (HKM),
of which V & M TUBES has owned 20% of the capital since 23 June
2005 (compared with 30% previously, 10% having been sold to
Mannesmannröhren-Werke in connection with the purchase of the
45% stake in V & M TUBES).
■ V & M CHANGZHOU Co. Ltd - China
V & M CHANGZHOU Co. Ltd was created in 2005 in order to
increase the Group’s machining capacity for large-diameter tubes hot-
rolled in Europe for the Chinese power generation market. Production
at the plant, which is in Changzhou, in the province of Jiangsu, will
start during 2006.
OCTG DIVISIONS (Oil Country Tubular Goods)
The two Divisions, OCTG Europe and OCTG North America, combine,
in two major geographical units, the worldwide oil & gas tube heat
treatment and threading works, which are located close to customers,
as well as manufacturing, heat treatment and machining facilities
for drilling products including drill pipes, drill collars and heavy
weight drill pipes. In addition, the OCTG North America Division
produces its own raw materials via V & M STAR whose facilities
include an electric steel mill and a rolling mill using some of the latest
technology.
The OCTG Europe and OCTG North America Divisions carry out all
types of API, Buttress and premium threading, particularly the VAM®
product line – patented threads developed by Vallourec since 1965
and ideally suited to the difficult conditions associated with operating
oil & gas wells.
In order to make VAM® the number one in “premium joints” with over
50% of the world market,Vallourec has concentrated the coordina-
tion of Research and Development services in respect of this line of
products within VALLOUREC MANNESMANN OIL & GAS FRANCE,
has set up a world network of licensees and has gradually created,
acquired or bought participating interests in many companies
throughout the world. The Group has also developed a worldwide
site service network operating from France, Scotland, the United
States and Singapore.
OCTG EUROPE DIVISION
■ VALLOUREC MANNESMANN OIL & GAS FRANCE - France
This company produces standard joints and the full VAM® range of
products, as well as drill pipes and tool-joints and welds them onto
tubes produced by V & M FRANCE and V & M DEUTSCHLAND GmbH
in order to supply the world market with oil drill pipes.
For this purpose, the company has a production unit at Aulnoye-
Aymeries (Nord) and a machining workshop in Tarbes (Hautes- Pyrénées,
France).
This company also coordinates OCTG Research and Development
activities throughout the world, assisted by the Vallourec Research
Centre at Aulnoye-Aymeries.
■ VALLOUREC MANNESMANN OIL & GAS GERMANY GmbH -
Germany
This company consists of sales and marketing teams responsible
for selling threaded products made by the threading works in
V & M DEUTSCHLAND GmbH’s Düsseldorf-Rath and Mülheim (North
Rhineland-Westphalia) plants.
■ VALLOUREC MANNESMANN OIL & GAS UK Ltd -
United Kingdom
Integrated into the Group since the beginning of 1994, this company
brings together installations specializing in heat treatment and
threading to meet, in particular, the needs of the North Sea market.
The company has been operating under a VAM® licence since 1970.
Production unit in Clydesdale, Bellshill (Scotland).
VALLOUREC MANNESMANN OIL & GAS UK Ltd has also set up a
significant services business for exploration platforms, based in
Aberdeen (Scotland).
The following companies, which operate in the same oil & gas
market, are, for the purposes of operational management, directly
attached to V & M TUBES and to the OCTG Europe Division:
■ VAM FAR EAST - Singapore (51%)
Formed in association with Sumitomo, this company has been
developing customer services and platform advice in South East Asia
and Oceania since 1992.
Its operational base is in Singapore.
Sect
ion
3Se
ctio
n 1
Sect
ion
5
■ P.T. CITRA TUBINDO - Indonesia (25%)
This company carries out heat treatment on tubes and threading of
standard joints in Indonesia and has been producing VAM® joints
since 1985.
Production unit on the island of Batam.
■ VIETUBES - Vietnam (12.25%)
This participating interest is held both directly by the Group and
indirectly via P.T. Citra Tubindo.Vietubes carries out threading on tubes
and sleeves for the Vietnamese market.
Production unit in Vung Tau.
OCTG NORTH AMERICA DIVISION
■ V & M STAR - United States (80.5%)
V & M STAR is an integrated manufacturer of seamless tubes for the
oil & gas industries. Its facilities include an electric steel mill, a
rolling mill using some of the latest technology and a heat treatment
and threading unit. The annual production capacity of this business
is 500,000 tonnes, of which 80% is OCTG. Sumitomo is a partner
with a 19.5% stake in V & M STAR.
Production units in Youngstown (Ohio) and Houston (Texas).
■ OMSCO Inc. - United States
Formed in September 2005 following the acquisition of the assets
of the Omsco division of ShawCor Ltd (Canada), OMSCO Inc.
manufactures tubular products adapted to the needs of the oil & gas
drilling industry.These products comprise mainly drill pipes, drill collars
and heavy weight drill pipes.
Production unit in Houston (Texas).
■ PRINVER - Mexico
Specializes in threading high-quality joints and provides the Mexican
oil & gas industry with the complete range of VAM® products.
The Veracruz production unit in Mexico has been producing VAM®
joints under licence since 1981.
■ VAM PC - Canada
Has been producing and marketing VAM® products in Canada since
1983.
Production unit in Nisku, Alberta (Canada).
■ VAM PTS - United States (51%)
Formed in 1984 in association with the Sumitomo group, the VAM®
product line has enabled VAM PTS to become one of the leaders in
premium joints in the United States.
Production unit in Houston (Texas).
BRAZIL DIVISION
■ V & M do BRASIL SA - Brazil (99.4%)
This integrated unit groups together all production facilities, from the
steel mill, via the various hot-rolling mills, through to the finishing
lines for tubes and pipes. The company produces seamless tubes for
the oil & gas, automotive, petrochemical, power generation and
mechanical engineering sectors. Its production site is at Belo
Horizonte in the State of Minas Gerais, Brazil.
In addition, V & M do BRASIL has the following subsidiaries:
– V & M FLORESTAL Ltda, which owns around 240,000 hectares of
eucalyptus forest, of which 130,000 are in operation, for the produc-
tion of charcoal used in the blast furnaces of V & M do BRASIL.
– V & M MINERAÇAO Ltda, which provides the iron ore for the
V & M do BRASIL steel mill and for other Brazilian manufacturers.
– Tubos Soldados Atlântico (TSA), a company formed in 2005 to
produce large-diameter welded tubes and carry out the coating
and lining process.V & M do BRASIL SA has a 20.7% stake in this
company, which is controlled by Europipe GmbH.
MARKETING IN THE UNITED STATES: V & M TUBES CORPORATION - UNITED STATES
This company markets in the United States all the tubes produced
by V & M TUBES’s various subsidiaries. It also has a stock of tubes
for the oil & gas industry for American distributors, which usually
thread the tubes themselves according to the end customer’s
requirements. On behalf of Vallourec Inc, it is also responsible for the
United States marketing of products manufactured by ValTubes’s
subsidiaries (Vallourec Précision, Interfit, Cerec, etc.).
Offices: Houston (Texas) and Pittsburgh (Pennsylvania).
The Group’s stake in V & M TUBES CORPORATION was increased to
100% when Vallourec acquired full control of V & M TUBES in
2005.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
43Vallourec 2005 Annual Report
44 Vallourec 2005 Annual Report
ValTubes (100%)
All of the companies associated with ValTubes are grouped within
two Divisions and a certain number of marketing companies:
■ the Automotive and Industry Division,
■ the Stainless Steel Division,
■ the marketing companies associated with ValTubes.
AUTOMOTIVE AND INDUSTRY DIVISION
This Division is composed of all of the companies specializing in the
manufacture of welded or seamless precision tubes or tube sections,
cold drawn or that have undergone various finishing operations, and
designed for various markets (automotive, mechanical engineering,
power generation, etc.).
Escofier Technologie, specialized in the design and manufacture of
machines for cold-rolling processes, is also part of this Division.
■ VALLOUREC PRECISION ETIRAGE - France
Specializes in the drawing of seamless and welded precision tubes,
both in carbon and alloy steel, which are used in all sectors of
industry, sold in long lengths or cut sections and machined or
formed for the Group’s internal or external customers.
Five production units in Saint-Florentin (Yonne), Vitry-le-François
(Marne), Rachecourt (Haute-Marne), La Charité-sur-Loire (Nièvre) and
Tonnerre (Yonne).
■ VALLOUREC PRECISION SOUDAGE - France
Produces carbon steel welded tubes for the automotive industry, in
long lengths or in sections, sold directly or through the Group’s
drawing companies to internal and external customers.
Two production units: Chevillon (Haute-Marne) and Hautmont (Nord).
■ VALLOUREC COMPOSANTS AUTOMOBILES VITRY - France
Specializes in the design, fabrication, assembly and machining of
chassis components (semi-rigid axles, rear axles, trailing arms etc.).
Production unit in Vitry-le-François (Marne).
■ INTERFIT - France
Manufactures and markets fittings (bends and reducers) for assembling
tubes to be used for fluid transfer (superheated water, steam, gas, oil
products, etc.).
Production unit in Maubeuge (Nord).
■ VALTI - France
Produces and markets seamless tubes and rings for bearing
manufacturers. Valti also cuts fixed-weight hollows (slugs).
Production units in Montbard (Côte-d’Or) and La Charité-sur-Loire
(Nièvre).
■ VALTI GmbH - Germany
This wholly-owned Valti subsidiary was formed at the beginning of
2000 to take over WRG (a subsidiary of Mannesmannröhren-Werke),
which has similar activities to Valti.
Production unit in Krefeld (North Rhineland-Westphalia).
Taken together,Valti and Valti GmbH now lead the European market
in tubing for bearings.
■ ESCOFIER TECHNOLOGIE - France
Specializes in the design and construction of machines for cold
forming of metal parts. In addition to its own range of machines,
Escofier Technologie designs and makes specially adapted equipment.
Production unit in Chalon-sur-Saône (Saône-et-Loire).
Vallourec do Brasil Autopeças Ltda, which specializes in the assembly
of rear axle units for Peugeot-Citroën do Brasil and Renault do Brasil,
and Vallourec Argentina, which specializes in the machining of
parts and the assembly of axle units for Renault Argentina, were sold
on 31 January 2005 and 8 February 2005 respectively.
Sect
ion
3Se
ctio
n 1
Sect
ion
5
STAINLESS STEEL DIVISION
This Division groups the various companies that produce and market
stainless steel or special tubes and one company producing dished
ends.
■ VALTIMET (51.3%)
Valtimet is a joint venture in which Vallourec has the controlling
interest (51.3%). Its partners are the US group Timet (43.7%) and
Sumitomo (5%).
A world leader in the production of stainless steel and titanium
welded tubes for secondary systems in conventional and nuclear
power plants, Valtimet has expertise in manufacturing smooth or
finned tubes for feedwater heaters as well as titanium, stainless steel
or copper-alloy tubes for condensers. Valtimet is also present in the
desalination and chemical markets and provides thin tubing for
the automotive industry.
Production unit in Laumes (Côte-d’Or).
United States subsidiary:Valtimet Inc.; plant in Morristown (Tennessee).
Chinese subsidiaries: Changzhou Valinox Great Wall (66%-owned
via the sub-holding company Valinox Asia); plant in Changzhou
(province of Jiangsu), and Xi’an Baotimet Valinox Tubes (49%-owned
via various subsidiaries of Valtimet and Valtimet itself) and production
unit in Xi’an (province of Shaan’xi).
Subsidiary in Korea: Poongsan Valinox (50%), joint venture with the
Korean company Poongsan. Production unit in Bupyung, Incheon,
near to Seoul.
■ VALINOX NUCLEAIRE - France
Produces and markets stainless steel seamless tubes and fittings for
use in nuclear power stations and, in particular, long, U-bent tubes
for steam generators.
Production unit in Montbard (Côte-d’Or).
■ CEREC - France
Manufactures and markets dished ends used by piping and vessel
fabricators and tank makers. Cerec is the French number one in heavy
pressing and delivers its products throughout the world.
Production unit in Recquignies (Nord).
Subsidiary: Deutsche Cerec (Germany).
The subsidiary Spécitubes, the only company in the Vallourec Group
operating in the aerospace sector, has been sold to the German
company Pfalz-Flugzeugwerke GmbH (PFW). This sale will take
effect during the first half of 2006.
VALTUBES’S SALES COMPANIES:
Trading and sales companies associated with ValTubes are located
in:
– Belgium,
– Canada,
– China,
– Dubai,
– Germany
– Italy,
– Singapore,
– Sweden,
– the United Kingdom,
– the United States.
4.1.2 Production and production volumes
The Group’s wide range of products and the lack of suitable units
of measurement (other than financial) make it difficult to supply
meaningful quantitative information.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
45Vallourec 2005 Annual Report
46 Vallourec 2005 Annual Report
Consolidated sales amounted to:
■ € 2,375 million in 2003, 84.4% of which outside France
■ € 3,038 million in 2004, 87.3% of which outside France
■ € 4,307 million in 2005, 90.5% of which outside France
i.e. an increase of 27.9% in 2004 compared with 2003 and an
increase of 41.8% in 2005 compared with 2004.
There were no significant changes in consolidation scope in 2003
and 2004. The changes in consolidation scope in 2005 were:
■ The disposal, effective as from 1 January 2005, of the automotive
components activities in Brazil and Argentina (2004 sales: € 71 million).
■ The consolidation as from 1 October 2005 of OMSCO’s assets
(2005 fourth-quarter sales: € 28 million).
4.1.3 Sales by markets and geographic regions
The breakdown of business activity by markets and geographic regions is only really meaningful from the point of view of the importance
of the integrated industrial processes and the development of downstream activities. This breakdown is as follows:
By region By market
2003
2004
2005
France
15.5%
Germany
17.4%
Rest of world
5.7%
North America
19.2%
South America
13.6%
Asia and Middle East
13.7%Other EU*
14.9%*Based on 25-member EU
Chemicals and petrochemicals
11.5%
Mechanical engineering
13.8%
Power generation
11.8%Other
7.5%
Oil & gas
36.4%
Automotive
19.0%
France
12.7%
Germany
17.2%
Other EU (25)
13.1%
Rest of world
5.2%
North America
22.6%
South America
13.2%
Asia and Middle East
16.0%
Chemicals and petrochemicals
11.0%
Mechanical engineering
14.1%
Power generation
15.4%Other
6.6%
Oil & gas
36.4%
Automotive
16.5%
France
9.5%
Germany
14.2%
Rest of world
4.3%
North America
25.9%
South America
11.6%
Asia and Middle East
19.5%
Other EU (25)
15.0%
Chemicals and petrochemicals
10.7%
Mechanical engineering
13.3%
Power generation
16.8%Other
5.5%
Oil & gas
42.5%
Automotive
11.2%
47Vallourec 2005 Annual Report
Sect
ion
3Se
ctio
n 1
Sect
ion
5
4.1.4 Location of main establishments
See 4.1.1 above.
4.1.5 Not applicable
4.1.6 Exceptional events influencingthe information givenin paragraphs 4.1.0 to 4.1.5
To date, there has not been any exceptional event likely to affect
substantially the business, results, assets or financial situation of the
Company or the Vallourec Group.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
4.2 Dependency on the economic, industrial and financial environment
The Group considers that at the present time there are no patents
or licences, no supply, industrial, commercial or financial contracts,
and no new manufacturing processes likely to have a significant
effect on its business and/or profitability.
4.2.1 Breakdown of raw materialsand consumable supplies
Purchases consumed during 2005 were as follows:
■ scrap metal (iron and iron alloys) € 326 million
■ round parts € 844 million (*)
■ flat products € 125 million
■ tubes € 100 million
■ pressed items € 13 million
■ others € 291 million
TOTAL € 1,699 million
(*) The above-mentioned tube round purchases were sourced mainly fromHKM’s German steel mill, in which the Group has a 20% stake (30% as fromthe formation of V & M TUBES in 1997 until the purchase of the 45% stakein 2005). Like its partners Thyssen Krupp AG and Salzgitter Mannesmann GmbH,V & M TUBES benefits from a cost-price based supply contract. Including theround parts produced by the integrated steel mills at Saint-Saulve in France(V & M FRANCE), Belo Horizonte in Brazil (V & M do BRASIL SA) andYoungstown in the United States (V & M STAR), in 2005 – a year in whichthe company enjoyed high levels of activity, as in 2004 – V & M TUBESproduced around 90% of its steel requirements.
4.2.2 Main customers
In 2005, the following customers accounted for sales greater than
€ 35 million (by sector and in alphabetical order):
■ Peugeot / Citroën Automotive
■ Alstom Power generation
■ China National Water Power generation
■ Dongfang Boiler Works Power generation
■ Harbin Boiler Works Power generation
■ Liaoning Power generation
■ Shanghai Boiler Works Power generation
■ Thyssen/Mannesmann Handel Trading
■ Champions Pipe & Supply Oil & Gas
■ China National Petroleum Company Oil & Gas
■ Pemex Oil & Gas
■ Petrobras Oil & Gas
■ Pipeco Oil & Gas
■ Premier Pipe Oil & Gas
■ Pyramid Oil & Gas
■ Groupe TOTAL Oil & Gas
■ Wilson Oil & Gas
■ INA-FAG Bearings
48 Vallourec 2005 Annual Report
4.3 Change in average number of Group employees
2003 2004 2005
Workers 12,812 12,840 12,670
Technicians 3,414 3,449 3,452
Managers 1,185 1,169 1,163
TOTAL 17,411 17,458 17,285
4.4 Investment policy
4.4.0 Research and Development
Vallourec continuously devotes significant efforts to Research and
Development, particularly in fields associated with oil & gas, the
automotive industry and power generation. These efforts cover
three areas:
■ manufacturing processes (steel, steel tubing, forming and machining,
precisions tubes, welding and machining),
■ new products and product improvement,
■ services (customer assistance in designing and adapting tubing).
Vallourec’s R&D structure is centred on the specialists and teams
based in the Group’s various companies, close to customers and
products.
Vallourec’s research centre, CEV, provides all its expertise to the R&D
teams: metallurgy, heat treatment, non-destructive testing, corrosion,
surface treatment, product and process simulations, etc.
Other research centres are associated with this process:
■ In France, the United States and Japan, three test stations carry
out life-size tests on the behaviour of oil joints in well conditions,
■ The Mannesmann research centre in Germany (Salzgitter Mannesmann
Forschung GmbH) is actively involved in V & M TUBES’s R&D
programmes, carrying out research and testing and providing
expertise,
■ V & M do BRASIL SA also has its own teams carrying out research
and providing expertise,
■ Studies have been developed in close collaboration with external
research centres and university laboratories.
Innovation in the service of customers is a permanent objective of
the Group, and is supported by:
■ Customer-supplier technical partnerships,
■ A portfolio of coherent projects, integrated into the Group’s
permanent operations,
■ Continuous interaction between the production units to ensure that
“best practices” are developed within the Group.
This cross-functional interaction results in constant improvement of
the product range, based on reliable and flexible processes at
minimum cost.
The Vallourec Group is also developing R&D programmes in association
with partners at the forefront of their field of activity, particularly:
■ Sumitomo (Japan): cooperating since 1975 on the development of
premium joints for the oil & gas industry (VAM® product range).
■ Timet (US): developing applications for titanium, especially in
the automotive industry, since 1997.
■ Autobench: participating in the technology monitoring programme,
the aim of which is to evaluate new tubular designs for use in the
automotive industry.
■ Shell: developing tubes and connections for the oil & gas industry.
■ Weatherford: developing an innovative tubular solution on a
specific premium connection.
A staff of about 400 is involved in R&D activities within the Vallourec
Group. The annual R&D budget is around 1.3% of sales.
49Vallourec 2005 Annual Report
Sect
ion
3Se
ctio
n 1
Sect
ion
5
4.4.1 Main investments made
In recent years, industrial investment programmes, which are mostly self-financed, have been directed mainly towards rationalizing
production equipment, reorganizing activities by business lines, improving quality, controlling processes, adapting product lines in
accordance with customers’ changing requirements and reducing production costs.
Over the last three financial years, investments were made as follows:
In € million 2003 2004 2005
Industrial investments (property, plant and equipment and intangible assets)
Europe 50.9 56.4 96.9
North America and Mexico (excl. OMSCO) 9.4 8.4 15.1
Central and South America 12.6 36.7 73.9
Asia 0.1 1.6 6.5
Total industrial investments 73.0 103.1 192.4
Acquisitions and financial investments - - 651(*)
(*) including the acquisition of the 45% stake in V & M TUBES for € 545 million and OMSCO for USD 120 million.
The most important programmes carried out during the period have
been:
In 2003:
■ Investment by V & M DEUTSCHLAND GmbH’s Reisholz plant in a
new tube machining lathe and heat-treatment furnace with a view
to increasing production capacity in respect of large boiler pipes
to meet the growing demands of the Chinese market.
■ Also in the context of the Chinese power generation market,
Changzhou Valinox Great Wall Co. Ltd increased its production
capacity as regards stainless steel condensers used in thermal
power generation plants by more than 20%.
■ Investment by Vallourec Composants Automobiles Vitry in
equipment to produce engine add-ons, the aim of which is to
improve the safety of the front section of the passenger
compartment.
■ The bringing into service at Spécitubes’s Samer plant of a new cold-
rolling mill designed to produce titanium tubes used by the
aerospace industry.
■ In the area of welded tubes, Vallourec Précision Soudage
(Hautmont plant) has installed a new coil-slitting plant. The entity
is thus no longer dependent on the services of outside suppliers,
capitalizing instead on its existing expertise. This investment was
carried out as part of the Group’s cost-reduction policy.
■ V & M do BRASIL SA improved the performance of its cold-
drawing plant by adapting its production lines to products and
increasing its drawing capacity by means of a new 80-tonne
drawing bench. At the end of 2003, the decision was taken to
launch, in 2004/2005, a capital expenditure programme with the
aim of increasing substantially the production capacity in respect
of hot-rolled tubes at V & M do BRASIL SA: installation of new
equipment, in particular a rotary furnace for heating billets and
modification of existing rolling and finishing equipment.
In 2004:
■ Among planned investments made in 2004, note should be
taken of the expenditure incurred in Europe aimed at increasing
production capacity in respect of boiler tubes, in particular at
V & M DEUTSCHLAND GmbH which, as well as continuing to
increase production facilities as in 2003, strengthened its internal
handling and storage facilities and increased its finishing capacity
in order to meet demand in the Chinese market. In addition,
V & M FRANCE improved the production capacity of the Saint-
Saulve steel mill by the acquisition of additional cooling and
oxygen injection facilities.
■ In the automotive sector, Vallourec Composants Automobiles
Vitry invested in equipment to produce engine add-ons notably
for the models replacing the Citroën Xsara and the Peugeot 206.
These add-ons improve the safety of the passenger compartment
in the event of front-end collisions.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
50 Vallourec 2005 Annual Report
■ Commencement of work on the important project, to which
V & M do BRASIL SA committed itself at the end of 2003, to
increase substantially its production capacity of hot-rolled tubes.
At V & M FLORESTAL, the planting of highly-productive eucalyptus
clones was stepped up, thus improving the company’s ability to
meet demand for charcoal as from 2012.
■ Changzhou Valinox Great Wall Co. Ltd increased its capacity for
the production of stainless steel condenser tubes used in thermal
power generation plants: following the investment made in 2003,
in September 2004 it installed two new welding lines and a new
tube-bending machine, which were brought into use in October.
A new building was constructed to house these new facilities.
In 2005:
■ Further investment aimed at increasing V & M TUBES’s production
capacity, particularly in respect of boiler tubes and tubes for the
power generation and oil markets. The Group also continued to
invest in the maintenance and updating of its production facilities
with the aim of improving capacity utilization in periods of high
activity.
■ Demand in the Chinese market for boiler tubes resulted in the
Group forming a subsidiary named V & M CHANGZHOU Co. Ltd
in Eastern China to operate its facilities for the finishing of its
products. This investment was made with a view to continuing the
Group’s activities at the Reisholz plant. The civil engineering
work began in December 2005.
■ Replacement by V & M DEUTSCHLAND GmbH of machining
lathes for internal diameters and threading to reach a higher level
of precision of finished products and to optimize internal flows.
■ Improvement of work flows of V & M FRANCE by the installation
of more compact finishing lines and a new coating unit of a
type that will facilitate compliance with the environmental
standards and working conditions of the various sectors. The
steel mill replaced its primary filtration system for fume extraction
in the building housing the furnace and embarked on a project to
increase capacity for processing 9% and 13% chromium steel and
100 C6.
■ Commissioning by V & M do BRASIL SA of its new furnace for
heating billets. The modifications to the drilling machine and
downstream equipment were commissioned in August 2005.
Other investments were made to increase capacity, including
charcoal grinding equipment, thereby improving the performance
of the blast furnaces.
Increase in the production capacity in respect of cold drawn
tubes and commencement of a project to design a cold-forming
machine to produce axles for lorries.
■ Launching by VALLOUREC MANNESMANN OIL & GAS FRANCE
of a major project to improve work flows including the relocation
of the couplings workshop, the increase in its capacity and
improvement in its performance as well as the realignment of the
heat treatment unit and the purchase of a new trimming machine
capable of dealing with upseted tubes.
Ordering by the testing unit of new testing equipment with
capacity reaching 18” to enable the Group to comply with the
increasingly technical requirements concerning products supplied,
without the need to subcontract these operations.
■ In the stainless steel sector, Changzhou Valinox Great Wall Co. Ltd
once again increased its production capacity in respect of
condenser tubes by the commissioning of additional welding
machines. Other investments made to improve the performance
of the production sites have included equipment to improve
welding speed, yields and work flow organization.
More generally, the Group continued to invest with a view to
maintaining its production tools. Heavy, and sometimes old,
equipment needs to be overhauled on a regular basis.
4.5 Not applicable
4.6 Not applicable
Sect
ion
3Se
ctio
n 1
Sect
ion
5
4.7 Risks
4.7.1 Market risks (interest-rate,exchange-rate, share-priceand credit risks)
Interest-rate risksDay-to-day treasury management in respect of the Group’s industrial
activities has been decentralized to the industrial companies.
Management of medium- and long-term financing within the
eurozone is centralized in Vallourec and the sub-holding companies
V & M TUBES and ValTubes.
31/12/2005 Bond Other Investments(In € million) loan loans
Fixed rate - 347.3 -
Variable rate - 398.4 541.3
Part of bank loans and other borrowings (€ 301.2 million) was
swapped to a fixed rate at an average rate of 3.35% (excluding
spread). € 100 million was swapped in 2003 and € 201.2 million
was swapped in 2005.
The Group is exposed to an interest-rate risk on its debt and cash.
Its bank debt exposed to changes in variable interest rates amounted
to about € 400 million (53% of total gross debt) at 31 December 2005.
The impact of a one-point rise in interest rates applied to the short-
term rates of the eurozone, to Brazilian rates and US money market
rates would result in a € 7.5 million increase in the Group’s annual
financial costs, based on the assumption that the level of debt
remained completely stable.
In addition, according to our simulations, the impact of a one-point
rise or fall in interest rates applied to all interest rate curves would
result in an approximately € 12 million change in the swaps in place
at 31 December 2005 (at Vallourec SA level).
Exchange-rate risksTranslation risk
The assets, liabilities, revenues and costs of the Group’s subsidiaries
are expressed in various currencies. The Group financial statements
are presented in euros. The assets, liabilities, revenues and costs
denominated in currencies other than the euro have to be translated
into euros at the applicable rate so that they can be consolidated.
If the euro rises (or falls) against another currency, the value in euros
of the various assets, liabilities, revenues and costs initially recognized
in that other currency will fall (or rise). Therefore, changes in the value
of the euro may have an impact on the value in euros of the assets,
liabilities, revenues and costs not denominated in euros, even if the
value of these items in their original currency has not changed.
In 2005, about 55.4% of the net income, Group share, was generated
by subsidiaries that prepare their financial statements in foreign
currencies (mainly in US dollars and Brazilian reals). A 10% change
in exchange rates would have an impact on net income, Group share,
of around € 28 million.
In addition, the Group’s sensitivity to the long-term exchange-rate
risk is reflected in the changes that have occurred in recent years in
the translation reserves booked to shareholders’ equity (€ 63.1 million
as at 31 December 2005) which, over the last two years, have
been linked mainly to movements in the US dollar and Brazilian real:
Translation reserve 31/12/2004 31/12/2005Group share
USD -12,019 20,001
GBP -118 52
MXN (Mexican peso) -790 2,243
ARS (Argentinean peso) -327 -
BRL (Brazilian real) 319 39,763
Others -260 1,013
-13,195 63,072
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
51Vallourec 2005 Annual Report
52 Vallourec 2005 Annual Report
Transaction risk
Vallourec is subject to exchange-rate risks due to its commercial
exposure linked to sales transactions entered into by some of its
subsidiaries in currencies other than their operating currency.
A significant proportion of Vallourec’s transactions is invoiced by the
Group’s European companies in US dollars (26.5% of sales in 2005).
Exchange-rate fluctuations between the euro and the US dollar
may therefore affect the Group’s operating margin. Their impact is,
however, very difficult to quantify for two reasons:
1. There is an adjustment phenomenon on selling prices denominated
in US dollars related to market conditions in the various sectors of
activity in which Vallourec operates.
2. Certain sales, even if they are denominated in euros, are influenced
by the level of the US dollar. They are indirectly and at some time in
the future affected by movements in the US currency.
The Group actively manages its exposure to exchange-rate risk in
order to reduce the sensitivity of its income to changes in rates by
implementing hedges as soon as the order is placed. Receivables,
payables, and operating cash flows are thus hedged with financial
instruments, which are mainly forward purchases and sales.
The procedures used and amounts involved are detailed in note 8
of the notes to the consolidated financial statements.
Vallourec does not hedge the financial assets and liabilities in
foreign currencies in its consolidated balance sheet.
Share-price risks
Vallourec holds 269,749 of its own shares (see 3.3.1.1 above)
acquired on 5 July 2001 at a price of € 53.256 per share.
These shares were transferred from marketable securities to
investments in the Vallourec company accounts as of 31 March 2003,
at their carrying amount of € 14,365,753 and are deducted from
shareholders’ equity in the consolidated financial statements.
As recommended by the Management Board, the Supervisory Board
decided at its meeting on 8 March 2005 to allocate these shares in
the following manner:
– 190,750 shares to cover share purchase options granted under
the option plan dated 11 June 2003.
– 78,999 shares to cover future allocations to certain Group
employees, managers or officers of the Company, in accordance
with the procedures to be defined jointly by the Management
Board and the Supervisory Board.
Counterparty risks
The Group enters into financial transactions only with leading
financial institutions.
Credit risks
In June 1996, Vallourec issued a 7.30% bond loan maturing in July
2004 for a total nominal amount of € 76.2 million (100,000 bonds
of € 762.25 nominal).
This loan was intended to cover the Group’s medium-term investment
requirements and to enhance its financial independence. It was
repaid in a single payment on maturity in July 2004.
This bond loan was refinanced in 2003 by means of a new five-year
€ 150 million credit facility from the Crédit Agricole group maturing
in September 2008.Vallourec has used hedging instruments (swaps)
to fix the rate of this loan. The loan facility documentation requires
the Group to maintain its ratio of consolidated net debt to consolidated
shareholders’ equity at less than 75%.
On 24 June 2002,VALLOUREC & MANNESMANN TUBES (V & M TUBES)
took out a five-year variable-rate bank loan of USD 110 million to
finance part of the purchase of the assets of North Star Steel Company
(V & M STAR). This loan was repaid early at the end of June 2005.
In March 2005, a seven-year € 460 million credit facility was made
available to Vallourec by a syndicate of banks to finance the
acquisition of the 45% stake in V & M TUBES.
This € 460 million facility requires Vallourec to maintain its ratio of
consolidated net debt to consolidated shareholders’ equity at less
than or equal to 75% calculated on 31 December each year and for
the first time on 31 December 2005.A change of control of Vallourec
could result in the repayment of the loan if so decided by a two-thirds
majority of the participating banks. It is also provided that the loan
would become immediately repayable if the Group failed to make
a repayment in respect of one of its other borrowings (“cross
default”), or if a significant event occurred affecting the Group’s
business or financial situation and ability to repay.
At 31 December 2005, the Group complied with its covenants.
Sect
ion
3Se
ctio
n 1
Sect
ion
5
4.7.2 Legal risks
All of the French plants require an authorization to operate in
accordance with the provisions of Law no. 76-663 of 19 July 1976
on facilities subject to restrictions relating to environmental protection
and of Decree 77-1133 of 21 September 1977. Updated authorizations
are obtained from the local Regional Directorates for Industry,
Research and the Environment (Direction Régionale de l’Industrie,
de la Recherche et de l’Environnement – DRIRE) for major changes
at the sites (capital expenditure, expansion, restructuring, etc.).
As indicated in paragraph 4.2, in the Group’s opinion there are
currently no patents, licences or supply contracts of an industrial,
commercial or financial nature or new manufacturing processes
that are likely to have a significant influence on its business and/or
profitability.
The Group owns all the main assets necessary for its operations.
As far as the Group is aware, no significant pledges, mortgages or
guarantees have been given in respect of its intangible assets,
property, plant and equipment or investments.
There are currently no disputes likely to materially affect the business,
assets, earnings or financial position of the Company or the Vallourec
Group.
4.7.3 Industrial and environmental risks
To the Company’s knowledge there are currently no specific industrial
or environmental risks resulting from production processes or the use
or storage of substances needed for such processes that are likely
to have a significant impact on the assets, earnings or financial
position of the Company or the Vallourec Group (for further
information, see “Information on the environmental consequences
of the Group’s activities” in the Management Board’s management
report).
However, in the various countries in which the Group operates,
particularly in Europe and the United States, its production activities
are subject to a large number of regulations concerning environmental
matters, which are extensive and are constantly being updated.These
regulations concern, in particular, control over major accidents,
disposal of wastewater, disposal of special industrial waste, air and
water pollution and site protection. In future, the Group’s activities
could be subject to even more stringent regulations that would result
in the Group being required to incur expenditure in order to comply
with regulations or to pay taxes.
In addition, the regulatory authorities and courts may require the
Group to carry out investigations, clean-up operations, restrict its
activities or close its facilities, on a temporary or permanent basis.
In the case of several of the Group’s sites that are currently being
used or are no longer in use and that have for a long time been used
for industrial purposes, the soil or ground water may have been
contaminated and other instances of contamination may be
discovered or may occur in the future. In such a case,Vallourec could
be required to clean up the sites concerned. As regards its former
activities, the Group could be held responsible in the event of
damage to persons or property, which could adversely affect
Vallourec’s results. This could arise in the case of asbestos, which was
not directly used in its production processes but was sometimes used
for thermal insulation. Legal action has been instituted against
Vallourec in a limited number of cases linked to exposure to asbestos.
4.7.4 Insurance - risk coverage
The Group’s policy in terms of protection against accidental risks
focuses on prevention and the purchase of insurance cover.This policy
is co-ordinated by the Human Resources department in the case of
the safety of individuals and by the Risks and Insurance department
for all other aspects. The Management Board has ultimate
responsibility for these issues.
Although Vallourec considers that its insurances cover adequately the
risks incurred in connection with its normal activities (and, in
particular, the warranties offered by the Group), it could prove to be
insufficient in the event of certain losses resulting from exceptional
damage, which would have a negative impact on the Group’s
financial position.
Industrial risks insured within the Vallourec Group centre around two
main types of insurance taken out with first-rate insurers:
■ general insurance
■ third-party liability insurance.
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
53Vallourec 2005 Annual Report
54 Vallourec 2005 Annual Report
General insurance
This insurance covers all direct material damage to the Group’s
property, subject to specific exclusions, as well as any costs and
consequential losses.
The contractual indemnity limit is € 230 million in respect of
specified risks with, however, a large number of exclusions and
coverage limitations, particularly regarding supply shortages.
Third-party liability
The aim of third-party liability insurance is to ensure that the Group
is insured in respect of any liability arising as a result of injury or loss
caused to third parties either resulting from the Group’s operations
or after delivery of goods or services.The level of cover is € 80 million.
In respect of both general insurance and third-party liability insurance,
contracts consist of a main contract in France and local contracts in
other countries.The main contract prevails where terms or limits differ
from those of local contracts issued by the leading insurer. Some
subsidiaries are not covered by the Group contracts.
Insurance in respect of staff is taken out locally in accordance with
applicable legislation, in particular Employer’s liability and Workmen’s
compensation insurance.
Third-party liability of company officers
The aim of directors’ liability insurance is to cover the senior
management against risk resulting from claims made against them
that could result in them being held personally, jointly and severally
liable for loss suffered by third parties and which could be attributed
to a real or alleged professional error committed by them in the
course of the performance of their duties. The amount of cover is
€ 20 million.
4.7.5 Other specific risks
To the Company’s knowledge, there are currently no other specific
risks likely to affect the assets, earnings or financial structure of the
Company or the Vallourec Group.
However, we draw your attention to the following:
■ Cyclical nature of the tubes market
The tubes market is traditionally subject to cyclical trends due, in part,
to the influence of macro-economic conditions, linked, in particular,
to movements in the oil price, which influence demand for certain
of its products.
■ Tubes market
Some of the markets in which the Vallourec Group operates are highly
competitive. In the energy sector (oil & gas and power generation),
differentiation and innovation, as well as the quality of the products
and associated services, play a key role. In the case of low value-
added products, which account for a small proportion of sales,
competition from producers in the emerging countries could affect
the Group’s markets.
■ An industry that consumes raw materials and energy
Tube production consumes raw materials such as iron ore, coal, coke
and scrap metal. The Group has certain of its own sources of supply
and uses a variety of external sources of supply wherever possible.
In addition, raw materials and energy represent a significant item in
the Group’s financial statements. As a result, the volatility of raw
material prices creates some uncertainty as regards earnings.
■ Activities in emerging countries
A significant part of the Group’s business takes place in emerging
countries. The risks associated with operating in such countries
may include political, economic, social or financial instability and
increased exchange-rate risk. The Group may not be in a position to
take out insurance or hedge against such risks and may also
encounter problems in the performance of its activities in such
countries, which could have an impact on its earnings.
■ Maintaining high technology on key products
The tubes market is subject to technological change. It is not possible
as of now to predict how such change could affect the Group’s
activities.
Sect
ion
3Se
ctio
n 1
Sect
ion
5
Information on the activities of the Vallourec Group
Sect
ion
2Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
4
55Vallourec 2005 Annual Report
56
5.1.0 Consolidated financial statements of the Vallourec Group
Consolidated balance sheet in € thousand
ASSETS Notes 01/01/2004 31/12/2004 31/12/2005restated restated prepared
under IFRS under IFRS under IFRS(a) (a) (a)
NON-CURRENT ASSETS
Intangible assets, net 1 12,556 10,849 21,201
Goodwill 1 50,084 47,336 91,018
Gross property, plant and equipment 2 1,315,862 1,366,494 1,669,871
less: accumulated depreciation 2 -575,621 -632,984 -749,953
Property, plant and equipment, net 2 740,241 733,510 919,918
Investments in equity affiliates 3 51,429 52,055 48,191
Other non-current assets 4 38,018 33,532 31,494
Deferred tax assets 5 18,975 17,675 45,094
Total 911,303 894,957 1,156,916
CURRENT ASSETS
Inventories and work-in-progress 6 458,155 593,504 861,171
Trade and other receivables 7 459,198 639,874 906,178
Derivatives - assets 8 - - 1,846
Other current assets 9 115,180 137,187 116,885
Cash and cash equivalents 10 425,890 484,969 541,278
Total 1,458,423 1,855,534 2,427,358
TOTAL ASSETS 2,369,726 2,750,491 3,584,274
a) The opening balance sheet as at 1 January 2004 and the balance sheet as at 31 December 2004 under IFRS have been extracted from the note entitled“Consequences for the Vallourec Group of the transition to IFRS”, included in the Group’s Reference Document for the financial year 2004 (paragraph1.2.2 of section 5.3). This note is reproduced in section D of the notes to the 2005 IFRS financial statements. The assumptions and principles used in thepreparation of the opening IFRS balance sheet as at 1 January 2004 and the IFRS balance sheet as at 31 December 2004 have been described in that note,which also includes explanations of the variances between these balance sheets and the consolidated balance sheets prepared on those dates under FrenchGAAP. In the preparation of these balance sheets, the same accounting options and methods have been used as were used in the published 2005 half-year financial statements and in the 2004 IFRS comparative information previously prepared within the context of the transition to IFRS. No changes havebeen made to the methods of presentation used or the financial data given in the information previously disclosed within the context of the transitionto IFRS.
Vallourec 2005 Annual Report
5.1 Consolidated and Company financial statements
Section 5Financial statements
LIABILITIES AND SHAREHOLDERS’ EQUITY Notes 01/01/2004 31/12/2004 31/12/2005restated restated prepared
under IFRS under IFRS under IFRS(a) (a) (a)
SHAREHOLDERS’ EQUITY 11
Capital 194,605 197,399 212,007
Additional paid-in capital 94,914 97,428 206,533
Consolidated reserves 414,212 399,889 492,743
Reserves, financial instruments - - -42,883
Translation reserve - -13,195 63,072
Income (loss) for the financial year N/A 145,024 472,985
Own shares -13,686 -13,686 -13,514
Shareholders’ equity - Group share 690,045 812,859 1,390,943
Minority interests 13 432,462 499,681 112,153
Total shareholders’ equity 1,122,507 1,312,540 1,503,096
NON-CURRENT LIABILITIES
Bank loans and other borrowings 14 202,002 189,815 469,627
Employee benefits 16 194,258 198,880 209,750
Other provisions 15 1,251 3,370 4,307
Deferred tax liabilities 5 36,847 38,947 53,245
Other long-term liabilities 1,820 1,530 736
Total 436,178 432,542 737,665
CURRENT LIABILITIES
Provisions for liabilities and charges 15 56,764 64,959 66,484
Overdrafts and other short-term bank borrowings 14 297,262 240,614 276,337
Trade payables 250,737 402,753 496,605
Derivatives - liabilities 8 - - 102,301
Tax liabilities 44,265 78,803 102,529
Other current liabilities 17 162,013 218,280 299,257
Total 811,041 1,005,409 1,343,513
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,369,726 2,750,491 3,584,274
It should be noted that, in accordance with the transitional provisions specifically provided for by IAS 32 “Financial Instruments: Disclosure andPresentation”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 1 “First-time Adoption of IFRS”, the Vallourec Group has chosen,in the preparation of the 2004 comparative information, to retain the recognition and presentation of financial instruments adopted under French GAAP.The IFRS relating to financial instruments have been applied only as from 1 January 2005. Therefore, the above balance sheets as at 31 December 2004and 31 December 2005 are not directly comparable. The most marked differences between the IFRS and French GAAP relate to hedge accounting(see paragraph 2.16 on accounting principles and methods and note 8).
In order to aid comparability, the 2003 and 2004 historical consolidated financial statements prepared under French GAAP have not been published inaddition to the 2005 IFRS financial statements: these financial statements are included in section 5.1.0 of the 2003 and 2004 Reference Documents filedwith the Autorité des Marchés Financiers (AMF) in France and are available on the Company’s website (www.vallourec.com).
Financial statements
57Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
58
Consolidated income statement in € thousand
Notes 2004 2005restated prepared
under IFRS (a) under IFRS (a)
Sales 20 3,037,759 4,307,405
Production taken into inventory 65,059 147,778
Other operating revenues 21 26,069 24,046
Purchases consumed -1,242,293 -1,699,321
Taxes and duties 22 -47,806 -52,965
Payroll costs 23 -618,890 -716,424
Other operating costs and revenues -767,568 -948,460
Net provisions 24 2,277 -1,496
EBITDA 454,607 1,060,563
Depreciation and amortization 25 -89,047 -99,195
Impairment of assets and goodwill -264 173
Asset disposals and restructuring costs 26 -10,016 3,725
OPERATING INCOME 355,280 965,266
Financial income 17,351 19,327
Interest costs -18,913 -23,637
Net financial costs -1,562 -4,310
Other financial income and charges 9,945 -13,433
Other discounting costs -9,270 -8,846
FINANCIAL RESULT 27 -887 -26,589
INCOME BEFORE TAX 354,393 938,677
Income tax 28 -89,448 -307,450
Net income of equity affiliates 3 297 1,162
NET INCOME FROM CONTINUING OPERATIONS 265,242 632,389
Income (loss) from discontinued operations - -
CONSOLIDATED NET INCOME 265,242 632,389
Minority interests 120,218 159,404
Group share 145,024 472,985
Group share:
Earnings per share 12 15.2 47.6
Diluted earnings per share 12 15.1 46.8
a) The IFRS income statement for the financial year 2004 has been extracted from the note entitled “Consequences for the Vallourec Group of the transitionto IFRS”, included in the Group’s Reference Document for the financial year 2004 (paragraph 1.2.4 of section 5.3). This note is reproduced in section Dof the notes to the 2005 IFRS financial statements.
The assumptions and principles used in the preparation of the 2004 IFRS income statement have been described in that note and a reconciliation and noteshave been prepared to give all the information needed to understand the variances between that income statement and the income statement for theyear ended 31 December 2004 prepared under French GAAP. In the preparation of these income statements, the same accounting options and methodshave been used as were used in the published 2005 half-year financial statements and in the 2004 IFRS comparative information previously prepared withinthe context of the transition to IFRS. No changes have been made to the method of presentation used or the financial data given in the information previouslydisclosed within the context of the transition to IFRS.
Vallourec 2005 Annual Report
(b)
In accordance with the transitional provisions specifically provided for by IAS 32 “Financial Instruments: Disclosure and Presentation”, IAS 39 “FinancialInstruments: Recognition and Measurement” and IFRS 1 “First-time Adoption of IFRS”, the Vallourec Group has chosen, in the preparation of the 2004 incomestatement, to retain the accounting methods adopted under French GAAP. The IFRS relating to financial instruments have been applied only as from 1 January2005. The most marked differences between the IFRS and French GAAP relate to hedge accounting (see 2.16 on accounting principles and methods and note 8).
b) The acquisition of the minority interests in VALLOUREC & MANNESMANN TUBES (V & M TUBES) and its subsidiaries was recognized by Vallourec onthe date of the legal transfer of the shares. Due to the proximity of this date to 30 June, the minority interests purchased have been consolidated intothe Vallourec Group’s income as from 1 July 2005 (see B - Consolidation scope).
In order to aid comparability, the 2003 and 2004 historical consolidated financial statements prepared under French GAAP have not been published inaddition to the 2005 IFRS financial statements: these financial statements are included in section 5.1.0 of the 2003 and 2004 Reference Documents filedwith the Autorité des Marchés Financiers (AMF) in France and are available on the Company’s website (www.vallourec.com).
Statement of changes in shareholders’ equity, Group share in € thousand
Capital Add- Consoli- Translation Reserves - Own Income Totalitional dated reserve changes shares (loss) share-paid-in reserves in fair value for the holders’capital of hedging financial equity -
instruments - year Groupnet of tax share
As at 1 January 2004 194,605 94,914 414,212 - N/A -13,686 N/A 690,045
Dividends paid - - -15,136 - - - - -15,136
2004 net income - - - - - - 145,936 145,936
Capital increase and premiums 2,794 2,514 - - - - - 5,308
Change in translation reserve - - - -13,195 - - - -13,195
Share-based payments - - 912 - - - -912 -
Other changes - - -99 - - - - -99
As at 31 December 2004 197,399 97,428 399,889 -13,195 - -13,686 145,024 812,859
Impact of first-time adoption
of IAS 32/39 - - -409 - 21,939 - - 21,530
Variance between minority interests
to be acquired and liabilities (put option) - - 30 - - - - 30
Shareholders’ equity restated as at 1 January 2005 197,399 97,428 399,510 -13,195 21,939 -13,686 145,024 834,419
2004 net income - - 145,024 - - - -145,024 -
Dividends paid - - -30,721 - - - - -30,721
Interim dividend paid by Vallourec - - -41,322 - - - - -41,322
2005 income before changes
in consolidation scope - - - - - - 477,708 477,708
Capital increase and premiums 14,608 109,105 - - - - - 123,713
Change in translation reserve - - 17 75,962 -17 - - 75,962
Financial instruments - - - - -47,954 - - -47,954
Financial instruments purchased from the
minority shareholders in V & M TUBES - - 16,851 - -16,851 - - -
Impact of purchase of 45%
stake in V & M TUBES - - 1,947 - - - -3,506 -1,559
Share-based payments - - 912 - - - -912 -
Change in own shares - - 525 - - 172 - 697
Other changes in consolidation scope - - - 305 - - -305 -
As at 31 December 2005 212,007 206,533 492,743 63,072 -42,883 -13,514 472,985 1,390,943
Financial statements
59Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
60
Statement of changes in minority interests in € thousand
Consolidated Translation Reserves - Income Minorityreserves reserve changes (loss) interests
in fair value for theof hedging financial
instruments - yearnet of tax
As at 1 January 2004 432,462 - N/A N/A 432,462
2004 net income - - - 120,219 120,219
Dividends paid -33,856 - - - -33,856
Change in translation reserve - -16,104 - - -16,104
Other changes in consolidation scope -1,004 - - - -1,004
Other changes -2,036 - - - -2,036
As at 31 December 2004 395,566 -16,104 - 120,219 499,681
2004 net income 120,219 - - -120,219 -
Impact of first-time application of IAS 32/39 655 - 17,439 - 18,094
Reclassification of minority interests as liabilitiesin accordance with IAS 32 -426,233 10,374 -15,421 - -431,280
Shareholders’ equity restated as at 1 January 2005 90,207 -5,730 2,018 - 86,495
Dividends paid -42,620 - - - -42,620
2005 net income - - - 159,404 159,404
Financial instruments - - -34,431 - -34,431
Change in translation reserve - 56,642 - - 56,642
Reclassification of minority interests as liabilitiesin accordance with IAS 32 - movements -101,783 -43,820 32,273 - -113,330
Other changes -7 - - - -7
As at 31 December 2005 -54,203 7,092 -140 159,404 112,153
Vallourec 2005 Annual Report
Cash flow statement reconciliation as at 31 December 2004 and 31 December 2005 in € thousand
2004 Restate- Reclassi- 2004 2005French GAAP ments fications IFRS IFRS
Net income of consolidated companies 254,436 10,640 166 265,242 632,389 Consolidated net income(including minority interests)
Net charges to amortization, depreciation and provisions 106,804 -8,531 - 98,273 99,762 Net charges to amortization, depreciation and provisions
Change in deferred taxes 1,840 2,304 -4,144 - -
Unrealized gains and losses from changes - - - - 6,156 Unrealized gains and losses linked to changesin fair value in fair value
Income and charges linked to share options - 912 - 912 912 Income and charges linked to share optionsand equivalent and equivalent
Capital gains and losses on disposals -3,879 1,638 - -2,241 -2,636 Capital gains and losses on disposals
Gross cash flow from consolidated companies 359,201
Share of income (loss) of equity affiliates - -132 -166 -298 -1,162 Share of income (loss) of equity affiliates
Dividends received from equity affiliates 438 - -1,285 -847 -938 Dividends received from equity affiliates
Cash flow from operating activities after cost - - - 361,041 734,483 Cash flow from operating activities after costof net debt and tax of net debt and tax
Cost of net debt - - 1,562 1,562 4,310 Cost of net debt
Tax charge (including deferred taxes) - - 89,448 89,448 307,450 Tax charge (including deferred taxes)
Cash flow from operating activities - - - 452,051 1,046,243 Cash flow from operating activitiesbefore cost of net debt and tax before cost of net debt and tax
Interest paid - - -21,745 -21,745 -22,884 Interest paid
Tax paid - - -76,920 -76,920 -237,609 Tax paid
Interest received - - 17,218 17,218 19,515 Interest received
Cash flow from operating activities - - - 370,604 805,265 Cash flow from operating activities
Change in operating working capital requirement -99,005 2,382 -8,394 -105,017 -279,200 Change in operating working capital requirement
NET CASH FLOW FROM 260,634 9,213 -4,260 265,587 526,065 NET CASH FLOW FROMOPERATING ACTIVITIES (1) OPERATING ACTIVITIES (1)
Cash outflows for acquisitions of property, -98,599 -9,012 - -107,611 -188,561 Cash outflows for acquisitions of property,plant and equipment and intangible assets plant and equipment and intangible assets
Cash inflows from disposals of property, 10,571 - - 10,571 6,665 Cash inflows from disposals of property,plant and equipment and intangible assets plant and equipment and intangible assets
Impact of acquisitions (changes in consolidation scope) -933 - - -933 -651,245 Impact of acquisitions (changes in consolidation scope)
Impact of disposals (changes in consolidation scope) - - - - 41,228 Impact of disposals (changes in consolidation scope)
Cash of subsidiaries sold (changes in consolidation scope) - - - - -6,062 Cash of subsidiaries sold (changes in consolidation scope)
Other cash flows from investing activities - - 1,121 1,121 1,169 Other cash flows from investing activities
NET CASH FLOW FROM INVESTING -88,961 -9,012 1,121 -96,852 -796,806 NET CASH FLOW FROM INVESTINGACTIVITIES (2) ACTIVITIES (2)
Increase and decrease in shareholders’ equity 1,192 - -5,308 -4,116 122,802 Increase and decrease in shareholders’ equity
Amounts received on exercise of share options - - 5,308 5,308 911 Amounts received on exercise of share options
Dividends paid during the year Dividends paid during the year
- Dividends paid to shareholders in the parent company -15,136 - - -15,136 -72,043 - Dividends paid to shareholders in the parent company
- Dividends paid to minority shareholders -33,645 - -361 -34,006 -41,610 - Dividends paid to minority shareholdersin consolidated companies in consolidated companies
Borrowings drawn down and loan repayments received 34,753 - 3,203 37,956 461,921 Cash drawn down renew loans
Borrowings repaid and loans granted -112,895 -201 -10,505 -123,601 -170,323 Repayments of borrowings
Change in loans, guarantees and advances granted - - 10,802 10,802 -1,249 Change in loans, guarantees and advances granted
CASH FLOW FROM FINANCING -125,731 -201 3,139 -122,793 300,409 CASH FLOW FROM FINANCINGACTIVITIES (3) ACTIVITIES (3)
Impact of changes in exchange rates (4) - - -6,471 -6,471 11,696 Impact of changes in exchange rates (4)
CHANGE IN CASH (1 + 2 + 3 + 4) 45,942 - -6,471 39,471 41,364 CHANGE IN CASH (1 + 2 + 3 + 4)
Opening net cash 225,001 - - 225,001 264,472 Opening net cash
Impact of changes in exchange rates 6,471 - -6,471 - - Impact of changes in exchange rates
Closing net cash 264,472 - - 264,472 305,836 Closing net cash
Change 45,942 - -6,471 39,471 41,364 Change
Financial statements
61Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
62
Statement of changes in net debt 01/01/2004 Change 31/12/2004
Gross cash (1) 425,890 59,079 484,969
Bank current accounts in debit and overdrafts (2) 200,889 19,608 220,497
Cash (3) = (1) - (2) 225,001 39,471 264,472
Gross debt (4) 298,374 -88,442 209,932
Net debt (4) - (3) 73,373 -127,913 -54,540
Statement of changes in net debt 01/01/2005 Change 31/12/2005
Gross cash (1) 484,969 56,309 541,278
Bank current accounts in debit and overdrafts (2) 220,497 14,945 235,442
Cash (3) = (1) - (2) 264,472 41,364 305,836
Gross debt (4) 209,932 300,589 510,521
Net debt (4) - (3) -54,540 259,225 204,685
Transition from French GAAP provisionsto IFRS in 2004
Net cash flows from operating activities in 2004 amounted to € 266
million under IFRS compared with € 261 million under French
GAAP. 2004 consolidated net income under IFRS (including minority
interests) totalled € 265 million, € 11 million higher than the
consolidated income published under French GAAP (€ 254 million).
At the same time, the change in operating working capital require-
ment shows a net outflow of € 105 million under IFRS, € 6 million
higher than the change calculated under French GAAP (€ 99 million).
This change is mainly due to a reclassification of tax receivables and
payables, which are now shown on the line “Tax paid”.
As regards net cash flows from investing activities, there was an
outflow of € 97 million under IFRS compared with € 89 million
under French GAAP due to the component approach adopted in
respect of property, plant and equipment and the reclassification of
certain tools from inventory to property, plant and equipment.
As regards net cash flow from financing activities, there was a net
outflow of € 123 million under IFRS, compared with € 126 million
under French GAAP.
The change in cash for 2004 is the same under both systems, i.e. an
increase of € 39 million, including the impact of the change in
exchange rates on opening cash. Group cash totalled € 264 million
at 31 December 2004.
2005
The acquisitions (changes in consolidation scope) consist mainly of
the purchase of the 45% stake in V & M TUBES (€ 545 million) and
the acquisition (USD 120 million) of OMSCO’s assets (including
cash of USD 5 million).
The disposals (changes in consolidation scope) consist mainly of the
sales of 10% of HKM and the participating interests in Vallourec do
Brasil Autopeças and Vallourec Argentina, whose cash on the
disposal date totalled € 6.1 million.
At the same time, cash flow from operating activities enabled the Group
to limit the increase in long and medium-term debts to € 292 million.
Vallourec 2005 Annual Report
A - CONSOLIDATION PRINCIPLES
1. Framework for the preparation andpresentation of financial statements
Pursuant to European Commission regulation 1606/2002 adopted
on 19 July 2002 for all listed companies in the European Union, the
consolidated financial statements for the year ended 31 December
2005 are the first consolidated financial statements prepared by
Vallourec in accordance with the International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards
Board (IASB). The versions of the IFRS used are those applicable as
at 31 December 2005, as endorsed by the European Commission as
at the date the financial statements were prepared.
The consolidated financial statements for the year ended
31 December 2005, including the related notes to the consolidated
financial statements, were approved by the Vallourec Management
Board on 6 March 2006.
The consolidated financial statements for the financial year 2005
include comparative information in respect of the financial year
2004, restated in accordance with IFRS. In order to aid comparability,
the 2003 and 2004 historical consolidated financial statements
prepared under French GAAP have not been published in addition
to the 2005 IFRS financial statements: these financial statements are
included in section 5.1.0 of the 2003 and 2004 Reference Documents
filed with the Autorité des Marchés Financiers (AMF) in France and
are available on the Company’s website (www. vallourec.com).
Information relating to the first-timeapplication of IFRSThe principles and options used in the preparation of the opening
IFRS balance sheet as at 1 January 2004, the differences between
these principles and options and the French GAAP previously applied
by the Group and their financial impact on the opening balance sheet,
the balance sheet as at 31 December 2004 and the income statement
for the year ended 31 December 2004 were detailed in the note
entitled “Consequences for the Vallourec Group of the transition to
IFRS” in section 5.3 of the Reference Document filed by the Group
for the financial year 2004.
In accordance with the interim provisions provided for by IFRS 1
“First-time Adoption of IFRS” and by IAS 32 and IAS 39 on the
presentation, recognition and measurement of financial instruments,
the Vallourec Group has chosen to apply IAS 32 and IAS 39 only as
from 1 January 2005. The 2004 comparative information does not
therefore include the impact of these standards, the main
consequences of which are described in paragraph 2.16.
Also in accordance with IFRS 1, the Group has opted for the
following exemptions to the retrospective application of IFRS in its
opening balance sheet as at 1 January 2004:
■ business combinations that occurred before 1 January 2004 have
not been restated,
■ all actuarial gains and losses in respect of retirement commitments
not recognized and measured in accordance with IAS 19 “Employee
Benefits” have been booked to shareholders’ equity in the IFRS
balance sheet as at 1 January 2004,
■ the cumulative translation differences as at 1 January 2004 resulting
from the translation of the financial statements of foreign subsidiaries
have been written off by transfer to consolidated reserves, which
had no impact on shareholders’ equity,
■ the provisions of IFRS 2 “Share-based payments” were applied only
to those plans and options granted after 7 November 2002 and in
respect of which the rights had not been vested at 1 January 2005.
The other options available under IFRS 1 have not been adopted, in
particular the exemptions relating to the revaluation of property, plant
and equipment and intangible assets.
In the preparation of its published 2005 consolidated financial
statements, Vallourec has used the same accounting options and
methods as those used in its published 2005 half-year financial state-
ments and in the 2004 comparative information restated under IFRS
and disclosed within the context of the transition to IFRS (see above).
Notes to the consolidated financial statementsfor the year ended 31 December 2005in thousands of euros (€ thousand) unless stated otherwise
Financial statements
63Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
64
Other options for the 2005 financialstatementsVallourec has chosen to apply early, as from 1 January 2005, the
IAS 39 amendment on intra group cash-flow hedging, which was
approved by the European Commission regulation 2106/2005. The
application of this amendment is mandatory for accounting periods
beginning on 1 January 2006 and application prior to this date is
encouraged.
In view of the restatement by the IASB of its IFRIC interpretation
“Emission rights” and the uncertainty surrounding the resulting
accounting treatment to be adopted by European industrial groups,
the Group has chosen not to recognize in its 2005 IFRS financial
statements any impact in respect of CO2 emission quotas. Those
quotas obtained free of charge by the Group at the beginning of the
financial year are recorded in the financial statements at nil value.
The Group has not purchased any additional quotas or sold any
quotas and had unused quotas at the end of the financial year.
Further qualitative and quantitative information is provided in the
notes to the financial statements.
2. Accounting principles
2.1 General valuation principlesThe Group’s consolidated financial statements are prepared in
accordance with the historical cost principle, with the exception of
financial derivatives, which are measured at fair value, and financial
assets, which are measured at fair value through profit or loss. The
carrying amount of assets and liabilities that are hedged is adjusted
to take account of changes in fair value on the basis of the closing
price.
2.2 Use of estimatesThe preparation of financial statements in accordance with IFRS
obliges Vallourec’s management to use estimates and to make
assumptions that affect the carrying amount of certain assets,
liabilities, revenues and costs, as well as the information disclosed
in certain notes to the financial statements.
Because of their uncertain nature, the outcome of such assumptions
may differ from the amounts shown in the financial statements. The
Group regularly reviews its estimates and assessments to enable it
to take into account past experience and prevailing economic
conditions.
Accounts and information that may be subject to the use of
significant estimates include property, plant and equipment, intangible
assets, goodwill, financial assets, financial derivatives, inventories and
work-in-progress, provisions for liabilities and charges and deferred
taxes.
2.3 Consolidation of subsidiariesThe consolidated financial statements of the Vallourec Group
comprise the financial statements of Vallourec and of its subsidiaries
covering the period from 1 January 2005 to 31 December 2005.
Subsidiaries controlled by Vallourec are fully consolidated as from the
date on which control is acquired. They cease to be consolidated
when control is transferred outside the Group. A subsidiary is
deemed to be controlled when the Group has the power to control,
directly or indirectly, its financial and operational policy in such a way
as to derive benefit from its activity. In general, controlled companies
are those in which Vallourec owns, directly or indirectly, more than
50% of the voting rights.
The consolidated financial statements include 100% of the assets,
liabilities, revenues and costs of the subsidiaries concerned. The
shareholders’ equity and income or loss are split between the
portion attributable to the Group and the portion attributable to the
minority shareholders.
The results of acquired companies are included in the consolidated
income statement as from the effective date of acquisition.The results
of companies disposed of are included up until the disposal date.
The impact on the balance sheet and income statement of intra Group
commercial and financial transactions is eliminated.
2.4 Investments in equity affiliatesThe Group’s investments in equity affiliates are accounted for in
accordance with the equity method. Equity affiliates are companies
over whose financial and operational policy the Group exerts
significant influence but does not have control. In general, equity
affiliates are companies in which the Group owns at least 20% of
the voting rights.
The value stated in the balance sheet of investments in equity
affiliates comprises the acquisition cost of the shares (including
goodwill), increased or reduced by changes in the Group’s share of
the net assets of the equity affiliate as from the date of acquisition.
The income statement reflects the Group’s share of the results of the
equity affiliate.
Vallourec 2005 Annual Report
2.5 Foreign currency translation2.5.1 Translation of subsidiaries’ foreign-currency
denominated financial statements
Assets and liabilities, including goodwill, of foreign subsidiaries are
translated at the official exchange rates ruling on the balance sheet
date. The income statements of foreign subsidiaries are translated
at the weighted average exchange rate for the period.
Translation differences arising are booked to shareholders’ equity.
The Group’s share of such differences is included under the heading
“Translation reserve”.
However, in accordance with the option authorized by IFRS 1 “First-
time Adoption of IFRS”, the Vallourec Group has chosen to reclassify
under the heading “Consolidated reserves” the accumulated
“Translation reserve” as at 1 January 2004 resulting from the
process of translating the financial statements of foreign subsidiaries.
On the disposal of a foreign subsidiary, the translation differences
accumulated in the “Translation reserve” account since 1 January
2004 are transferred to the income statement as part of the profit
or loss on divestment.
2.5.2 Translation of foreign-currency denominated
transactions
Foreign-currency denominated transactions are translated into the
company’s functional currency. They are translated at the spot rate
of the hedging instrument when the transaction is hedged
(see 2.16.4) and at the exchange rate applicable on the transaction
date when the transaction is not hedged.
Foreign-currency denominated monetary assets and liabilities are
translated at the balance sheet date at the exchange rate applicable
on that date. Translation differences resulting from the difference
between this rate and the rate at which the transactions were
initially recorded are included in financial income or loss.
2.6 Property, plant and equipment2.6.1 Measurement at cost net of depreciation
and impairment losses
Other than when they are acquired on the acquisition of a company,
property, plant and equipment are recorded at acquisition or
production cost. They are not revalued. At each balance sheet date,
the acquisition cost is reduced by accumulated depreciation and any
provisions for impairment losses determined in accordance with
IAS 36 “Impairment of Assets” (see 2.10).
Costs of loans used to finance assets over a long period of
commissioning or manufacture are not capitalized as part of the cost
of the asset concerned. Instead, they are written off in the period in
which they are incurred.
2.6.2 Component approach
The main components of an item of property, plant and equipment
whose useful life is shorter than that of the main asset (furnaces,
heavy industrial equipment, etc.) have been identified by the
technical departments so that they may be depreciated over their own
specific useful lives.
Subsequent expenditure on the replacement of the component
(i.e. the cost of the new component) is capitalized provided that future
economic benefits are still expected to be derived from the main
asset.
The component approach is also applied to expenditure on major
overhauls that are planned and carried out at intervals of more than
one year. Such expenditure is identified as a component of the
acquisition price of the asset and depreciated over the period
between two overhauls.
2.6.3 Maintenance and repair costs
Recurring maintenance and repair costs that do not comply with the
criteria for the component approach are written off when incurred.
2.6.4 Depreciation
Depreciation of property, plant and equipment is calculated on a
straight-line basis over the useful lives summarized below. Land is
not depreciated.
Main categories Straight-line depreciation Useful life
Buildings
Administrative and commercial buildings 40
Industrial buildings / Infrastructure 30
Fixtures and fittings 10
Technical installations, equipment and tools
New industrial installations 25
Specific production equipment 20
Standard production equipment 10
Other (automatons, etc.) 5
Other
Motor vehicles 5
Office equipment and furniture 10
Computer equipment 3
Financial statements
65Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
66
2.6.5 Property, plant and equipment acquired
as part of a business combination
Property, plant and equipment acquired as part of a business
combination are measured at fair value on the acquisition date
and depreciated on a straight-line basis over the residual useful life
as at the acquisition date.
2.6.6 Impairment
Property, plant and equipment are tested for impairment in
accordance with the provisions of IAS 36 “Impairment of Assets”
(see 2.10 below).
2.7 LeasesAssets financed by way of finance leases which transfer to the Group
substantially all of the risks and rewards of ownership are capitalized
as property, plant and equipment at the fair value of the leased asset
or, if lower, at the present value of the minimum lease payments. The
corresponding liability is recorded within financial liabilities.
Lease payments are apportioned between the financial charge and
the reduction of the outstanding liability so as to produce a constant
periodic rate of interest on the remaining balance of the liability.
Assets leased under finance leases are depreciated over the shorter
of their useful life in accordance with Group rules (see 2.6) and the
lease term. They are tested for impairment in accordance with
IAS 36 “Impairment of Assets” (see 2.10).
Leases under which the lessor retains substantially all of the risks and
rewards of ownership are operating leases. Lease payments under
operating leases are recognized as an expense on a straight-line basis
over the lease term.
2.8 GoodwillGoodwill represents the part not allocated to specific balance sheet
items of the difference between the acquisition price of consolidated
companies and the Group’s share in the assets and liabilities
acquired, measured at their fair value on the acquisition date.
In accordance with IFRS 3 “Business Combinations”, goodwill is not
amortized. In accordance with IAS 36 “Impairment of Assets”,
goodwill is tested for impairment at least once a year or more
frequently if there is evidence that the goodwill may be impaired.The
testing procedures aim to determine whether the recoverable
amount of the cash generating unit to which the goodwill is related
or allocated is at least equal to its carrying amount (see 2.10:
Impairment of property, plant and equipment and intangible assets).
If any impairment is noted, an irreversible provision is recognized on
a specific line within operating income or loss.
In accordance with the transitional measures authorized by IFRS 1
“First-time adoption of IFRS”, acquisitions and business combinations
recognized before 1 January 2004 have not been restated and
goodwill recognized as at that date has been stated in the opening
balance sheet as at 1 January 2004 at its amount net of amortization.
This amount has become the new carrying amount under IFRS.
Since IFRS 3 does not contain specific provisions on this matter, the
Group has chosen to recognize in shareholders’ equity the difference
between the price paid and the share of the minority shareholders
repurchased in companies previously controlled.
2.9 Intangible assets2.9.1 Research and Development costs
In accordance with IAS 38 “Intangible Assets”, research costs are
written off and development costs must be capitalized as intangible
assets as soon as the entity can demonstrate that:
■ it intends and has the financial and technical resources necessary
to complete the project,
■ it is probable that the future economic benefits attributable to the
development expenditure will flow to the enterprise,
■ it is able to measure reliably the cost of the asset during its
development phase.
The main Research and Development projects were reviewed on the
basis of the information available from the central departments
coordinating the work, in order to identify and analyze those projects
in progress that had entered their development phase as defined in
accordance with IAS 38.
As a result of this review, no major projects were identified as
being in their development phase during 2004 or 2005.The Group’s
development efforts, mainly in its activities associated with oil, the
automotive industry and power generation, the aim of which is to
improve product design and develop new or improved manufacturing
processes, fulfill the criteria for classification as assets under IAS 38
only at a very late stage. It is very difficult to prove the existence of
additional, long-term future economic benefits that can be clearly
distinguished from the normal expenditure on maintaining and
enhancing production facilities and products with a view to preserving
the Group’s technological and competitive advantages.
The Group therefore considered that it would be inappropriate to
capitalize any development costs in the financial statements for the
Vallourec 2005 Annual Report
year ended 31 December 2005. The same treatment was adopted
in the financial statements for the year ended 31 December 2004
restated under IFRS.
2.9.2 Other intangible assets
Other than in the case of development costs (see above), internally
generated intangible assets are never capitalized but are written off
as expenses of the period in which they are incurred.
Intangible assets acquired separately are recognized at cost. Such
assets comprise mainly patents and trademarks, which are amortized
on a straight-line basis over their useful lives.
Intangible assets acquired as part of the acquisition of an activity are
recorded separately from the goodwill if their fair value may be
measured reliably at the time the assets and liabilities are initially
recognized. Intangible assets with finite useful lives are amortized
over the period during which they will be used by the entity.
Intangible assets with indefinite useful lives are not amortized.
2.9.3 Impairment
Intangible assets are tested for impairment in accordance with the
provisions of IAS 36 “Impairment of Assets” (see 2.10).
2.10 Impairment of property, plantand equipment and intangible assetsUnder IAS 36 “Impairment of Assets”, the value in use of property,
plant and equipment and intangible assets is tested as soon as there
is any evidence of impairment, such evidence being reviewed at each
balance sheet date. These tests are performed at least once a year
in the case of assets with an indefinite useful life, i.e. mainly goodwill
in the case of the Vallourec Group.
To carry out these tests, assets are grouped into cash generating units
(CGUs). These CGUs are uniform groups of assets whose continuing
use generates cash inflows that are largely independent of the
cash inflows generated by other groups of assets. The value in use
of these units is determined on the basis of the present value of net
future cash flows which will be generated by the assets tested. Cash
flows are discounted at a rate corresponding to the weighted
average cost of the Group’s capital, incorporating a market risk
premium and a risk premium specific to the sector. This rate is then
adjusted, where appropriate, by a risk premium to take into account
the geographical region concerned.
Where the value in use is less than the carrying amount of the CGU,
an impairment loss is recognized on a specific line within operating
income or loss.When a CGU includes goodwill, the impairment loss
generally reduces the goodwill first, i.e. before any write-down is
recognized in respect of any other of the CGU’s assets.
However, in some cases, the appearance of impairment factors that
relate to certain specific assets (linked to internal factors or events
or decisions that cast doubt on the continuing operation of a site,
for example) may be such that they prompt an impairment test to
be performed and justify a write-down of these assets independently
of the CGU to which they hitherto belonged.
The main CGUs within the Group’s current structure and organization
are V & M Europe,V & M do BRASIL,V & M North America, the CGU
comprising the Automotive and Industry activities, and the Stainless
steel activities. Those entities not part of these CGUs are tested on
the basis of their own cash flows.
2.11 Inventories and work-in-progressInventories are measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
The cost of raw materials, goods for resale and other supplies
comprises the purchase price excluding taxes, less discounts, rebates
and other payment deductions obtained, plus incidental costs of
purchase (transportation, unloading charges, customs duties, buying
commission, etc.). These inventories are measured in accordance with
the weighted average cost method.
The cost of work-in-progress and intermediate and finished goods
consists of the production cost, excluding financial charges.
Production cost comprises raw materials, supplies, factory labour and
direct and indirect industrial overheads that may be allocated to the
transformation and production process, on the basis of normal
capacity.Administrative and general expenses are excluded from this
measurement.
2.12 ProvisionsA provision is recognized when, at the balance sheet date, the
Group has a present obligation (legal or constructive) and it is
probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.
Provisions are discounted to present values if the time value of
money is material (for example in the event of provisions for
environmental risks or for site clean up costs). The increase in the
provisions associated with the passage of time is recognized within
financial charges.
Financial statements
67Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
68
In the case of a restructuring, a provision may only be recognized if,
at the balance sheet date, the company has announced the
restructuring, drawn up a detailed plan or started to implement the
plan.
Provisions must be booked in respect of disputes (technical,
guarantees, tax investigations, etc.) if the Group has an obligation
to a third party at the balance sheet date. Provisions are measured
on the basis of the best estimate of the expenditure likely to be
required to settle the obligation.
2.13 Retirement and similar commitments The Group participates in the financing of additional retirement
schemes or other long-term benefits for its employees, in accordance
with custom or legal requirements. The Group offers these benefits
by means of either defined benefit schemes or defined contribution
schemes.
In the case of defined contribution schemes, the Group’s only
obligation is the payment of premiums.The contributions paid to the
schemes are written off as expenses of the period in which they are
incurred. Where relevant, a provision is booked in respect of
contributions for the financial year remaining to be paid at the
balance sheet date.
Provisions are booked to cover retirement and similar commitments
in respect of defined benefit schemes.These provisions are measured
on the basis of an actuarial calculation carried out at least once a
year and usually by independent actuaries. The projected unit credit
method is applied: each period of service gives rise to an additional
unit of benefit entitlement, and each of these units is measured
separately to build up the Group’s commitment towards employees.
The calculations take into account the specific features of the
various schemes as well as the assumptions concerning retirement
date, career progression, salary increases and the probability of an
employee still being employed by the Group at retirement age
(staff turnover rates, mortality tables, etc.). The commitment is
discounted on the basis of the interest rates applicable to long-term
bonds of first-rate issuers.
The commitment is provided for net, where relevant, of plan assets
measured at their fair value.
Actuarial gains and losses are generated by changes in assumptions
or experience variances (difference between projected and actual)
in respect of commitments or plan financial assets. These variances
are recognized in the income statement in accordance with the
“corridor” method defined in IAS 19 “Employee Benefits”. The
part exceeding by more than 10% the larger of the following
values:
■ the discounted value of the commitment at the balance sheet date,
■ the fair value of the plan assets at the balance sheet date
is amortized over the employees’ expected remaining period of
service.
For the purposes of the preparation of the opening IFRS balance sheet
as at 1 January 2004, the Vallourec Group has used the option
available under IFRS 1 of booking to shareholders’ equity all actuarial
gains and losses at that date.
Net charges for retirement and similar commitments are recognized
in operating income with the exception of the charge for discounting
rights and income associated with the return on plan assets, which
are recognized within financial income or loss.
Retirement and similar commitments mainly relate to the Group’s
French subsidiaries and its subsidiaries in Germany, the United
Kingdom, the USA, Mexico and Brazil.
2.14 Share-based paymentCertain Group officers and employees benefit from share purchase
or share subscription plans that give them the right to buy an
existing share or to subscribe for a capital increase at an agreed price.
IFRS 2 “Share-based Payment” requires such plans to be measured
and recognized.
Options must be measured on the date they are granted.
In accordance with the transitional provisions specifically provided
for by IFRS 1 and IFRS 2, the Group has chosen to recognize only
those plans established after 7 November 2002 the rights of which
had not been vested by 1 January 2005: only one share purchase
option plan fell into this category. In accordance with the previously-
applied French GAAP, the pre-7 November 2002 plans are not
measured or recognized until the options are exercised.
The Group retrospectively measured, on the grant date, the share
purchase option plan that falls within the scope of IFRS 2, in
accordance with the Black & Scholes model. Changes in value
subsequent to the grant date do not affect the initial measurement
of the option.The number of options taken into account in measuring
the plan is adjusted at each balance sheet date to take account of
Vallourec 2005 Annual Report
the probability that the beneficiaries will still be employed by the
Group at the end of the holding period.
The benefit measured in accordance with IFRS 2 is equivalent to
remuneration paid to the beneficiaries: it is therefore recognized
within payroll costs, on a straight-line basis over the vesting period,
the corresponding amount being booked as an increase in
shareholders’ equity.
2.15 Own sharesOwn shares held by the Group are stated at acquisition cost as a
deduction from shareholders’ equity. Proceeds from the sale of
own shares are booked directly as an increase in shareholders’
equity so that gains or losses on disposal do not affect consolidated
income.
2.16 Financial instruments Financial instruments comprise financial assets and liabilities and
derivatives.
The presentation of financial instruments is defined by IAS 32. The
measurement and recognition of financial instruments are governed
by IAS 39. The standards have been adopted by the European
Commission with the exception of certain provisions of IAS 39
concerning the application to financial liabilities of the fair value
option and the prohibition on the application of hedge accounting
to customer deposits with deposit-taking institutions. None of the
provisions of IAS 39 rejected in their current form by the European
Commission affects the Vallourec Group.
In accordance with the interim provisions contained in IFRS 1,
IAS 32 and IAS 39, the Vallourec Group has chosen to apply IAS 32
and IAS 39 only as from 1 January 2005. The 2004 comparative
information does not therefore reflect the impact of these standards.
The main consequences as from 1 January 2005 have related mainly
to the treatment in accordance with IAS 39 of hedging contracts
entered into by the Group in respect of its commercial purchase and
sale transactions in foreign currencies. Implementation of the
standard has necessitated the adaptation of the Group’s cash
management and invoicing systems to render hedging operations
eligible for hedge accounting in accordance with IAS 39. Contrary
to the position under French GAAP, changes in the fair value of
derivatives are systematically recognized in the financial statements.
Changes in the fair value of hedged instruments are also recognized
at each period end (see 2.16.4 below: Derivatives and hedge
accounting). The impact of the first-time application of hedge
accounting in accordance with IAS 32 and IAS 39, at the transition
date of 1 January 2005, is reflected in the table of changes in
shareholders’ equity presented for the period from 31 December 2004
to 31 December 2005.
Moreover, in accordance with IAS 32, the existence of a repurchase
(put) option that could be exercised by Mannesmannröhren-Werke,
a 45% shareholder in the VALLOUREC & MANNESMANN TUBES
(V & M TUBES) subgroup which is 55%-controlled by the Vallourec
Group, in the event of a third party obtaining control of Vallourec, has
resulted in the recognition at 1 January 2005 of a financial liability
of an amount equal to the discounted fair value of the repurchase
amount (€ 431 million). This financial liability was recognized by
deduction from the amount at which the minority interests in
V & M TUBES are recorded in shareholders’ equity in the IFRS
balance sheet as at 31 December 2004, and as a deduction from
shareholders’ equity – Group share, in the case of the portion of the
liability that exceeds said minority interests.
The purchase by Vallourec on 23 June 2005 of the 45% minority
stake in V & M TUBES held by Mannesmannröhren-Werke terminated
the put option (see section 3).
2.16.1 Financial assets
Financial assets comprise:
■ non-current financial assets: participating interests in non-
consolidated companies and associated receivables, construction
effort participating loans and guarantees,
■ current financial assets, including accounts receivable and other
trade receivables, short-term financial derivatives and cash and
cash equivalents (marketable securities).
Initial measurement
Financial assets are initially recorded at fair value, including
transaction costs, except for assets designated as fair value through
profit or loss, which exclude transaction costs.
In most cases, fair value on the transaction date is the historical cost,
i.e. the acquisition cost of the asset.
Financial statements
69Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
70
Classification and measurement at the balance sheet date
Financial assets (excluding hedging derivatives) are classified by IAS 39 into one of the following four categories with a view to their balance
sheet measurement:
Category Measurement Method of accounting for changes in value
Financial assets measured at fair value through profit or loss Fair value Changes in fair value recognized in profit or loss
Held-to-maturity investments Amortized cost Not applicable
Loans and receivables Amortized cost Not applicable
Available-for-sale financial assets General principle: fair value Changes in fair value recognized in shareholders’ equity
But
Amortized cost for equity Not applicableinstruments for which the fair value can not be reliably determined (in particular, shares not listed on an active market)
Financial assets at fair value through profit or loss
This category of assets comprises:
■ assets held for trading purposes, i.e. acquired by the enterprise with
the aim of realizing a short-term gain,
■ derivative instruments that are not expressly designated as
hedging instruments.
In the Vallourec Group, the assets concerned are all cash assets
(marketable securities, cash and cash equivalents, etc.).
Marketable securities (French SICAV and FCP mutual funds, etc.) are
measured at their fair value at the balance sheet date and changes
in fair value are recognized in financial income or loss. They are not
therefore tested for impairment. Fair values are determined mainly
by reference to market quotations.
Loans and receivables
These are mainly non-derivative financial assets with fixed or
determinable payments that are not listed on an active market.
In the Vallourec Group, this category includes:
■ receivables associated with participating interests, long-term
loans and construction effort participating loans,
■ accounts receivable and other trade receivables.
The amortized cost of short-term receivables such as accounts
receivable is usually similar to their historical cost.
Staff loans are measured in accordance with the effective interest
rate method applied to estimated future cash flows until the maturity
dates of the loans (the contractual interest rate may be lower).
Held-to-maturity investments
These are non-derivative financial assets with fixed or determinable
payments and fixed maturity that the entity has the intention and
ability to hold to maturity, other than loans and receivables and
financial assets classified by the entity in the other two categories
(measured at fair value through profit or loss and available-for-sale).
In the Vallourec Group, the only assets in this category are guarantee
deposits and guarantees.
Available-for-sale financial assets
Available-for-sale financial assets are mainly those that have not been
classified in any of the other three categories.
In the Vallourec Group, the main assets in this category are non-
consolidated participating interests. These are generally unlisted
shares the fair value of which cannot be estimated reliably. They are
stated at cost and tested for impairment during the preparation of the
consolidated financial statements.
Vallourec 2005 Annual Report
Impairment testing of financial assets
Financial assets carried at amortized cost and available-for-sale
financial assets measured at cost must be tested for impairment at each
balance sheet date if there is any evidence of impairment such as:
■ significant financial difficulties or a high probability that the
counterparty will suffer bankruptcy or restructuring,
■ a high risk of non-recovery of receivables,
■ the lender, for economic or legal reasons relating to the borrower’s
financial difficulties, granting to the borrower a concession not
initially provided for,
■ an effective breach of contract such as the failure to make a
payment (of interest, principal or both),
■ the disappearance of an active market for the financial asset
concerned.
In the case of assets carried at amortized cost, the amount of the
impairment is measured as the difference between the asset’s
carrying amount and the present value of the estimated future
cash flows, taking into account the counterparty’s situation and
determined on the basis of the financial instrument’s original
effective interest rate. The estimated cash flows of short-term assets
are not discounted.
The impairment loss thus determined is recognized in financial
income or loss of the period.
As regards “Held-to-maturity investments” and “Loans and
receivables”, if, during subsequent periods, the conditions that lead
to the impairment cease to exist, the impairment loss must be
reversed, although such reversal must not result in a carrying
amount that, on the date the impairment is reversed, exceeds what
the amortized cost would have been had the impairment not been
recognized.
As regards unlisted participating interests classified as “Available-for-
sale” whose fair value cannot be determined reliably, no impairment
loss previously recognized may be reversed in subsequent periods, even
in the event of an increase in the value of the securities concerned.
2.16.2 Cash and cash equivalents
This item consists of bank current account balances and units in short-
term cash UCITS.
The cash reconciliation in the cash flow statement is performed on
the basis of the above definition of cash, net of overdrafts and
other short-term bank borrowings.
2.16.3 Financial liabilities
The Group’s financial liabilities comprise interest-bearing bank
borrowings and derivative instruments.
Borrowings are broken down into current liabilities, which are those
amounts that must be repaid within twelve months after the balance
sheet date, and non-current liabilities, which are those amounts that
mature more than twelve months after the balance sheet date.
Interest-bearing borrowings are initially recorded at historical cost
less associated transaction costs. Such costs (loan-issuance charges
and premiums) are taken into account in the calculation of the
amortized cost in accordance with the effective interest rate method.
They are recognized in financial income or loss on an actuarial
basis over the life of the liability.
At each balance sheet date, in addition to the specific procedures
associated with hedge accounting (see below), financial liabilities are
then measured at amortized cost in accordance with the effective
interest rate method.
Variable-rate borrowings for which interest rate swaps have been
entered into are accounted for in accordance with the principles
applied to cash-flow hedges. Changes in the fair values of swaps,
linked to movements in interest rates, are recognized in shareholders’
equity to the extent that they relate to the effective portion.
Otherwise, they are recognized in financial income or loss.
2.16.4 Derivatives and hedge accounting
Group’s exposure to exchange-rate risks on commercial
transactions
In addition to the hedging of certain financial liabilities (see 2.16.3),
the Group mainly enters into hedging contracts with a view to
controlling its exposure to exchange-rate risks resulting from orders
received and sales by certain subsidiaries in currencies other than their
functional currency. In particular, significant portions of Vallourec’s
sales are invoiced by European companies in US dollars. Exchange
rate fluctuations between the euro and the dollar may therefore affect
the Group’s operating margin.
The Group manages its exposure to exchange-rate risk by
implementing hedges on the basis of regularly updated forecasts of
customer orders. Operating receivables and revenues that will be
generated by the orders are thus hedged by financial instruments,
mainly forward sales of currencies.
The Group also, to a lesser extent, enters into forward purchases of
currencies to hedge its foreign currency purchase commitments.
Financial statements
71Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
72
Measurement and presentation of derivatives
Changes in the values of derivatives as compared with the values on
the date of implementation are measured at each balance sheet date.
The fair value of forward foreign exchange contracts is calculated on
the basis of market conditions and data. Since they hedge commercial
transactions, such derivatives are presented in the balance sheet
within current assets and current liabilities.
Hedge accounting
Hedging operations in respect of commercial transactions come
within the category of cash flow hedges.
The Group applies hedge accounting only in strict compliance with
the criteria of IAS 39:
■ Documentation of the hedging relationship: nature of the underlying
hedged item, term of the hedge, hedging instrument used, spot rate
of the hedge, forward points, etc.
■ Carrying out an effectiveness test on implementation of the
derivative and updating the test at least once a quarter, in the case
of cash flow hedges.
Hedge accounting within the Group is as follows:
At the balance sheet date, changes in the hedging instrument as
compared with its date of implementation are measured at fair
value and recognized in the balance sheet in derivative accounts
(asset or liability). The following are shown separately:
■ the change in the intrinsic value of the hedging instrument
(difference between the spot rate on the date of implementation of
the hedge and the spot rate on the valuation date, i.e. the balance
sheet date).
If the hedge is effective and as long as the sale (or purchase) hedged
is not recognized, changes in the intrinsic value are recognized in
shareholders’ equity, in accordance with the principles of cash-flow
hedge accounting,
If the hedging instrument is not effective (a rare occurrence given the
procedures introduced by the Group), the change in the intrinsic
value of the derivative is recognized in financial income or loss,
■ the change in the time value (premium/discount) is systematically
recognized in financial income or loss, since this component is not
included in the hedging relationship.
The sale (purchase) corresponding to the sales forecasts (purchase
orders) hedged is recognized at the spot rate of the hedging contract
(i.e. the spot rate on the date of implementation). The account
receivable (account payable) is initially recognized at this same
spot rate.
At each balance sheet date, hedged foreign currency accounts
receivable and accounts payable are measured and recognized at the
exchange rate ruling on the balance sheet date. The difference
between that rate and the rate used on initial recognition (spot rate
on the date of implementation of the hedge) or the rate ruling on the
last balance sheet date constitutes an exchange gain or loss
recognized in financial income or loss for the period.
As from the time the hedged item (foreign currency receivable or
payable) is recorded in the balance sheet, the change in the intrinsic
value of the hedging instrument previously recognized in
shareholders’ equity is transferred to financial income or loss.
Changes in the value of the hedging instrument and the underlying
then have a symmetrical impact on the Group’s income.
The effect of the premium/discount is recognized in financial income
or loss.
2.17 Tax Deferred tax is recognized, using the liability method, in respect of
temporary differences existing on the balance sheet date between
the tax base of the assets and liabilities and their carrying amount,
as well as in respect of tax losses, in accordance with the provisions
detailed below.
The main types of deferred tax recognized are:
■ long-term deferred tax assets (provisions for retirement
commitments - French companies) which are likely to be recovered
in the foreseeable future,
■ deferred tax assets for short-term recurring items (provision for paid
holidays, etc.) or non- recurring items (employee profit sharing,
provisions for liabilities and charges that are not deductible for tax
purposes, etc.) when they are likely to be recovered in the foreseeable
future,
■ deferred tax associated with the cancellation of entries made
solely for tax purposes in local financial statements (regulated
provisions, etc.) and restatements to ensure consistency with the
parent company or consolidated financial statements,
■ losses carried forward and long-term capital losses are recognized
only for companies and tax groups in which recovery in the
foreseeable future is probable.
Vallourec 2005 Annual Report
A deferred tax liability is not recognized in respect of goodwill or
business goodwill with the exception of those amounts that give rise
to a tax deduction (e.g. by means of an amortization charge in the
local financial statements).
The rates used to calculate deferred tax are the tax rates known on
the date the financial statements are finalized.
Deferred tax balances are never discounted.
In the balance sheet, current tax assets and liabilities relating to the
same taxable entity (e.g. tax consolidation group) are offset.
Current and deferred tax charges are recognized as income or
expenditure in the income statement unless they relate to a
transaction or event that is recognized directly in shareholders’
equity (see in particular accounting for hedging instruments,
paragraph 2.16.4).
Deferred tax balances are shown under specific headings in the
balance sheet within non-current assets and non-current liabilities.
2.18 SalesRevenues from the sale of goods are recognized in the income
statement when the following conditions are satisfied:
■ the main risks and rewards of ownership have been transferred
to the buyer,
■ the seller retains neither managerial involvement to the degree
usually associated with ownership nor effective control over the goods
sold,
■ it is probable that the financial benefits associated with the sale
will flow to the enterprise,
■ the amount of the revenues and costs incurred (or due to be
incurred) as a result of the sale can be measured reliably.
Revenues from the provision of services are recognized in the
income statement pro rata to the stage of completion at the balance
sheet date.
Revenues are not recognized if there are significant uncertainties
regarding the collectibility of the consideration due or associated
costs, or if it is possible that the goods may be returned (e.g.: buy
back or return clause).
In the event of a sale with reservation of title, the sale is recognized
on delivery of the goods if the risks and rewards have been
transferred to the buyer (the main purpose of the reservation of title
clause is to protect the seller against the risks of non-collectibility).
Revenues are measured at the fair value of the consideration
received or receivable, as determined by the agreement entered into
between the enterprise and the customer, less any trade discounts
or volume rebates allowed by the enterprise.
Reference should be made to paragraphs 2.5.2 and 2.16.4 as
regards the procedures for accounting for sales denominated in
foreign currencies.
2.19 Determination of operating income (loss) The income statement format used by the Group employs a classifica-
tion based on the nature of expenses.
Operating income is calculated as the difference between pre-tax
revenues and costs other than those of a financial nature or relating
to the income or losses of equity affiliates, and excluding any
income or losses from activities that have been or are being
discontinued.
Employee profit sharing is included in payroll costs.
German tax (“Gewerbesteuer”) is recognized in income tax.
EBITDA is an important indicator for the Group, enabling it to
measure the Group’s recurring performance. It is calculated by
taking operating income before amortization and depreciation and
removing certain material operating revenues and expenses that are
unusual in nature or occur rarely, i.e.:
■ impairment provisions relating to goodwill, other intangible assets
or property, plant and equipment and identified during impairment
tests carried out in accordance with IAS 36 (see note 2.10),
■ material restructuring costs or costs associated with staff retraining
relating to events or decisions of major importance,
■ capital gains or losses on disposals,
■ revenues and costs that would result from major litigation or
significant roll-out or capital operations (e.g. costs of integrating a
new activity).
2.20 Earnings per shareEarnings per share is calculated by dividing the Group’s consolidated
net income by the weighted average number of shares in circulation
during the financial year.
Financial statements
73Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
74
Diluted earnings per share is calculated by assuming the exercise of
all outstanding options in accordance with the “Treasury stock
method” defined in IAS 33 “Earnings per Share”.
3. Segment reporting
Given the fundamental organizational and management structure
of the Vallourec Group, the primary segment reporting format used
in accordance with the provisions of IAS 14 “Segment Reporting”
is based on the following two sectors of activity:
■ the V & M TUBES reporting format segment, which brings together
all the entities with production and marketing facilities dedicated to
the Group’s main activity, i.e. the production of hot-rolled seamless
carbon and alloy steel tubes, both smooth and threaded, for the oil
and gas industry. This activity is characterized by a highly-integrated
manufacturing process, from the production of the steel and the hot-
rolling right through to the final stages, facilitating the manufacture
of products that are suitable for a variety of markets (oil & gas, power
generation, chemicals and petrochemicals, automotive and mechanical
engineering, etc.);
■ the Automotive, Industry and Stainless Steel reporting segment,
which comprises the entities grouped around ValTubes. This segment
incorporates primarily the specific forming and machining activities
(in particular, the production of precision tubes and automotive
components), that exhibit certain similarities in terms of risks and
performance due to their business cycles. This segment also
incorporates a number of other activities, such as the production of
stainless steel tubes and forged products, whose characteristics
are very different from those described above, but which are not
presented separately due to their relative immateriality. Such
treatment is authorized by IAS 14.
The secondary segment reporting format is geographical and
distinguishes five geographical sectors, determined on the basis of
an analysis of the specific risks and rewards they present. The
segments are as follows:
■ the European Union,
■ North and Central America (USA, Mexico and Canada),
■ South America (Argentina and Brazil),
■ Asia,
■ the rest of the world (mainly the Middle East).
Business segments Note 29 shows, for each business segment, information about the
revenues and results as well as certain information on the assets,
liabilities and capital expenditure for the financial years 2004 and
2005.
Geographical segmentsNote 29 shows, by geographical segment, information about sales
(by geographical zone in which customers are located), capital
expenditure and certain information on the assets (by zone in which
they are located) for the financial years 2004 and 2005.
Vallourec 2005 Annual Report
B - CONSOLIDATION SCOPE
Fully consolidated companies % interest % interest % interest % control01/01/2004 31/12/2004 31/12/2005 31/12/2005
Cerec 100.0 100.0 100.0 100.0
Changzhou Valinox Great Wall - China 32.4 33.8 33.8 100.0
Escofier Technologie 100.0 100.0 100.0 100.0
Interfit 100.0 100.0 100.0 100.0
OMSCO Inc. - United States - - 100.0 100.0
Prinver Peisa - Mexico 54.6 55.0 100.0 100.0
Setval 100.0 100.0 100.0 100.0
Spécitubes 100.0 100.0 100.0 100.0
Valinox Asia 32.4 33.8 33.8 65.8
Valinox Nucléaire 100.0 100.0 100.0 100.0
Valinox Welded 96.0 100.0 - -
Vallourec 100.0 100.0 100.0 100.0
Vallourec Argentina (formerly Perdriel) - Argentina 100.0 100.0 - -
Vallourec Composants Automobiles Hautmont 100.0 100.0 100.0 100.0
Vallourec Composants Automobiles Vitry 100.0 100.0 100.0 100.0
Vallourec do Brasil Autopeças - Brazil 100.0 100.0 - -
V & M Holdings Inc. - United States 55.0 55.0 100.0 100.0
Vallourec Inc. - United States 100.0 100.0 100.0 100.0
Vallourec Industries Inc. - United States 55.0 55.0 100.0 100.0
V & M FRANCE 55.5 55.5 100.0 100.0
V & M DEUTSCHLAND GmbH - Germany 54.5 54.5 100.0 100.0
V & M CHANGZHOU Co. Ltd - China - - 100.0 100.0
V & M do BRASIL SA - Brazil 54.7 54.7 99.4 99.4
V & M FLORESTAL Ltda - Brazil 54.7 54.7 99.4 100.0
V & M MINERAÇAO Ltda - Brazil 54.7 54.7 99.4 100.0
V & M ONE 55.0 55.0 100.0 100.0
V & M SERVICES 55.0 55.0 100.0 100.0
V & M STAR - United States 44.3 44.3 80.5 80.5
V & M TUBES 55.0 55.0 100.0 100.0
V & M TUBES CORPORATION - United States 36.7 36.7 100.0 100.0
VALLOUREC MANNESMANN OIL & GAS FRANCE 55.3 55.3 100.0 100.0
VALLOUREC MANNESMANN OIL & GAS UK - United Kingdom 55.3 55.3 100.0 100.0
VALLOUREC MANNESMANN OIL & GAS GERMANY - Germany 54.5 54.5 100.0 100.0
Vallourec Précision Etirage 100.0 100.0 100.0 100.0
Vallourec Précision Soudage 100.0 100.0 100.0 100.0
Vallourec Tubes Canada Inc. - Canada 100.0 100.0 100.0 100.0
Valti 100.0 100.0 100.0 100.0
Valti GmbH - Germany 100.0 100.0 100.0 100.0
Valtimet SAS 49.2 51.3 51.3 51.3
Valtimet Inc. - United States 49.2 51.3 51.3 100.0
ValTubes (formerly Sopretac: merger of Sopretac and Valtubes in 2004) 100.0 100.0 100.0 100.0
VAM Far East - Singapore 28.1 28.1 51.0 51.0
VAM PC - Canada 55.0 55.0 100.0 100.0
VAM PTS - United States 28.1 28.1 51.0 51.0
Equity affiliatesHüttenwerke Krupp Mannesmann (HKM) - Germany 16.5 16.5 20.0 20.0
Pacific Tubular Limited - Jersey 13.6 13.6 24.8 24.8
Poongsan Valinox - South Korea - 25.6 25.6 50.0
P.T. Citra Tubindo - Indonesia 13.8 13.8 25.0 25.0
Tubos Soldados Atlântico - Brazil - - 20.6 20.7
The Group does not control any special purpose entities.
Financial statements
75Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
76
2004
■ On 1 January 2004, the German company Deutsche Cerec, which
was in the process of being liquidated, was deconsolidated.
■ On 2 August 2004, Poongsan Valinox, which is 50%-controlled
by Vallourec, was created in South Korea. The company specializes
in the field of welded stainless steel and titanium tubes. Exceptionally,
given the relatively immaterial amounts concerned (the Group’s
share of the company’s total assets amounted to € 5 million at
31 December 2005), this company was consolidated by the equity
method.
■ The sub-holding companies Sopretac and Valtubes merged on
16 December 2004 with retroactive effect to 1 January 2004. This
merger was carried out with a view to simplifying the Vallourec
Group structure by reducing the number of sub-holding companies.
Sopretac absorbed Valtubes and changed its name to “ValTubes”.
ValTubes owns the Vallourec Group subsidiaries whose activities come
within those included since June 2004 in the “Automotive and
Industry” and “Stainless Steel” divisions.
■ Since December 2004,ValTubes has exercised full control over its
subsidiary Valinox Welded, following the acquisition of the 4%
stake formerly held by minority shareholders.
The Group’s percentage shareholdings in Valinox Welded and its
subsidiaries (Valtimet SAS, Valtimet Inc., Valinox Asia, Changzhou
Valinox Great Wall and Poongsan Valinox) changed as a result.
■ Since December 2004,V & M TUBES has exercised full control over
its subsidiary Prinver, following the acquisition of the shares formerly
held by minority shareholders.
The Group’s percentage shareholding in Prinver changed as a result.
2005
■ On 31 January 2005, Vallourec sold to Benteler Automotive its
subsidiary Vallourec do Brasil Autopeças Ltda, which specializes in
the assembly of car rear axle units. In 2004, the company achieved
sales of 203 million Brazilian reals (€ 55.9 million).
■ On 8 February 2005, Vallourec signed an agreement for the sale
of Vallourec Argentina to a member of its senior management. The
company specializes in the machining of automotive parts and the
assembly of rear axle units for Renault Argentina. In 2004, it
achieved sales of 62 million Argentinian pesos (€ 17.1 million).
Vallourec Argentina’s business was severely affected by the slump
in Argentina.An exceptional write-down of € 3 million was booked
in 2004 before the sale.
These assembly activities were not part of Vallourec’s core business and
had not achieved the critical size necessary for their development.
■ On 23 June 2005, Vallourec acquired all of the shareholdings in
V & M TUBES1 held by Mannesmannröhren-Werke, a 100%
subsidiary of Salzgitter AG. The acquisition price fixed for this
transaction was € 545 million. This price includes the dividend due
in respect of 2004.
The transaction consisted of the linked and simultaneous acquisition:
i. By Vallourec of the 45% stake in V & M TUBES for € 534.4 million,
ii. By V & M TUBES of 1% of the capital of V & M DEUTSCHLAND
GmbH for € 3.6 million, and
iii. By V & M Holdings Inc., a subsidiary of V & M TUBES, of 33.33%
of the capital of V & M TUBES CORPORATION for € 7 million.
Following this transaction, Vallourec controls directly 100% of
V & M TUBES and indirectly 100% of V & M DEUTSCHLAND GmbH
and V & M TUBES CORPORATION.
In addition, Vallourec sold 10% of the shares in the HKM steel mill
(Germany) for € 22 million to Mannesmannröhren-Werke. Following
this sale,V & M TUBES retains a 20% stake in HKM, which continues
to be accounted for as an equity affiliate.
The acquisition was financed by the available cash of Vallourec,
V & M TUBES and V & M Holdings Inc. and by a bank loan of
€ 460 million taken out by Vallourec. Of this loan, € 311.2 million
had been drawn down by 31 December 2005, of which € 260 million
was used to finance this acquisition. Details of the loan, including
the main covenants, are provided in note 14.
In addition, a rights offering, the aim of which was to partially finance
this acquisition, was launched on 20 June 2005 (subscription period from
20 June to 1 July 2005 inclusive). € 123 million of the funds were paid
up on 13 July.
(1) The acquisition by Vallourec of the 45% stake in V & M TUBES terminatedthe joint venture agreement signed between Vallourec and Mannesmannröhren-Werke in 1997, and in particular the change of control clause (see note 33of Section 5 of the 2004 annual report).
Vallourec 2005 Annual Report
Preferential subscription rights were granted to all Vallourec’s
shareholders.
The new shares (706,312 shares) were issued at a price of € 176.95
(nominal value of € 20 and premium of € 156.95) and were
admitted to trading on the Euronext Paris Eurolist on 13 July 2005.
Accounting impact The application of IAS 32 and IAS 39 resulted, on 1 January 2005,
in the reduction in minority interests and the recognition of a
liability to Mannesmannröhren-Werke (€ 431 million), reflecting
Vallourec’s option to buy the 45% stake in V & M TUBES (change
of control clause of the joint venture agreement signed in 1997).
The acquisition by Vallourec on 23 June 2005 of the minority
interests in V & M TUBES terminated this option.This acquisition was
deemed to have been completed on the date of the legal transfer
of the shares. Due to the proximity of this date to 30 June, the
minority interests purchased have been consolidated into the
Vallourec Group’s income as from 1 July 2005.
If the acquisition had been effective as at 1 January 2005, the net
income, Group share, of the Vallourec Group would have totaled
€ 576.7 million in 2005 instead of € 473.0 million with virtually no
change in the consolidated net income.
Goodwill in respect of the 45% stake in V & M TUBES
and its subsidiaries
Under IFRS, two treatments are allowed as regards the presentation
of the difference between the price paid and the share of the
interests acquired from the minorities in companies that are already
controlled: either in assets as “goodwill” or as a reduction in
shareholders’ equity.
Vallourec has opted to treat the difference as a deduction from
shareholders’ equity (€ 1.5 million).
The Group’s share in the assets and liabilities acquired as a result
of the transaction has not been revalued.
Sale of 10% of HKM
The sale by Vallourec of 10% of HKM generated a consolidated
capital gain of € 5.9 million.
■ In July 2005, V & M CHANGZHOU Co. Ltd, a subsidiary of
V & M TUBES, was created to invest in the construction of a new plant
in China, specializing in the cold finishing of large-diameter seamless
alloy steel tubes for power generation plants produced in Germany.
Production is planned to start in the first half of 2006.
■ On 30 September 2005, OMSCO Inc. (United States), a subsidiary
of V & M Holdings Inc. (United States), was formed to acquire the
Omsco division of ShawCor Ltd (Canada), which is based in Houston
and specializes in the manufacture of steel drill pipes adapted to the
needs of the oil & gas industry, including drill pipes, heavy weight
drill pipes and drill collars and other drilling equipment.
The acquisition price was USD 120 million. Following the independent
valuation at their fair value of Omsco’s assets, goodwill of USD 45.2
million was recognized.This goodwill reflects the unique opportunity
for the Group to strengthen its presence in the high value-added drill
pipe market, particularly in North America.
OMSCO Inc. contributed USD 33.3 million to consolidated sales for
the period from 1 October to 31 December 2005, the adjusted
2005 sales amounting to USD 107.6 million.
Financial statements
77Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
78
C - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in € thousand)
Note 1 INTANGIBLE ASSETS AND GOODWILL
Concessions, Other Total Goodwillpatents, licences intangible intangibleand other rights assets assets
Gross values
At 01/01/2004 25,895 11,540 37,435 50,084
Acquisitions 1,441 1,179 2,620 -
Disposals -724 -34 -758 -
Impact of changes in exchange rates -381 -392 -773 -2,769
Other changes 400 -5 395 21
At 31/12/2004 26,631 12,288 38,919 47,336
Acquisitions 1,486 2,808 4,294 -
Acquisitions by OMSCO Inc. 1,014 8,809 9,823 38,064
Disposals -566 -17 -583 -
Impact of changes in exchange rates 1,672 853 2,525 5,735
Other changes 416 167 583 -117
At 31/12/2005 30,653 24,908 55,561 91,018
Amortization and impairment
At 01/01/2004 -17,007 -7,872 -24,879
Amortization charges for the year -2,741 -1,825 -4,566
Reversals of impairment losses 132 - 132
Disposals 629 34 663
Impact of changes in exchange rates 257 338 595
Other changes -7 -8 -15
At 31/12/2004 -18,737 -9,333 -28,070 -
Amortization charges for the year -2,744 -2,312 -5,056
Disposals 566 17 583
Impact of changes in exchange rates -1,229 -654 -1,883
Other changes 101 -35 66
At 31/12/2005 -22,043 -12,317 -34,360 -
Net values
At 01/01/2004 8,888 3,668 12,556 50,084
At 31/12/2004 7,894 2,955 10,849 47,336
At 31/12/2005 8,610 12,591 21,201 91,018
Intangible assets: intangible assets comprise mainly:
■ V & M TUBES’s right to benefit from the contract to purchase tube rounds produced by HKM. This right was capitalized for 1997 in an
amount of € 12,381 thousand and is being amortized over the period of the contract (12 years). At 31 December 2005, the residual value
amounted to € 3,868 thousand (€ 4,900 thousand at 31 December 2004 and € 5,932 thousand at 1 January 2004).
■ On the asset acquisition by OMSCO Inc. on 1 October 2005, the intangible assets were independently valued at € 9,823 thousand.They are
being amortized over a maximum period of 10 years.
Vallourec 2005 Annual Report
Goodwill is tested at the level of the CGUs (cash generating units)
as defined in the Group’s current organizational structure. Impairment
testing of the CGUs is carried out and their value in use determined
in accordance with the discounted cash flow method (see para-
graph 2.10 of the Consolidation principles section).
On 30 September 2005, V & M TUBES signed a contract to acquire
the assets of the Omsco division of ShawCor Ltd (Canada), which
is based in Houston (United States) and specializes in the manufacture
of steel drill pipes. OMSCO Inc., a wholly-owned subsidiary of
V & M Holdings Inc., was formed to acquire this division.The goodwill
of the OMSCO division is the difference between the acquisition price
and the independent appraisal of the fair value on the acquisition
date of the identifiable assets and liabilities (€ 38,064 thousand).
This goodwill reflects the unique opportunity for the Group to strengthen
its presence in the high value-added drill pipe market, particularly
in North America. The division’s intangible assets were also valued
(see intangible assets above).
The Group has a period of 12 months expiring on 30 September 2006
to finalize the valuation of OMSCO Inc.’s assets and liabilities.
As at 31 December 2005, the main components of goodwill
(V & M STAR and OMSCO Inc.) are included within the intangible
assets of the US companies. The changes in the euro value of these
components of goodwill are due to changes in the EUR/USD
exchange rate. Their carrying amount has been compared with their
value in use, defined as the present value of future cash flows,
taken from the latest five-year forecasts. These forecasts have been
prepared taking into account cyclical variations that affect selling
prices, volumes and raw material costs. The extrapolation of the
forecasts for the last year, projected to infinity, was determined by
applying a growth rate of 1%, which is the same as that used for
the purposes of the previous year’s tests.
Cash flows were discounted at a rate corresponding to the weighted
average cost of the Group’s capital, incorporating a market risk
premium and a risk premium specific to the sector. A rate of 8.6%
was used in 2005 (9% in 2004).
The comparison of the carrying amounts of the CGU’s assets with
the corresponding discounted cash flows, calculated using these
assumptions, did not result in the making of any provisions for
impairment losses in respect of goodwill as at 1 January 2004,
31 December 2004 or 31 December 2005. The impairment tests
carried out at 31 December 2004 were simpler than those carried
out at 1 January 2004 due to the absence of any material change
in the assets comprising the CGUs and the absence of indications
of impairment during the year.At 31 December 2005, more specific
impairment tests were re-introduced in the case of the V & M North
America CGU due to the acquisition of OMSCO Inc.’s assets.
GoodwillAnalysis of net values
Cash generating unit (CGU) V & M Europe V & M North America V & M do BRASIL(see paragraph 2.10 of Consolidation principles section)
Entities V & M DEUTSCHLAND V & M STAR OMSCO Inc. V & M USA V & M do BRASIL TotalAcquisition date 1997 2002 2005 2000
At 01/01/2004 9,128 36,926 N/A 1,112 2,918 50,084
At 31/12/2004 9,128 34,258 N/A 1,032 2,918 47,336
At 31/12/2005 9,128 39,555 38,350 1,067 2,918 91,018
Financial statements
79Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
Note 2 PROPERTY, PLANT AND EQUIPMENT
Land Buildings Technical Property, Other property, Totalinstallations, plant and plant and
equipment and equipment equipmentindustrial tools in progress
Gross values
At 01/01/2004 49,921 187,542 974,871 23,102 80,426 1,315,862
Acquisitions 67 2,473 42,133 49,070 6,763 100,506
Disposals -1,043 -1,504 -21,798 -584 -2,380 -27,309
Impact of changes in exchange rates -473 -2,720 -15,764 -237 -1,313 -20,507
Other changes -249 4,609 24,403 -32,560 1,739 -2,058
At 31/12/2004 48,223 190,400 1,003,845 38,791 85,235 1,366,494
Acquisitions 6,101 6,611 90,593 64,328 20,491 188,124
Acquisitions by OMSCO Inc. 241 2,572 16,574 179 305 19,872
Disposals -180 -4,096 -16,808 - -5,035 -26,119
Impact of changes in exchange rates 7,868 10,400 67,882 9,473 11,719 107,342
Other changes -723 1,358 60,637 -44,032 -3,082 14,158
At 31/12/2005 61,530 207,245 1,222,723 68,739 109,633 1,669,871
Depreciation and impairment
At 01/01/2004 -6,908 -78,902 -451,697 -573 -37,541 -575,621
Net depreciation charge for the year - -8,197 -66,045 - -8,339 -82,581
Impairment losses -1,900 -539 -1,255 -70 -4 -3,768
Reversals of impairment losses - - 583 603 160 1,346
Disposals 88 1,388 17,121 - 2,265 20,862
Impact of changes in exchange rates 70 666 3,569 - 479 4,784
Other changes 343 -754 1,999 - 406 1,994
At 31/12/2004 -8,307 -86,338 -495,725 -40 -42,574 -632,984
Net depreciation charge for the year - -8,449 -75,477 - -7,999 -91,925
Impairment losses -2,217 - -765 - - -2,982
Reversals of impairment losses - - 865 48 - 913
Disposals - 1,935 12,475 - 1,529 15,939
Impact of changes in exchange rates -2,177 -3,095 -21,292 -3 -2,457 -29,024
Other changes 124 -367 -13,842 -97 4,292 -9,890
At 31/12/2005 -12,577 -96,314 -593,761 -92 -47,209 -749,953
Net values
At 01/01/2004 43,013 108,640 523,174 22,529 42,885 740,241
At 31/12/2004 39,916 104,062 508,120 38,751 42,661 733,510
At 31/12/2005 48,953 110,931 628,962 68,647 62,424 919,918
In 2005, disposals of property, plant and equipment comprise a net amount of € 8,481 thousand (gross value € 13,506 thousand and
depreciation of € 5,025 thousand) corresponding to the disposal of Vallourec do Brasil Autopeças and Vallourec Argentina.
The lines “Other changes” correspond mainly to reclassifications between balance sheet headings.
80 Vallourec 2005 Annual Report
The most important capital expenditure projects in progress or
finalized were as follows:
2004
In Europe, capital expenditure was incurred in order to increase
production capacity in respect of boiler tubes, in particular at
V & M DEUTSCHLAND GmbH which, as well as continuing the
expansion of its production facilities begun in 2003, strengthened
its internal handling and storage facilities and increased its finishing
capacity in order to meet demand in the Chinese market. In addition,
V & M FRANCE increased the production capacity of the Saint-Saulve
steel mill by the installation of cooling system and Pyrejet equipment.
In the automotive sector, Vallourec Composants Automobiles Vitry
invested in equipment to produce engine add-ons for the models
replacing the Citroën Xsara and Peugeot 206.These add-ons improve
the safety of the passenger compartment in the event of front-end
collisions.
At the end of 2003, V & M do BRASIL embarked on a project to
increase substantially the production capacity in respect of hot-rolled
tubes. In 2004, the Brazilian plant installed a new furnace for heating
billets and modified its existing hot-rolling and finishing equipment.
The new installations became operational at the end of 2005.
At V & M FLORESTAL, the planting of highly productive eucalyptus
clones was stepped up, thus improving the company’s ability to meet
demand for charcoal as from 2012.
Changzhou Valinox Great Wall increased its production capacity in
respect of stainless steel condenser tubes used in thermal power
generation plants and, following the investment made in 2003, in
September 2004 installed two new welding lines and a new tube-
bending machine, which were brought into use in October. A new
building was constructed to house these new facilities.
More generally, the Group continued to invest with a view to
maintaining its equipment and improving the performance of its
production facilities.
2005
In V & M TUBES’s business sector, capital expenditure was incurred
in 2005 to increase production capacity in Brazil: the Group continued
with the modifications, begun the previous year, to existing rolling
and finishing plants.
The Group also allocated significant resources to its plants that finish
tubes for the power generation and oil sectors. Demand from the
Chinese market for boilers has resulted in the Group deciding to
install a plant in Eastern China equipped with facilities for the
finishing of these products. This capital expenditure was carried
out as part of the continuing expansion of V & M DEUTSCHLAND’s
facilities. Civil engineering work began in December 2005.
In the stainless steel sector, boiler tube production capacity in China
was increased.
The Group continued to invest in the maintenance and updating of
its production facilities with the aim of ensuring sufficient capacity
in periods of high activity.
Impairment testingIn the specific case of the first-time adoption of IFRS, and in view of
the positive impact on shareholders’ equity in the opening IFRS
balance sheet as at 1 January 2004, depreciation schedules have been
amended (see note on transition to IFRS - section D) and impairment
tests conducted at the level of the main reporting entities (legal
entities), i.e. the lowest level at which detailed cash forecasts are
prepared, in order to test the recoverable amount of the various
property, plant and equipment and intangible assets (excluding
goodwill) that make up the Group’s production equipment. The
only exceptions related to the grouping of the following entities:
■ HKM and V & M DEUTSCHLAND, whose individual cash flows
cannot be separately identified;
■ V & M do BRASIL, V & M MINERAÇAO and V & M FLORESTAL,
whose cash flows are closely linked.
Please refer to note 1 for information on the impairment testing of
goodwill.
Capital expenditure
Industrial investments (property, plant and equipment and intangible assets) 2004 2005
Europe 56,327 96,946
North America and Mexico 8,382 44,777
South America 36,809 73,867
Asia 1,608 6,523
TOTAL 103,126 222,113
Financial statements
81Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
82
The impairment tests did not identify any significant impairment losses
in 2004 or 2005.
Biological assetsThe Group’s Brazilian subsidiary V & M FLORESTAL cultivates eucalyptus
forests in order to produce charcoal used in V & M do BRASIL’s blast
furnaces.
As at 31 December 2004, the company was cultivating about
185,550 hectares of eucalyptus forests compared with 177,076 hectares
as at 31 December 2005.
In the absence of a benchmark market for V & M FLORESTAL,
which is fully integrated into the production cycle of V & M do BRASIL,
its main customer, the measurement at fair value required by IAS 41
“Agriculture” is not appropriate. Instead, in accordance with the
exemptions provided by IAS 41, the forest is recognized in the
consolidated financial statements at its fair value on the acquisition
date.
At 31 December 2005, the biological assets are included within
“Other property, plant and equipment” in an amount of
€ 17.3 million. V & M FLORESTAL achieved sales of € 31.5 million
in 2005.
Note 3 INVESTMENTS IN EQUITY AFFILIATESThe main equity affiliates (carrying amount greater than € 10 million) are listed below.
HKM P.T. Citra Tubindo Other TotalGermany Indonesia
At 01/01/2004 37,583 11,806 2,040 51,429
Capital increase - - 2,096 2,096
Impact of changes in exchange rates - -829 -113 -942
Dividends paid -12 -489 -295 -796
Contribution to net income of the period -31 211 117 297
Other changes - - -29 -29
At 31/12/2004 37,540 10,699 3,816 52,055
Changes in consolidation scope -11,264 - 5 -11,259
Capital increase - - 3,784 3,784
Impact of changes in exchange rates - 1,713 1,161 2,874
Dividends paid -17 -410 - -427
Contribution to net income of the period -1,267 1,322 1,107 1,162
Other changes - - 2 2
At 31/12/2005 24,992 13,324 9,875 48,191
The change in consolidation scope in 2005 resulted from the sale of the 10% shareholding in HKM (see paragraph A - Consolidation scope).
The capital increases relate to Poongsan Valinox in 2004 and Tubos Soldados Atlântico in 2005.
HKM’s contribution to consolidated net income of € -1,267 thousand in 2005 differs from the Group’s share of the company’s net income
due to the change in Vallourec’s percentage holding during 2005 (30% in the first half and 20% in the second half).
Vallourec 2005 Annual Report
Key company financial data (in € thousand) Shareholders’ equity Sales Net income
P.T. Citra Tubindo - Indonesia 2005 35,258 84,640 3,638
2004 42,863 47,548 773
2003 47,225 60,483 1,394
HKM - Germany 2005 124,958 1,924,236 30
2004 125,132 1,627,341 55
2003 125,278 1,351,802 41
The contribution to consolidated net income of the equity affiliates is as follows: 2004 2005
P.T. Citra Tubindo 211 1,322
Pacific Tubular Ltd 209 -42
HKM -32 -1,267
Poongsan Valinox -91 834
Tubos Soldados Atlântico - 315
TOTAL 297 1,162
The stock market price of P.T. Citra Tubindo’s shares was 8,500 Indonesian rupees at 31 December 2005, giving a valuation of the company
of € 14.7 million.
Note 4 OTHER NON-CURRENT ASSETS
Non- Receivables associated Loans Other Totalconsolidated with non-consolidated financialinvestments participating interests investments
At 01/01/2004 2,736 405 15,779 19,098 38,018
Gross values 15,178 1,340 14,451 16,460 47,429
Provisions -12,407 -1,332 - -158 -13,897
At 31/12/2004 2,771 8 14,451 16,302 33,532
Gross values 5,155 1,240 9,906 19,301 35,602
Provisions -2,674 -1,232 - -202 -4,108
At 31/12/2005 2,481 8 9,906 19,099 31,494
Financial statements
83Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
84
Main non-consolidated participating interests Cefival Impac technologie Finalourec
At 31/12/2004
Share of shareholders’ equity 636 - 1,077
Gross values 436 10,068 1,538
Net values 436 - 1,077
% control 16.7% 100.0% 100.0%
At 31/12/2005
Share of shareholders’ equity 478 - 863
Gross values 436 - 1,538
Net values 436 - 861
% control 16.7% - 100.0%
The reduction in non-consolidated participating interests (gross values and provisions) is due to the liquidation of Impac technologie during
2005.
Loans consist mainly of long-term construction effort participating loans. The reduction in these loans between 2004 and 2005 is the result
of the change in the measurement method associated with the application of IAS 39 on financial instruments as from 1 January 2005.These
loans are measured in accordance with the effective interest rate method applied to expected cash flows until the maturity dates of the
loans. The rate used at 31 December 2005 was 3.5% (compared with 4% at 1 January 2005).
Other financial investments consist mainly of interest-bearing security deposits in connection with tax disputes in Brazil (€ 11 million at
31 December 2004 and € 17 million at 31 December 2005, see note 15).
Maturities of other non-current assets Between 1 and 5 years Over 5 years Total
Gross values at 01/01/2004
Loans 4,662 11,117 15,779
Non-consolidated investments 33 17,625 17,658
Receivables associated with non-consolidated participating interests 4,413 - 4,413
Other financial investments 18,379 928 19,307
Total 27,487 29,670 57,157
Gross values at 31/12/2004
Loans 5,119 9,332 14,451
Non-consolidated investments 144 15,034 15,178
Receivables associated with non-consolidated participating interests 1,340 - 1,340
Other financial investments 13,952 2,508 16,460
Total 20,555 26,874 47,429
Gross values at 31/12/2005
Loans 4,274 5,632 9,906
Non-consolidated investments 188 4,967 5,155
Receivables associated with non-consolidated participating interests - 1,240 1,240
Other financial investments 16,274 3,027 19,301
Total 20,736 14,866 35,602
Vallourec 2005 Annual Report
Note 5 DEFERRED TAXATIONThe main bases used in the calculation of deferred taxation are:
■ recurring items: provisions for paid holiday, solidarity social
security contributions, etc.
■ non-recurring items: cancellation of regulated provisions, employee
profit-sharing, non-tax deductible provisions for liabilities and charges
and any restatements to ensure the conformity of company or
consolidated accounts to Group practices.
■ long-term recurring items: non-tax deductible provisions for
retirement commitments.
The following items are recognized in accordance with the liability
method:
■ long-term deferred tax assets (provisions for retirement commitments-
French companies), deferred tax assets for recurring items (provision
for paid holidays, etc.) which are likely to be recovered in the
foreseeable future,
■ deferred tax liabilities,
■ deferred tax liabilities resulting from timing differences in the
treatment of provisions for impairment of securities between the tax
groups and the consolidated financial statements,
■ losses carried forward are recognized only for companies and tax
groups in which recovery in the foreseeable future is reasonably
certain.
The rates used are the recovery rates known at the date the accounts
are closed.
Amounts of deferred tax, per tax entity, are shown net in the
balance sheet either under assets or under liabilities.
The basic income tax rate applicable to companies in France is
33.33%. French Social Security Finance Act 99-1140 of 28 December
1999 introduced an additional tax charge of 3.3% of the basic tax
due, resulting, for French companies, in a 1.1% increase in the
statutory tax rate. Finance Act 2004-1484 of 30 December 2004
provided for the progressive withdrawal of the supplementary
contribution which had been fixed, since 2002, at 3% of the basic
tax due. This contribution was reduced to 1.5% on 1 January 2005
and will be withdrawn in 2006.
The amended Finance Act 2004-1485 of 30 December 2004 provided
for:
■ the reduction in the taxation of all long-term capital gains and
losses from 19% to15% as from 2005;
■ the progressive withdrawal of the taxation of long-term net capital
gains arising on the disposal of participating interests. This taxation
will be reduced to 8% in 2006 and withdrawn as from 2007.
Accordingly, the deferred tax rates used for the French companies
in 2005 are 34.43% for current tax and 15.72% for long-term capital
gains and losses.
The deferred tax rates used in 2005 are 39.9% for Germany, 34%
for Brazil and 39.8% for the United States.
Financial statements
85Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
86
The following table provides an analysis of deferred tax assets and liabilities:
Assets Liabilities Net deferredtax liabilities
At 31/12/2004
Intangible assets - 1,677
Property, plant and equipment - 76,626
Other non-current assets 1,760 -
Current assets 12,312 -
Employee benefits 28,852 -
Other non-current liabilities - 15,603
Current provisions 2,964 -
Other current liabilities 7,338 -
Net balance 53,226 93,906 40,680
Recognition of tax losses 19,408 - -19,408
TOTAL 72,634 93,906 21,272
At 31/12/2005
Intangible assets - 2,659
Property, plant and equipment - 91,640
Other non-current assets 15,970 -
Derivatives - assets - 662
Current assets 29,908 -
Cash and cash equivalents 9 -
Bank loans and other borrowings - 209
Employee benefits 25,782 -
Other non-current liabilities - 25,213
Current provisions 2,799 -
Trade payables 558 -
Derivatives - liabilities 35,747 -
Other current liabilities - 1,928
Net balance 110,773 122,311 11,538
Recognition of tax losses 3,387 - -3,387
TOTAL 114,160 122,311 8,151
Vallourec 2005 Annual Report
The following table provides an analysis of the Group’s deferred tax balances as at 31 December 2004 and 31 December 2005:
Gross Corresponding Deferred tax Deferred taxvalues deferred tax recognized not recognized
At 31/12/2004
Tax losses carried forward 66,937 24,178 19,408 4,770
Other tax credits (long-term capital losses) 27,885 5,552 - 5,552
Other tax assets 62,467 21,089 15,673 5,416
Reclassification of net liability position - - -17,406 -
Total tax assets - 50,819 17,675 15,738
Tax liabilities -157,052 -56,353 -56,353 -
Reclassification of net asset position - - 17,406 -
Total tax liabilities - -56 353 -38,947 -
TOTAL - - -21,272 15,738
At 31/12/2005
Tax losses carried forward 16,349 3,443 3,387 56
Other tax credits (long-term capital losses) 10,038 1,578 - 1,578
Other tax assets 115,715 41,707 41,707 -
Total tax assets 142,102 46,728 45,094 1,634
Tax liabilities -154,487 -53,245 -53,245 -
Total tax liabilities - -53,245 -53,245 -
TOTAL - - -8,151 1,634
The tax losses carried forward as at 31 December 2005 relate exclusively to the subsidiary V & M FLORESTAL and consist of BRL 19 million
of tax losses carried forward taxable at 9% and BRL 30 million of tax losses carried forward taxable at 25%.
The following table provides an analysis of the changes in deferred tax:
2004 2005
As at 1 January 17,872 21,272
Impact of changes in exchange rates -743 -1,518
Recognized in income 4,143 10,576
Recognized in reserves - -22,929
Change in consolidation scope and other - 750
AS AT 31 DECEMBER 21,272 8,151
Financial statements
87Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
88
Note 6 INVENTORIES AND WORK-IN-PROGRESS
Raw materials, supplies Products in the course Finished and semi- Totaland goods for resale of production finished products
Gross values
At 01/01/2004 240,436 154,227 138,466 533,129
Changes in inventories recognized in the income statement 73,370 20,403 44,656 138,429
Impact of changes in exchange rates -2,594 -2,671 -2,303 -7,568
Other movements 1,056 -15 13 1,054
At 31/12/2004 312,268 171,944 180,832 665,044
Changes in inventories recognized in the income statement 81,830 78,110 62,616 222,556
Acquisitions by OMSCO Inc. 22,601 5,631 1,423 29,655
Other changes in consolidation scope -6,725 -151 -501 -7,377
Impact of changes in exchange rates 16,141 7,535 16,643 40,319
Other movements -30,538 - - -30,538
At 31/12/2005 395,577 263,069 261,013 919,659
Provisions
At 01/01/2004 -58,394 -8,894 -7,686 -74,974
Impact of changes in exchange rates 130 8 60 198
Charges to provisions -7,198 -1,445 -3,423 -12,066
Reversals of provisions 6,626 5,397 3,277 15,300
Other movements -350 - 352 2
At 31/12/2004 -59,186 -4,934 -7,420 -71,540
Impact of changes in exchange rates -977 -110 -590 -1,677
Charges to provisions -6,432 -4,000 -5,047 -15,479
Reversals of provisions 9,614 907 2,339 12,860
Other movements 17,348 - - 17,348
At 31/12/2005 -39,633 -8,137 -10,718 -58,488
Net values
At 01/01/2004 182,042 145,333 130,780 458,155
At 31/12/2004 253,082 167,010 173,412 593,504
At 31/12/2005 355,944 254,932 250,295 861,171
“Other changes in consolidation scope” in 2005 represent the disposal of Vallourec do Brasil Autopeças and Vallourec Argentina.
“Other movements” comprise € 30 million in the case of gross values and € 17 million in the case of provisions representing the amount
of inventories reclassified as property, plant and equipment in accordance with IAS 16.
Vallourec 2005 Annual Report
Note 8 FINANCIAL INSTRUMENTS Financial assets and liabilities
Financial assets and liabilities are measured and presented in the
balance sheet in accordance with the various categories specified by
IAS 39.
Impact of IAS 32 and IAS 39 on shareholders’ equity
and income or loss
As explained in paragraph 2.16 of the consolidation principles
section, the main impact of IAS 32 and IAS 39 relates to the
accounting treatment of hedging contracts entered into by the
Group in respect of its commercial purchase and sale transactions
in foreign currencies.The Group has also swapped to a fixed rate part
of its variable-rate debt. The other effects of the transition to IAS 32
and IAS 39 have little impact on the financial statements
(measurement of housing loans granted to staff in accordance with
the effective interest rate method and measurement at fair value of
marketable securities).
The main effects of IAS 32 and IAS 39 on the opening balance sheet
as at 1 January 2005 and on the financial statements for the year
ended 31 December 2005 are detailed in the following table.
The impact on opening shareholders’ equity is € 39.7 million after
deferred taxes (€ -24.4 million). The impact on closing shareholders’
equity is € -82.4 million after deferred taxes (€ 49.2 million).
As regards exchange rate hedges, the hedging relationship is based
on the spot rate for the currency (i.e. the intrinsic value of forward
purchases and sales of currencies). The premium and discount of
derivatives are systematically regarded as ineffective and recognized
in the income statement (financial income or loss).
Similarly, currency receivables and payables at 1 January 2005 have
been revalued at the spot rate at 1 January 2005.
The exchange rate differences arising as a result of the change in
accounting method (€ 21.5 million) have been recognized in
shareholders’ equity.
Note 7 TRADE ACCOUNTS AND NOTES RECEIVABLE
Advances Accounts Provisions Totaland receivable
deposits paid (gross)on orders (*)
At 01/01/2004 2,865 474,378 -18,045 459,198
Impact of changes in exchange rates -5 -6,809 86 -6,728
Changes in gross values 1,467 187,042 - 188,509
Charges to provisions - - -3,084 -3,084
Reversals of provisions - - 2,002 2,002
Other movements -23 - - -23
At 31/12/2004 4,304 654,611 -19,041 639,874
Impact of IAS 32/IAS 39 - -21,999 - -21,999
Acquisitions by OMSCO Inc. 61 11,742 - 11,803
Other changes in consolidation scope -221 -5,632 33 -5,820
Impact of changes in exchange rates 662 46,198 -423 46,437
Changes in gross values 3,301 226,867 - 230,168
Charges to provisions - - -3,677 -3,677
Reversals of provisions - - 9,392 9,392
At 31/12/2005 8,107 911,787 -13,716 906,178
(*) Please refer to paragraph 2.16.1 of the consolidation principles section for details of the recognition and measurement methods.
The increase in “Accounts receivable” and “Advances and deposits paid on orders” is in line with the increase in the Group’s activity.
The provision reversals in 2005 relate mainly to receivables that have become irrecoverable during the year and revaluations of provisions.
The other changes in consolidation scope in 2005 represent the disposal of Vallourec do Brasil Autopeças and Vallourec Argentina.
Financial statements
89Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
90
The position regarding hedging instruments changed from net assets
of € 89 million at 1 January 2005 to net liabilities of € 100 million
at 31 December 2005. This change is due mainly to the hedging of
commercial transactions entered into by the European subsidiaries
in US dollars. The appreciation of the US dollar against the euro
(EUR/USD rate of 1.36 at 31 December 2004 compared with
1.18 at 31 December 2005) generated a change of € 132 million
resulting from hedges in respect of currency purchase and sale
forecasts and € 43 million on hedges backed by receivables and
payables.
In view of the effectiveness of the hedges in accordance with the criteria
of IAS 39, the impact to be recognized in the income statement concerns
only the premium/discount, which is in fact a loss of € 13,758 thousand
in respect of the financial year 2005 (see note 28).
As regards interest rates, the Group fixed, by means of swaps, a part
of its variable-rate debt denominated in euros. At 31 December 2005,
the debt swapped to a fixed rate totalled € 301.2 million. On the same
date, the fair value of the swaps recognized in shareholders’ equity
was € -1.4 million.
Balance sheet items concerned At At Movements in 200501/01/2005 31/12/2005 Total Of which Of which
reserves income (loss)
1 - Derivatives recognized in the balance sheet, see note 9 (1)
Changes in the intrinsic value of forward sales of currencies and forwardpurchases(2) linked to order books and commercial bids 65,240 -66,993 -132,233 -132,233 -
Changes in the intrinsic value of forward sales of currencies (and forwardpurchases) associated with accounts receivable (and trade accounts payable (2)) 21,686 -21,721 -43,407 - -43,407
Recognition of premium/discount 2,612 -11,145 -13,757 1 -13,758
Recognition of changes in fair value of interest rate swaps -2,051 -1,398 653 653 -
Non-effective portion of hedging instruments 1,816 724 -1,092 - -1,092
Other 106 78 -28 - -28
Sub-total: Derivatives 89,409 -100,455 -189,864 -131,579 -58,285
Of which: derivatives - assets 93,355 1,846 - - -
Of which: derivatives - liabilities 3,946 102,301 - - -
2 - Accounts receivable (accounts payable(2)) hedged in currencies - forex gain/loss
Measurement at period-end exchange rate -21,450 20,280 41,730 - 41,730
Impact of hedging operations 67,959 -80,175 -148,134 -131,579 -16,555
3 - Measurement of construction loans at the effective interest rate -3,893 -3,660 233 - 233
4 - Measurement of marketable securities at fair value 1 34 33 - 33
5 - Deferred taxes (on exchange rate and interest rate hedges) -24,400 28,861 53,261 49,179 4,082
TOTAL 39,667 -54 940 -94,607 -82,400 -12,207
Impact - see table of changes in shareholders’ equity
Revaluation reserves - financial instruments 39,378 -43,023 - -82,400 -of which: Group share 21,939 -42,883 - -64,822 -
of which: minority interests 17,439 -140 - -17,579 -
Other consolidation reserves 289 290 - 1 -
Income (loss) - -12,207 - - -12,207
TOTAL 39,667 -54,940 - -82,400 -12,207
(1) Assets and liabilities offset in this table to give net position: + = net assets, - = net liabilities.(2) Amounts not material in relation to sales.
Vallourec 2005 Annual Report
At 31 December 2005, the following amounts were outstanding under forward foreign exchange contracts to hedge foreign-currency-
denominated purchases and sales:
Hedging contracts in respect of commercial transactions - Exchange rate risk 2004 2005
Forward exchange contracts: forward sales 1,043,396 1,880,606
Forward exchange contracts: forward purchases 32,594 61,342
Foreign exchange options 2,000 -
Foreign exchange swaps - -
TOTAL 1,077,990 1,941,948
Contract maturities at 31 December 2005:
Contracts in respect of commercial transactions Total One year or less One to five years Over five years
Forward exchange contracts: forward sales 1,880,606 1,680,157 200,449 -
Forward exchange contracts: forward purchases 61,342 58,193 3,149 -
TOTAL 1,941,948 1,738,350 203,598 -
Forward sales correspond mainly to sales of US dollars (€ 1,758 million of the € 1,881 million total).
The contracts were at an average EUR/USD rate of 1.26.
They usually cover an average period of six to twelve months and are mainly used to hedge firm orders and foreign currency receivables.
The average EUR/USD rate for US dollar sales outside the Group in 2005 was 1.2516.
Management of market risk
The industrial companies manage their foreign exchange positions
in respect of foreign currency transactions with the aim of hedging
against exchange rate fluctuations.
The strategy generally adopted is that as soon as an order is
received, forward contracts are entered into.
Receivables, payables and operating cash flows are thus hedged with
financial instruments - mainly forward purchases and sales.
To be eligible for hedge accounting as defined in accordance with
IAS 39, the Vallourec Group has developed its cash management and
invoicing systems to facilitate the traceability of hedged transactions
throughout the duration of the hedging instruments.
Financial statements
91Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
92
Note 9 OTHER CURRENT ASSETS
Amounts due Receivables Receivables Pre- Receivables Other Totalfrom staff re. taxes re. disposals payments re. income receivablesand social excluding of property, tax
security bodies income tax andequipment
At 01/01/2004 6,288 49,298 74 4,100 42,049 13,371 115,180
Impact of changes in exchange rates -3 17 11 -140 -292 -194 -601
Other movements 255 17,073 1,936 1,568 2,713 -937 22,608
At 31/12/2004 6,540 66,388 2,021 5,528 44,470 12,240 137,187
Impact of changes in exchange rates 171 2,438 730 595 4,543 706 9,183
Other movements 64 6,673 1,301 -690 -45,697 8,864 -29,485
At 31/12/2005 6,775 75,499 4,052 5,433 3,316 21,810 116,885
Changes in “Receivables re income tax” result from the reclassification of payments on account, which have been shown as a deduction
from the tax liability shown on the liabilities side of the balance sheet as at 31 December 2005.
Changes in “Receivables re taxes excluding income tax” are mainly due to the increase in taxes recoverable from the government (VAT).
Note 10 CASH AND CASH EQUIVALENTS
Marketable securities (gross) Cash Total
At 01/01/2004 345,388 80,502 425,890
Impact of changes in exchange rates -968 -5,201 -6,169
Other movements 4,133 61,115 65,248
At 31/12/2004 348,553 136,416 484,969
Impact of changes in exchange rates 27,394 7,071 34,465
Other movements 24,025 -2,181 21,844
At 31/12/2005 399,972 141,306 541,278
“Cash and cash equivalents” comprises cash in bank current accounts and marketable securities (shares in short-term cash UCITS and mutual
and investment funds) that are immediately available (not pledged) and risk-free.
No provisions for impairment have been booked in respect of marketable securities.
Vallourec 2005 Annual Report
USD GBP Argentinean Peso Brazilian Real Mexican Peso Others Total
At 31/12/2004 -12,019 -118 -327 319 -790 -260 -13 195
Movements 32,020 170 327 39,444 3,033 1,273 76,267
AT 31/12/2005 20,001 52 - 39,763 2,243 1,013 63,072
It should be noted that, in accordance with the option offered by IFRS 1 (“First-time Adoption of IFRS”), the Vallourec Group chose, on
1 January 2004, to reclassify under the heading “Consolidated reserves” the translation reserve accumulated since the acquisition by the
Group of the foreign subsidiaries. Main exchange rates used (Euro/Currency): Translation of balance sheet items (closing rate) and income
statement items (average rate).
USD GBP Argentinean Peso Brazilian Real Mexican Peso
2003
Average rate 1.1309 0.6919 3.3376 3.4694 12.2166
Closing rate 1.2630 0.7048 3.6670 3.6263 14.1838
2004
Average rate 1.2439 0.6787 3.6736 3.6335 14.0422
Closing rate 1.3621 0.7051 4.0506 3.6137 15.1806
2005
Average rate 1.2441 0.6838 3.8345 3.0337 13.5567
Closing rate 1.1797 0.6853 - 2.7416 12.5358
Note 11 SHAREHOLDERS’ EQUITYCapital
Vallourec’s share capital comprised 10,600,332 ordinary shares with a
nominal value of € 20 per share fully paid up as at 31 December 2005
compared with 9,869,956 shares as at 31 December 2004. The
increase was due to the issue of 730,376 new shares as a result of
the transactions described in the following two paragraphs.
Firstly, the rights offering was launched on 20 June 2005 and was
paid up on 13 July in the amount of € 122.8 million, net of costs
deducted from the issue premium of € 2.1 million. The aim of the
rights offering was to partially refinance the acquisition of the 45%
stake in V & M TUBES. The new shares (706,312 shares) were
issued at the price of € 176.95 (nominal value of € 20 and premium
of € 156.95) and were admitted to trading on the Euronext Paris
Eurolist on 13 July 2005.
Secondly, the share subscription options exercised at € 38 after
1 January 2005 resulted in the issue of 24,064 new shares (compared
with 139,730 shares in 2004), i.e. an increase of € 914 thousand,
premium included.
The preferential subscription rights in respect of own shares held were
sold and the profit on disposal increased shareholders’ equity by
€ 697 thousand (see table of changes in shareholders’ equity). The
Company held 269,749 of its own shares as at 31 December 2005.
Reserves, financial instruments
In accordance with IAS 39 on financial instruments, postings to this
reserve account are made in respect of two types of transactions:
■ effective currency hedges in respect of the order book and
commercial bids. Changes in the intrinsic values at the period end
are recognized in shareholders’ equity.
■ variable-rate borrowings in respect of which interest rate swaps
(to a fixed rate) have been entered into. They are accounted for in
accordance with the cash flow hedge method. Changes in the fair
value of swap contracts, linked to interest rate movements, are
recognized in shareholders’ equity.
Translation reserve
The translation reserve arises as a result of the translation of the share-
holders’ equity of subsidiaries outside the euro zone. The movement
in the reserve corresponds to changes in exchange rates used to
translate the shareholders’ equity and income or loss for the year of
such subsidiaries. Components of the reserve may only be written
off to the income statement in the event of the disposal of a foreign
subsidiary.
Financial statements
93Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
94
Note 12 EARNINGS PER SHAREBasic earnings per share is calculated by dividing the net income for the financial year attributable to the ordinary shareholders by the weighted
average number of ordinary shares in circulation during the financial year.
Diluted earnings per share is calculated by dividing the net income for the financial year attributable to the ordinary shareholders by the
weighted average number of ordinary shares in circulation during the financial year (adjusted for the effects of dilutive options).
Details of the earnings and numbers of shares used to calculate basic and diluted earnings per share are given in the following table:
2004 2005
Net income attributable to the ordinary shareholders for basic earnings per share 145,024 472,985
Weighted average number of ordinary shares for basic earnings per share 9,512,058 9,938,830
Effect of dilution - share purchase and share subscription options 83,061 161,911
Adjusted weighted average number of ordinary shares for diluted earnings per share 9,595,119 10,100,741
DILUTED EARNINGS PER SHARE 15.1 46.8
Note 13 MINORITY INTERESTS
Reserves Translation difference Net income Total
At 01/01/2004 432,462 - - 432,462
At 31/12/2004 395,566 -16,104 120,219 499,681
At 31/12/2005 -54,343 7,092 159,404 112,153
An analysis of minority interests is provided in the table of changes in shareholders’ equity. The difference between the position as at
31 December 2004 and that as at 31 December 2005 is due to the acquisition by Vallourec of the 45% minority interest in V & M TUBES;
the amounts as at 31 December 2005 represent the interests of the Sumitomo and Timet groups in the subsidiaries controlled by Vallourec.
Note 14 BANK LOANS AND OTHER BORROWINGSFinancial liabilities - Non-current liabilities
Bank Other bank Totalloans and similar
borrowings
At 01/01/2004 201,935 67 202,002
New borrowings taken out 25,995 48 26,043
Repayments -38,967 -131 -39,098
Impact of changes in exchange rates 40 -18 22
Other movements -1,782 2,628 846
At 31/12/2004 187,221 2,594 189,815
Reclassification of minority interests as liabilities in accordance with IAS 32 - 01/01/2005 - 431,280 431,280
Purchase of minority interests on 23 June 2005 - -436,627 -436,627
New borrowings taken out 303,786 147 303,933
Repayments -24,245 -741 -24,986
Impact of changes in exchange rates 5,629 794 6,423
Other movements -3,119 2,908 -211
At 31/12/2005 469,272 355 469,627
Vallourec 2005 Annual Report
Financial liabilities - current liabilities
Bank Bank loans Accrued Other bank Totaloverdrafts (one year interest and similar
or less) borrowings(one year or less)
At 01/01/2004 200,889 92,714 3,550 109 297,262
Impact of changes in exchange rates 275 42 - 16 333
Other movements 19,266 -73,454 -2,793 - -56,981
At 31/12/2004 220,430 19,302 757 125 240,614
Impact of changes in exchange rates 22,769 2,372 - - 25,141
Other movements -7,798 16,952 556 872 10,582
At 31/12/2005 235,401 38,626 1,313 997 276,337
■ In 2003,Vallourec entered into a € 150 million credit facility with
the Crédit Agricole group maturing in September 2008.The borrowing
was initially at a variable rate, but was subsequently converted into
a fixed rate borrowing by the use of swaps.The loan contract requires
the Vallourec Group to maintain its ratio of consolidated net debt to
consolidated shareholders’ equity at less than or equal to 75%.
■ In March 2005, a seven-year € 460 million credit facility was made
available to Vallourec by a syndicate of banks to finance the
acquisition of the 45% stake in V & M TUBES.
This € 460 million facility requires Vallourec to maintain its ratio of
consolidated net debt to consolidated shareholders’ equity at less
than or equal to 75% calculated on 31 December each year and for
the first time on 31 December 2005.A change of control of Vallourec
could result in the repayment of the loan if so decided by a two-thirds
majority of the participating banks. It is also provided that the loan
would become immediately repayable if the Group failed to make
a repayment in respect of one of its other borrowings (“cross
default”), or if a significant event occurred affecting the Group’s
business or financial situation and ability to repay its borrowings.
The Group complied with these covenants as at 31 December 2005.
On 31 December 2005, tranches of € 260 million and USD 25 million
were drawn down for respectively seven and five years and are
included in non-current liabilities. A tranche of € 30 million was
drawn down for six months on 12 October 2005 and is included in
current liabilities.
■ At the end of June 2005,V & M TUBES repaid the balance of USD
48 million (equivalent to € 35 million) of the borrowing entered into
on the acquisition of V & M STAR (USD 16 million matured in 2005
and USD 32 million was repaid early).
■ In addition, as a result of the capital expenditure it incurred, the
subsidiary V & M do BRASIL needed to put in place several medium-
term financing lines denominated in BRL (comprising mainly BRL
99 million from BNDES and BRL 52 million from Banco do Nordeste).
The movements in “Other bank loans and similar borrowings”
consist mainly of the treatment of the “put option” exercisable by
Mannesmannröhren-Werke in connection with the implementation
of IAS 32 and IAS 39 as at 1 January 2005:
At 1 January 2005,a financial liability was recognized of an amount equal
to the discounted fair value of the purchase amount (€ 431 million).This
amount takes into account the acquisition price of € 545 million which
includes the net income until the acquisition date.This financial liability
was recognized by deduction from the amount at which the minority
interests in V & M TUBES were recorded in shareholders’ equity in the
IFRS balance sheet as at 31 December 2004, and as a deduction from
shareholders’ equity - Group share, in the case of the portion of the
liability that exceeds said minority interests.The costs directly associated
with the transaction have also been deducted from shareholders’ equity
- Group share.The purchase by Vallourec on 23 June 2005 of the 45%
stake in V & M TUBES held by Mannesmannröhren-Werke terminated
the put option (see information on consolidation scope - A).
A discounting charge in respect of the put option of € 5.3 million
is included in financial income (loss) (see note 27).
Financial statements
95Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
96
Indebtedness by currency
USD EUR CAD BRL GBP Total
At 01/01/2004 - currency thousand 122,789 381,554 1,823 45,551 4,598 N/A
At 01/01/2004 - € thousand 97,502 381,554 1,123 12,561 6,524 499,264
At 31/12/2004 - currency thousand 131,606 313,208 - 69,774 642 N/A
Au 31/12/2004 - € thousand 96,620 313,208 - 19,690 911 430,429
At 31/12/2005 - currency thousand 162,471 562,234 1,632 122,875 - N/A
At 31/12/2005 - € thousand 137,722 562,234 1,189 44,819 - 745,964
Breakdown by maturity of non-current bank loans and other borrowings
> 1 year > 2 years > 3 years > 4 years 5 years or more Total
At 01/01/2004 16,080 15,660 15,054 151,709 3,499 202,002
At 31/12/2004 18,375 14,731 152,253 1,555 2,901 189,815
At 31/12/2005 4,418 156,096 6,805 6,512 295,796 469,627
Indebtedness over one year at the outset, by rate
The following table groups the current and non-current portions of bank loans and other bank and similar borrowings.
Rate < 3% Rate 3% to 6% Rate 6% to 10% Rate >10% Total
At 01/01/2004
Fixed rates 4,871 100,495 76,225 12,561 194,152
Variable rates - 100,673 - - 100,673
Total 4,871 201,168 76,225 12,561 294,825
At 31/12/2004
Fixed rates 3,987 100,217 6,088 13,602 123,894
Variable rates - 85,348 - - 85,348
Total 3,987 185,565 6,088 13,602 209,242
At 31/12/2005
Fixed rates 1,171 301,351 - 44,818 347,340
Variable rates 161,910 - - - 161,910
Total 163,081 301,351 - 44,818 509,250
Indebtedness contracted at a rate higher than 10% is for companies based in Brazil.
Vallourec 2005 Annual Report
Reorganization measures
In its financial statements for the year ended 31 December 2004,
Vallourec Précision Etirage (VPE) booked a provision in respect of its
legal and contractual obligations regarding the collective redundancy
plan for the Laigneville site. This provision of € 8,055 thousand was
calculated on the basis of the most likely outcome, taking into account
redundancies already announced at 31 December 2004. It mainly
consists of estimated expenses to be incurred under the redundancy
scheme, i.e. € 7,445 thousand, the balance representing an estimate of
the costs to be incurred in connection with the closure of the site
including contract termination costs.This provision was partly used in 2005
and the remaining provision required was estimated at € 1,834 thousand
at 31 December 2005, to cover the estimated expenses for 2006.
Note 15 PROVISIONS FOR LIABILITIES AND CHARGES
Non-current liabilities Provisions for environmental risks
At 01/01/2004 1,251
Allocations for the year 1,988
Provisions used -81
Impact of changes in exchange rates -27
Other 239
At 31/12/2004 3,370
Allocations for the year 363
Provisions used -
Impact of changes in exchange rates 574
Other -
At 31/12/2005 4,307
This provision covers, in particular, the costs of soil treatment at two industrial sites: the full amount of the likely costs has been
provisioned.
The provision also covers the clean-up costs in respect of the mine in Brazil: amounts are provided as and when minerals are extracted,
based on the volumes extracted.
Current liabilities Commercial Orders Reorganization Tax risks Other Totaland other outstanding measures (duties,
disputes - losses on taxes, tax completion audits, etc.)
At 01/01/2004 13,908 7,883 9,422 19,742 5,809 56,764
Allocations for the year 10,707 3,486 9,607 3,470 6,419 33,689
Provisions used -5,461 -3,911 -5,163 -2,408 -239 -17,182
Other reversals -2,162 - -1,479 -1,643 -949 -6,233
Impact of changes in exchange rates -24 8 - 60 1 45
Other -726 - - -1,502 104 -2,124
At 31/12/2004 16,242 7,466 12,387 17,719 11,145 64,959
Allocations for the year 9,368 929 - 14,065 7,485 31,847
Provisions used -6,630 -5,096 -9,634 -8,856 -4,678 -34,894
Other reversals -2,205 - -261 - -1,098 -3,564
Impact of changes in exchange rates 2,194 40 - 6,125 653 9,012
Other -383 - - 6 -499 -876
At 31/12/2005 18,586 3,339 2,492 29,059 13,008 66,484
Financial statements
97Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
98
In connection with this redundancy scheme,VPE has received a claim
for damages of € 40 thousand on behalf of 18 former employees.
Given the general conditions that necessitated implementation of the
scheme, we consider that there is no need to book any additional
provisions.
Provision for tax risks
This provision mainly relates to risks in connection with tax disputes
in Brazil and has given rise to the payment of security deposits
(see note 4).
Other current provisions
This heading comprises various provisions in respect of guarantees
as to liabilities, penalties for delay, disputes with employees, etc.
The legal proceedings instituted on 22 June 2001 in the Trenton (New
Jersey) court by two US companies, MTI and Net Shape Inc.,
concerning the sale of a licence by MPS, a 99.7%-owned subsidiary
of Vallourec, to Carpenter Technology ended in December 2004
when the judge ruled that the law suit filed against Vallourec was
inadmissible. No appeal has been lodged and the case is closed.
Note 16 EMPLOYEE BENEFITS
Germany France United Kingdom Other Total
At 31/12/2004
Discounted value of the commitment 141,152 37,349 58,674 11,389 248,564
Retirement 115,746 27,930 58,674 8,965 211,315
Early retirement commitments 13,754 4,618 - - 18,372
Long-service awards and medical benefits 11,652 4,801 - 2,424 18,877
Fair value of the plan assets - - -48,628 -1,969 -50,597
Actuarial gains and losses -79 1,423 1,064 -1,495 913
Provision 141,073 38,772 11,110 7,925 198,880
At 31/12/2005
Discounted value of the commitment 171,728 42,665 85,834 21,173 321,400
Retirement 141,524 34,787 85,834 17,885 280,030
Early retirement commitments 16,236 2,811 - - 19,047
Long-service awards and medical benefits 13,968 4,838 - 3,290 22,096
Fair value of the plan assets - -900 -59,969 -4,045 -64,914
Actuarial gains and losses -20,433 -4,324 -15,875 -5,877 -46,509
Provision 151,295 37,212 9,990 11,253 209,750
Vallourec 2005 Annual Report
The main actuarial assumptions used to value the commitments of post-employment benefit schemes, given the duration of the schemes,
are as follows:
Germany France United Kingdom Other
At 31/12/2004
Discount rate 5.25% 4.75% 5.50% between 5.87% and 9.65%
Long-term return on plan assets N/A N/A 7.00% between 8.50% and 9.65%
Rate of salary increase 2.75% 2.75% 4.30% between 3.22% and 3.50%
At 31/12/2005
Discount rate 4.25% 4.00% 4.75% between 4.00% and 9.65%
Long-term return on plan assets N/A 4.00% 6.50% between 4.00% and 9.65%
Rate of salary increase 2.75% 2.75% 4.25% between 1.00% and 3.50%
The Vallourec Group participates in the financing of additional
retirement schemes or other long-term benefits for its employees, in
accordance with custom or legal requirements.
Some of these schemes are defined benefit schemes and the Group has
thereby entered into a long-term commitment towards its employees.
In 2003, an exhaustive review was carried out of the defined benefit
schemes in respect of all companies within the consolidation scope.
No significant amendments were made to these schemes during
2004 or 2005, the presentation in 2005 of the commitments in
Mexico corresponding to an accounting reclassification.
At 31 December 2004, as at 31 December 2003, the Group recognized
in its financial statements provisions for all material defined benefit
schemes on the basis of the CNC’s (the French Conseil National de
la Comptabilité) recommendations of April 2003. The process of
identifying and classifying retirement and similar benefit schemes did
not bring to light any additional commitments as defined by IAS 19
“Employee Benefits”.The methods used by the Vallourec Group under
French GAAP for measuring retirement and similar commitments do
not differ materially from the provisions of IAS 19.
As was the case previously under French GAAP, the commitments not
recognized in the balance sheet (mainly actuarial gains and losses)
correspond to changes in or the non-crystallization of assumptions,
the effect of which is amortized over time using the “corridor”
method. However, when preparing the opening IFRS balance sheet
as at 1 January 2004, the Vallourec Group decided to recognize all
actuarial gains and losses on that date as a reduction in shareholders’
equity. Material unrecognized actuarial surpluses and deficits are
amortized over the employees’ expected remaining period of service
in accordance with the corridor method as described in IAS 19
(Germany: 13 years, France: 14 years, United Kingdom: 18 years).
The amortization begins in the financial year following the year in
which the surpluses and deficits are ascertained.
For 2004 and 2005:
■ the value of payments into the plans was € 3,868 thousand in 2004
and € 5,849 thousand in 2005;
■ the return on plan investments was € 5,043 thousand in 2004
and € 9,278 thousand in 2005.
The commitments are valued by actuaries independent of the Group.
The assumptions used take account of the specific characteristics of
the schemes and companies concerned.
France
Commitments in France correspond to retirement gratuities and
long-service award schemes.
The main change in the assumptions used in 2005 is the reduction
in the discount rate to 4.0%.A sensitivity test was carried out on the
retirement gratuities and long-service awards: a 0.5% reduction in
the discount rate would result in a change of about € 1.7 million
in these commitments.
In France, the provision booked in respect of "CASA" agreements
(early retirement programmes for older employees) implemented
in 2002 amounted to € 4.6 million as at 31 December 2004 and
€ 2.9 million as at 31 December 2005.
Under the terms of the agreement entered into with the government,
the scheme has been closed since 28 February 2005, that being the
latest date on which employees were able to join the scheme.
Financial statements
99Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
100
At 31 December 2005, 162 employees had entered into such
agreements compared with 186 at 31 December 2004.
On 14 September 2005, an additional retirement scheme with its own
plan assets was set up for senior management. A contribution of
€ 900 thousand was made to outsource the scheme to an insurance
company. Since this is a defined benefit scheme, it is valued on an
actuarial basis and recognized in accordance with IAS 19 until the
retirement date of the employee concerned. As a result of the
amortization of past service costs, this scheme has generated a
surplus of around € 720 thousand, which is recognized in the
balance sheet since it represents an actual future saving for the
Group. The past service cost not recognized amounted to
€ 3,397 thousand at 31 December 2005.
Germany
The Group’s employees in Germany benefit from a variety of schemes
(retirement, deferred compensation, long-service awards and early
retirement) which constitute long-term commitments for the Group.
The actuarial gains and losses are mainly associated with successive
reductions in the discount rates used: 5.25% at 31 December 2004
and 4.25% at 31 December 2005.
The main change in the assumptions used in 2005 is the reduction in
the discount rate to 4.25%. A sensitivity test was carried out on the
two main German pension plans: a 0.5% reduction in the discount rate
would result in a change of about € 10.9 million in these commitments.
The significant increase in these commitments is mainly due to the
reduction in the discount rate: the reduction from 5.25% to 4.25%
generated approximately € 23 million of actuarial losses out of a net
total of € 20.3 million.
United Kingdom
The Group participates in the financing of a defined benefit pension
scheme for Group employees.The commitments are carried off balance
sheet and managed by leading institutions in the financial markets.
Since 2004, a continuing improvement has been noted: during the
financial year 2005, the return on plan assets was € 9.3 million
(€ 4.8 million in 2004) compared with an expected return of
€ 3.5 million, i.e. an actuarial gain of € 5.9 million.
The discount rate was reduced to 4.75%. A sensitivity test was carried
out on this plan: a 0.5% reduction in the discount rate would result
in a change of about € 9.5 million in this commitment.
The increase in commitments in the United Kingdom (actuarial
gains and losses for the financial year of € 22.8 million) is due, on
the one hand, to the reduction in the discount rates (impact of around
17%, or € 10 million) and, on the other hand, to changes in mortality
rates (impact of around 23%, or € 13.5 million) following the
publication of new national tables.
Brazil
In Brazil, the employer participates in the financing of retirement
gratuities and long-service awards. The retirement gratuities are
partially carried off balance sheet in a pension fund with total assets
of € 482 thousand at 31 December 2004 and € 689 thousand at
31 December 2005. The amounts paid into the fund totalled
€ 279 thousand in 2004 and € 595 thousand in 2005.
Mexico
Mexico was not one of the countries included in the review as at
31 December 2004 since local standards were considered to be
similar to IFRS and any restatement deemed not material. This year,
valuations in accordance with IAS 19 were carried out and included
in the report. The Group’s commitments in Mexico, which amounted
to € 471 thousand, correspond mainly to retirement gratuities
which are partially financed.
United States
There is a retirement scheme under which benefits are not linked to
salary. Until 31 December 2004, it was assumed that benefits
would no longer increase in the future. Following two consecutive
years of increases, this assumption has been reviewed (change of
3%), which resulted in an increase in commitments of around
€ 2.7 million.
In addition, the reduction in the discount rate and a more significant
than forecast movement in salaries in respect of a limited number of
employees resulted in the generation of actuarial losses for the period.
The changes in the assumptions are deemed to have been made
during 2005 and the charge for retirement commitments amended
accordingly. As regards the assumption concerning the increase in
medical benefits, the rate used will reduce successively from 2005
to 2012 and then be fixed beyond 2012, i.e. from 10.4% to 5.9%
for active employees and from 12.2% to 6.5% for retired employees.
Other countries
Provisions are made in respect of commitments in other countries
in accordance with local standards. They are judged to be not
material at Group level.
The charges recognized during the year comprise additional rights
acquired in respect of an additional year’s service, the change in rights
existing at the beginning of the year due to discounting, the past
Vallourec 2005 Annual Report
service cost recognized during the period, the expected return on plan
assets, the impact of reductions in or liquidations of plans and the
amortization of actuarial gains and losses. The portion relating to the
discounting of rights is now recognized within financial income or
loss and the return on plan assets is recognized within financial
income.
An analysis of these charges is provided in the following table:
Germany France United Kingdom Other Total
At 31/12/2004
Cost of services provided 7,350 2,737 1,279 1,246 12,612
Interest charges on the commitment 6,849 1,760 3,124 601 12,334
Expected return on plan assets - - -2,976 -87 -3,063
Net actuarial gains/losses recognized during the period -579 -325 - -773 -1,677
Net charge recognized 13,620 4,172 1,427 987 20,206
Actual return on plan assets - - 4,801 242 5,043
At 31/12/2005
Cost of services provided 8,944 1,809 1,392 2,033 14,178
Interest charges on the commitment 7,184 1,530 3,261 961 12,936
Expected return on plan assets - - -3,510 -267 -3,777
Net actuarial gains/losses recognized during the period 1,537 -183 - 780 2,134
Past service costs - 74 - 5 79
Impact of any reduction or liquidation - - - -169 -169
Net charge recognized 17,665 3,230 1,143 3,343 25,381
Actual return on plan assets - - 9,341 -63 9,278
The changes in assets associated with these benefits are as follows:
Germany France United Kingdom Other Total
At 01/01/2004
Value of the assets N/A N/A 43,451 555 44,006
Movements during the period N/A N/A 5,177 1,414 6,591
At 31/12/2004 N/A N/A 48,628 1,969 50,597
Value of the assets N/A - 48,628 1,969 50,597
Movements during the period N/A 900 9,961 1,488 12,349
Impact of changes in exchange rates N/A - 1,380 588 1,968
At 31/12/2005 N/A 900 59,969 4,045 64,914
Financial statements
101Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
102
The movements during the year in the net liabilities recognized in the balance sheet are as follows:
Germany France United Kingdom Other Total
Provision at 01/01/2004 134,361 39,034 11,907 8,956 194,258
Total charge for the period 13,620 4,172 1,427 987 20,206
Benefits or contributions to the funds -6,907 -4,951 -2,250 -1,681 -15,789
Impact of changes in exchange rates - - 26 -338 -312
Other - - - 517 517
Provision at 31/12/2004 141,074 38,255 11,110 8,441 198,880
Total charge for the period 17,665 3,230 1,143 3,343 25,381
Benefits or contributions to the funds -7,444 -4,679 -2,587 -1,982 -16,692
Impact of changes in exchange rates - - 324 1,913 2,237
Other (reclassifications, etc.) - -104 - 48 -56
Provision at 31/12/2005 151,295 36,702 9,990 11,763 209,750
Amounts written off as expenses in respect of defined contribution plans:
Workers Management and Totalsupervisory staff
At 31/12/2004
Employer’s share of retirement contributions 6,536 9,017 15,553
Life insurance paid by the employer 669 875 1,544
Other retirement contributions 1,536 160 1,696
TOTAL 8,741 10,052 18,793
At 31/12/2005
Employer’s share of retirement contributions 7,222 9,241 16,463
Life insurance paid by the employer 1,106 1,157 2,263
Other retirement contributions 29 119 148
TOTAL 8,357 10,517 18,874
Vallourec 2005 Annual Report
Other employee benefits (options)
- Share subscription options
The Extraordinary General Meeting held on 15 June 2000 (first resolution) authorized the Management Board to grant subscription options
to managers and/or employees of the Group’s companies, for a duration of five years and up to a limit of 4% of Vallourec’s share capital.
A first tranche of options was granted under this authorization on 15 June 2000. The main characteristics of these options are shown in
the table below.
Plan
Date of General Meeting 15 June 2000
Date of Management Board meeting 15 June 2000
Total number of options granted 178,500
- of which number of options granted to those employees who were members of the Executive Committee as at 31 December 2005 31,000
- number of senior managers involved 7
- exercise price (*) € 38.00
- exercise price adjusted after rights offering on 13 July 2005 (note 11) € 37.43
Number of options cancelled since date granted (**) 6,750
Date from which options may be exercised 15 June 2004
Expiry date 14 June 2007
Number of shares subscribed as at 31/12/2004 (1 option = 1 share) 139,730
- of which number of shares subscribed by members of the Executive Committee 30,250
Number of options that could be exercised at 31/12/2004 32,020
- of which number of shares that could be exercised by members of the Executive Committee 750
Number of shares subscribed in 2005 (1 option = 1 share) 24,064
- of which number of shares subscribed by members of the Executive Committee 750
Adjustment in the number of options following the rights offering (note 11) 218
Number of options that could be exercised at 31/12/2005 8,174
- of which number of options that could be exercised by members of the Executive Committee -
(*) 95% of the average price for the 20 trading sessions preceding the grant date.(**) option holders who have left the Group.
Financial statements
103Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
104
- Share purchase options
The second resolution of the Extraordinary General Meeting held on 15 June 2000 also authorized the Management Board, during a five-year
period and up to a limit of 10% of the share capital, to grant purchase options concerning existing shares that would first have to be bought
on the stock exchange in accordance with the share repurchase authorizations given by the Meeting.
A first tranche of options was granted under this authorization on 11 June 2003. The main characteristics of these options are shown in
the table below.
Plan
Date of General Meeting 15 June 2000
Date of Management Board meeting 15 June 2003
Total number of shares employees may purchase 193,000
- of which number of shares that those employees who were members of the Executive Committee as at 31 December 2005 may purchase 54,000
- number of senior managers involved 7
- exercise price (*) € 53.65
- exercise price adjusted after rights offering on 13 July 2005 (note 11) € 52.85
Number of options cancelled since date granted (**) 2,750
Number of shares that employees may purchase as at 31/12/2004 190,750
Options cancelled in 2005 500
Adjustment in the number of options following the rights offering (note 11) 2,896
Number of shares that employees may purchase as at 31/12/2005 193,146
- of which number of shares that those employees who were members of the Executive Committee as at 31 December 2005 may purchase 54,819
- number of senior managers involved 7
- exercise price adjusted after rights offering on 13 July 2005 (note 11) € 52.85
Date from which options may be exercised 11 June 2007
Expiry date 10 June 2010
Number of shares purchased as at 31/12/2005 -
(*) average price for the 20 trading sessions preceding the grant date, not discounted.(**) option holders who have left the Group.
In accordance with the transitional provisions specifically provided for by IFRS 1 and IFRS 2, the Group has recognized and measured in
accordance with IFRS 2 only the share purchase option plan - see paragraph 2.14 of the consolidation principles section. This plan gave
rise to payroll costs of € 0.9 million as at 31 December 2004 and € 0.9 million as at 31 December 2005.
Vallourec 2005 Annual Report
Note 17 OTHER CURRENT LIABILITIES
Social Tax Payables relating Deferred Other Totalsecurity liabilities to the acquisition income current
liabilities of property, liabilitiesplant and equipment
At 01/01/2004 132,892 - 7,072 6,677 15,372 162,013
Impact of changes in exchange rates -854 -481 - -1 -559 -1,895
Other movements 5,033 48,764 -1,798 2,696 3,467 58,162
At 31/12/2004 137,071 48,283 5,274 9,372 18,280 218,280
Impact of changes in exchange rates 9,361 2,691 15 5 1,287 13,359
Other movements 39,621 26,047 4,592 -3,819 1,177 67,618
At 31/12/2005 186,053 77,021 9,881 5,558 20,744 299,257
Social security liabilities were higher at 31 December 2005 due, in particular, to the increase in the liability in respect of employee profit sharing.
Note 18 INFORMATION ON RELATED PARTIES
The following transactions were entered into with related parties:
Sales Purchases Receivables due Payables due to related from related from related to related
parties parties parties parties
At 31/12/2004
Salzgitter AG Group 73,195 359,608 7,742 31,668
Rothschild & Cie - 1,150 - -
Timet Group 3,684 17,130 1,241 1,672
At 31/12/2005
Salzgitter AG Group 82,556 634,290 6,517 57,449
Rothschild & Cie - 750 - -
Timet Group 4,985 23,795 1,497 5,382
Sales to the Salzgitter AG Group concern sales of tube hollows to be drawn.
Purchases concern mainly the purchase of steel rounds from HKM, which is 30%-owned by the Salzgitter AG Group. These products are
used as raw materials in the manufacturing processes of the European rolling mills of V & M DEUTSCHLAND and V & M FRANCE.
The transactions carried out in 2004 and 2005 with Rothschild & Cie relate to the consultancy agreement to assist the Management Board
in the acquisition of the 45% stake in V & M TUBES finalized on 23 June 2005.
The transactions with the Timet Group represent mainly purchases of titanium coils used in the manufacture of welded tubes by Valtimet
and its subsidiaries.
Financial statements
105Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
106
SUPERVISORY BOARD AND MANAGEMENT BOARD REMUNERATION
The total attendance fees paid to members of the Supervisory Board in 2005 was € 230 thousand compared with € 179 thousand in 2004.
The total remuneration paid to the Executive Committee (8 members) was as follows:
2004 2005
Remuneration and benefits in kind 1,965 2,419
Retirement commitments 432 550
Supplementary pension commitments N/A 1,956
As regards retirement benefits granted to senior management, there is no specific scheme and they benefit from the Vallourec Group’s
supplementary pension scheme (Article 39 type) introduced in 2005 (see note 16).
- Share subscription options (see note 16)
Number of shares subscribed as at 31 December 2004 (1 option = 1 share) by members of the Executive Committee 30,250
Number of shares subscribed in 2005 (1 option = 1 share) by members of the Executive Committee 750
Number of options that could be exercised as at 31/12/2005 -
- Share purchase options (see note 16)
Total number of shares that the members of the Executive Committee as at 31 December 2005 may purchase 54,819
As at 31 December 2005, no loans or guarantees had been granted to senior management by the parent company Vallourec or its subsidiaries.
Note 19 OFF-BALANCE-SHEET COMMITMENTSOn 24 May 2005, due to the nature of its business,V & M FRANCE was granted a greenhouse gas emission allowance. For 2005, this allowance
amounted to 92,855 tonnes of CO2. The market value as at 31 December 2005 was € 21.10 per tonne. The remaining balance of the
allowances granted for the financial year 2005 is 14,859 tonnes. The balance of the allowances due in respect of the current three-year
period which began in 2005 amounts to 185,710 tonnes.
2004 2005
Commitments received
Guarantees and commitments received 17,093 39,824
HKM supply contract 68,429 56,707
Other commitments received 21,313 19,344
TOTAL 106,835 115,875
Commitments given (excluding financial instruments) 214,616 335,403
Vallourec 2005 Annual Report
Commitments given by maturity
2004 One year or less Over one year Over five years
Balance sheet
Long-term borrowings 209,242 19,427 186,914 2,901
Off-balance sheet
Market guarantees 62,131 38,665 22,517 949
Other security, mortgages and pledges given 46,025 9,283 13,454 23,288
Equipment leasing 58 29 15 14
Long-term leasing contract 11,482 2,592 7,246 1,644
HKM supply contract 68,429 14,406 54,023 -
Pensions and retirement benefits -913 N/D N/D -913
Other commitments 4,559 4,444 115 -
TOTAL 191,771 69,419 97,370 24,982
2005 One year or less Over one year Over five years
Balance sheet
Long-term borrowings 509,250 39,623 173,831 295,796
Off-balance sheet
Market guarantees 96,010 77,895 18,115 -
Other security, mortgages and pledges given 116,461 5,620 34,356 76,485
Long-term leasing contract 10,913 3,060 6,209 1,644
HKM supply contract 56,707 15,144 41,563 -
Pensions and retirement benefits 46,508 N/D N/D 46,508
Other commitments 8,804 8,804 - -
TOTAL 335,403 110,523 100,243 124,637
V & M TUBES and its subsidiaries benefit from a contract to purchase
tube rounds from the HKM (affiliated company) steel mill. In this
connection, commitments to collect the agreed tonnage throughout
the contract period are shown as an off-balance-sheet item. As a
counterpart, HKM’s commitment to deliver the tube rounds to the
V & M TUBES sub-group is shown under commitments received.
All material off-balance-sheet commitments, as per the accounting
standards currently in force, have been included in the above
breakdown.
In addition, in connection with its normal operations, the Group is
involved in a number of disputes and litigation which, in the
Management Board’s opinion, will not result in the Group bearing
significant costs nor will they have a material impact on its financial
situation, business or net income.
Financial statements
107Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
108
The main exchange rates used are shown in note 11.
(income statement items are translated at the average rate)
Note 20 SALES
2004 2005
France 385,977 406,414
Germany 523,417 613,568
Other EU Member States 397,610 649,982
North America (NAFTA) 685,194 1,118,899
South America 400,089 496,098
Asia 486,241 838,103
Rest of the world 159,231 184,341
TOTAL 3,037,759 4,307,405
Note 21 OTHER OPERATING REVENUES
2004 2005
Fees for concessions and patents 8,537 12,449
Operating subsidies and other revenues 17,532 11,607
TOTAL 26,069 24,056
“Operating subsidies and other revenues” represent mainly subsidies and reimbursements received from third parties.
Note 22 TAXES AND DUTIES
2004 2005
Taxes on remuneration -6,708 -7,673
Business use tax -19,380 -24,488
Property tax -6,518 -6,431
Other taxes and duties -15,200 -14,373
TOTAL -47,806 -52,965
Vallourec 2005 Annual Report
Note 23 PAYROLL COSTS AND AVERAGE NUMBER OF EMPLOYEES IN CONSOLIDATED COMPANIES
2004 2005
Payroll costs
Wages and salaries -441,215 -482,949
Employee profit sharing -18,782 -55,524
Charge in respect of share options -912 -912
Social security contributions -157,981 -177,039
TOTAL -618,890 -716,424
Average number of employees in consolidated companies
Executives 1,169 1,163
Supervisory, clerical and technical staff 3,449 3,452
Workers 12,840 12,670
TOTAL 17,458 17,285
Note 24 CHARGES TO PROVISIONS NET OF REVERSALS
2004 2005
Provisions for operating liabilities and charges -30,540 -45,454
Provisions against current assets -14,893 -19,412
Reversals of provisions for operating liabilities and charges 30,218 41,063
Reversals of provisions against current assets 17,492 22,307
TOTAL 2,277 -1,496
Note 25 AMORTIZATION AND DEPRECIATION
2004 2005
Amortization of intangible assets (see note 1) -4,566 -5,077
Depreciation of property, plant and equipment (see note 2) -84,481 -94,357
Reversals of depreciation and provisions on property, plant and equipment - 239
TOTAL -89,047 -99,195
Note 26 ASSET DISPOSALS AND RESTRUCTURING COSTS
2004 2005
Reorganization measures (net of expenses and provisions) -15,801 -1,175
Net capital gains on disposals of non-current assets 5,785 4,900
TOTAL -10,016 3,725
The capital gains on disposal correspond mainly to the disposal of consolidated participating interests (10% of HKM and all of
Vallourec do Brasil Autopeças in the first half of 2005) and the disposal of other non-current assets.
Financial statements
109Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
110
Note 27 FINANCIAL INCOME (LOSS)
2004 2005
Financial income
Income from marketable securities 10,440 13,422
Income from disposal of marketable securities 6,911 5,905
Total 17,351 19,327
Interest charges -18,913 -23,637
Other financial income and charges
Income from securities 847 938
Income from loans and receivables 2,072 2,847
Exchange losses (-) or gains (+) 6,507 4,767
Charges to provisions, net of reversals 2,373 -205
Discounting of the put option on the 45% stake in V & M TUBES (until 23/06/2005) - (see note 14) N/A -5,347
Losses (-) or gains (+) on the change in the premium/discount (see note 8) N/A -13,758
Other financial income and charges -1,854 -2,675
Total 9,945 -13,433
Other discounting charges
Financial charges: discounting of retirement commitments (see note 16) -12,333 -13,306
Financial income: discounting of certain assets and liabilities - 310
Financial income from retirement plan assets (see note 16) 3,063 4,150
Total -9,270 -8,846
FINANCIAL RESULT -887 -26,589
Vallourec 2005 Annual Report
Note 28 RECONCILIATION OF THEORETICAL AND ACTUAL TAX CHARGE
Breakdown of the tax charge 2004 2005
Current tax charge -85,305 -296,874
Deferred taxes (see note 5) -4,143 -10,576
Net charge -89,448 -307,450
Net income (loss) of consolidated companies 264,945 631,227
Tax charge -89,448 -307,450
Net income (loss) of consolidated companies, before tax 354,393 938,677
Statutory tax rate of consolidating company (see note 5) 35.43% 34.93%
Theoretical tax charge -125,561 -327,880
Impact of main losses carried forward 8,410 12,736
Impact of long-term capital gains or losses 11,379 5,579
Impact of permanent differences 9,362 20,944
Impact of temporary differences and other effects 1,502 -
Impact of differences in tax rates 5,460 -18,829
-89,448 -307,450
ACTUAL TAX RATE 25.24% 32.75%
The permanent differences consist mainly of the net income of the minority interests in V & M STAR taxed at Sumitomo group (partnership) level.
The differences in tax rates reflect mainly the diversity of tax rates applied in each country (France 34.93%, Germany 39.90%, the United States
41.19% and Brazil 34%) and, to a lesser extent, the changes in these rates from one year to the next (€ 3.3 million).
Financial statements
111Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
112
Note 29 SEGMENT INFORMATION
Business segmentsThe following tables provide, for each business segment, information on the revenues and results as well as certain information on the assets,
liabilities and capital expenditure for the financial years 2004 and 2005.
Primary segment reporting format: by business segment
2005 V & M TUBES ValTubes Vallourec Inter-segment Totaland others (*) transactions
Income statement
Sales
Sales to external customers 3,568,842 671,267 67,296 - 4,307,405
Inter-segment sales 172,655 27,436 41,306 -241,397 -
Total 3,741,497 698,703 108,602 -241,397 4,307,405
Charges to amortization and depreciation -79,739 -17,624 -765 -1,067 -99,195
Operating income (loss) 909,603 59,019 -2,835 -521 965,266
Balance sheet
Non-current assets 994,933 144,475 1,079,720 -1,062,212 1,156,916
Current assets 1,610,336 292,501 37,749 -54,506 1,886,080
Cash and cash equivalents 432,617 94,534 14,127 - 541,278
TOTAL ASSETS 3,037,886 531,510 1,131,596 -1,116,718 3,584,274
Shareholders’ equity 1,542,768 257,339 614,917 -1,024,081 1,390,943
Minority interests 81,813 30,376 - -36 112,153
Non-current liabilities 295,349 31,516 431,122 -20,322 737,665
Current liabilities 1,117,956 212,279 85,557 -72,279 1,343,513
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 3,037,886 531,510 1,131,596 -1,116,718 3,584,274
Cash flows
Capital expenditure: property, plant and equipment and intangible assets 203,354 17,716 1,043 - 222,113
Other information
Average no. of employees 13,604 3,391 290 - 17,285
Payroll costs 552,898 134,271 29,255 - 716,424
(*) Vallourec, Setval (Vallourec Group analysis and research services) and the marketing subsidiaries Vallourec Tubes Canada and Vallourec Inc.
Vallourec 2005 Annual Report
2004 V & M TUBES ValTubes Vallourec Inter-segment Totaland others (*) transactions
Income statement
Sales
Sales to external customers 2,332,918 663,724 41,117 - 3,037,759
Inter-segment sales 142,246 26,173 36,170 -204,589 -
Total 2,475,164 689,897 77,287 -204,589 3,037,759
Charges to amortization and depreciation -67,574 -19,045 -1,396 -1,032 -89,047
Operating income (loss) 336,385 29,667 -8,320 -2,452 355,280
Balance sheet
Non-current assets 719,095 155,940 503,156 -483,234 894,957
Current assets 1,107,230 289,036 65,438 -91,139 1,370,565
Cash and cash equivalents 243,661 64,471 176,837 - 484,969
TOTAL ASSETS 2,069,986 509,447 745,431 -574,373 2,750,491
Shareholders’ equity 500,398 224,343 552,436 -464,318 812,859
Minority interests 480,708 19,893 - -920 499,681
Non-current liabilities 251,574 35,801 145,156 11 432,542
Current liabilities 837,306 229,410 47,839 -109,146 1,005,409
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,069,986 509,447 745,431 -574,373 2,750,491
Cash flows
Capital expenditure: property, plant and equipment and intangible assets 84,882 17,381 863 - 103,126
Other information
Average no. of employees 13,272 3,893 293 - 17,458
Payroll costs 453,395 138,666 26,829 - 618,890
(*) Vallourec, Setval (Vallourec Group analysis and research services) and the marketing subsidiaries Vallourec Tubes Canada and Vallourec Inc.
Financial statements
113Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
114
Geographical segmentsThe following tables provide, by geographical segment, information on sales (by geographical location of the Group’s customers) and capital
expenditure as well as certain information on assets (by location in which the companies have a presence).
Secondary segment reporting format: by geographical area
2005 Europe North South Asia Rest TotalAmerica America of the
and Mexico world
Sales
Sales to external customers 1,669,964 1,118,899 496,098 838,103 184,341 4,307,405
Balance sheet
Property, plant and equipment and intangible assets (net) 442,713 258,207 228,990 11,209 - 941,119
Cash flows
Capital expenditure: property, plant and equipment and intangible assets (*) 96,946 44,777 73,867 6,523 - 222,113
Other information
Average no. of employees 10,478 1,317 5,322 168 - 17,285
Payroll costs 518,880 100,843 95,570 1,131 - 716,424
(*) Cash flows in respect of capital expenditure in the “North America and Mexico” segment comprise the acquisition of the assets of OMSCO Inc., which,in the cash flow statement, are shown as a change in consolidation scope.
2004 Europe North South Asia Rest TotalAmerica America of the
and Mexico world
Sales
Sales to external customers 1,307,004 685,194 400,089 486,241 159,231 3,037,759
Balance sheet
Property, plant and equipmentand intangible assets (net) 399,908 205,854 134,353 4,244 - 744,359
Cash flows
Capital expenditure: property, plant and equipment and intangible assets 56,327 8,382 36,809 1,608 - 103,126
Other information
Average no. of employees 10,385 1,204 5,720 149 - 17,458
Payroll costs 470,423 71,145 76,370 952 - 618,890
Vallourec 2005 Annual Report
Note 30 POST-BALANCE-SHEET EVENTSThe acquisition on 21 March 2006 by V & M TUBES of SMFI (Société
Matériel de Forage International), a company based in Cosne-sur-
Loire, France, and specialized in the manufacture of heavy-weight drill
pipes and high-tech products for oil & gas drilling.
The acquisition by VALLOUREC MANNESMANN OIL & GAS FRANCE
on 1 February 2006 of a machine shop for these same products,
located in Tarbes, France. The machine shop was previously owned
by GIAT.
During the first half of 2006, ValTubes announced the sale of its
subsidiary Spécitubes, the only company in the Vallourec Group
operating in the aerospace sector, to one of Spécitubes’s important
customers, the German company Pfalz-Flugzeugwerke GmbH (PFW).
Spécitubes has two plants in France, employs about 160 staff and
generated sales of € 27 million in 2005. The affiliation with its new
shareholder will enable Spécitubes to strengthen its position, whilst
developing complementary activities for major aerospace customers.
The acquisition by Valtimet, at the beginning of April 2006, of 75% of
CST Ltd.This Indian company, which has been renamed CSTValinox Ltd,
is located in Hyderabad and specializes in the production of tubes
for power plant condensers for the Indian market.
Vallourec will submit for approval to the General Meeting of the
shareholders to be held on 1 June 2006 the payment of a dividend of
€ 11.2 per share. This dividend is 3.5 times the 2004 dividend
(€ 3.2 per share). After taking into account the interim dividend
of € 4.0 per share already paid on 12 October 2005, the balance
remaining to be paid is € 7.2 per share, which will be paid on
5 July 2006.
Financial statements
115Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
116
D - CONSEQUENCES FOR THE VALLOURECGROUP OF THE TRANSITION TO IFRS
Pursuant to European Commission regulation 1606/2002 adopted
on 19 July 2002 for all listed companies in the European Union, as
from the financial year commencing 1 January 2005, Vallourec will
prepare its consolidated financial statements in accordance with the
International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB) and endorsed by
the European Commission.
The IFRS have thus become the framework for the preparation of
Vallourec’s consolidated financial statements, replacing French
GAAP, which was applied for the last time to the 2004 consolidated
financial statements.
This change represents a major transformation for the Group’s
internal organization and for all those – shareholders, institutional
investors, financial analysts, rating agencies and journalists – that
have a direct interest in the financial information published by the
Group.
The aim of this memorandum is to provide the necessary information
concerning the transition to IFRS (in accordance with the
recommendations of the CESR – the Committee of European
Exchange Securities Regulators – and the AMF – the French Financial
Markets Authority).
However, the Vallourec Group reserves the right, when it publishes
the final and definitive version of its first financial statements
prepared in accordance with IFRS, to amend certain accounting
policies and principles used in this memorandum.
This presentation memorandum was reviewed by Vallourec’s Executive
Board on 7 March 2005, and presented to the Finance Committee
on 2 March 2005 and to the Supervisory Board on 8 March 2005.
The information contained herein has been audited by Vallourec’s
Statutory Auditors who expressed a favourable opinion on the
information contained in this publication in their specific audit
report thereon.
1 Presentation of the quantitative impactof the transition to IFRS
1.1 Objective and content
1.2 Impact of transition to IFRS
1.2.1 Consolidated balance sheet reconciliation as at 1 January 2004
1.2.2 Consolidated balance sheet reconciliation as at 31 December 2004
1.2.3 Shareholders’ equity reconciliation as at 1 January 2004 and 31 December 2004
1.2.4 Consolidated income statement reconciliation for the period from 1 January to 31 December 2004
2 Recognition, measurement and presentationprinciples applied by the Group under IFRS
2.1 Preliminary comments
2.2 IFRS principles applied by Vallourec
2.3 Non-application of IAS 32 and IAS 39 to the 2004financial statements restated under IFRS
2.4 Principles used in the preparation of the opening IFRSbalance sheet as at 1 January 2004 and exemptionsto the general principle of retrospective application
2.5 Principles used by Vallourec in its IFRS financial statements:differences from French GAAP/IFRS options/Main impacts
2.5.1 Balance sheet presentation under IFRS
2.5.1.1 Presentation principles
2.5.1.2 Main reclassifications in the consolidated balance sheets as at 1 January and 31 December 2004
2.5.2 Income statement presentation under IFRS
2.5.3 Recognition and measurement principles
Note 1 Research and development costs
Note 2 Goodwill
Note 3 Property, plant and equipment
Note 4 Impairment of tangible and intangible assets
Note 5 Employee benefits
Note 6 Share-based payment (share options)
Note 7 Deferred taxation
Note 8 Investments in equity affiliates
Note 9 Other restatements
2.6 Levels of segment reporting used by the Vallourec Group
3 Main impact of the application of IAS 32 and IAS 39 starting 1 January 2005
Vallourec 2005 Annual Report
1.1 Objective and content
The quantitative effects of the transition to IFRS detailed below
(see 1.2) relate to:
– the preparation of the opening IFRS balance sheet as at 1 January
2004,
– the impact on the presentation and measurement of the main
balance sheet items as at 31 December 2004 and income statement
items for the period from 1 January to 31 December 2004.
As the transition to IFRS will have only a very limited impact on the
presentation of the cash flow statement prepared under IFRS, this
report is not covered.
The aim of the following reconciliations is to highlight and explain
the main effects of the change of accounting framework on the
Group’s financial position and performance. This information is not
a substitute for the more detailed comparative presentation that will
be provided in respect of the consolidated financial statements for
the financial year ended 31 December 2005, including, in particular,
comprehensive comparative notes to the financial statements for both
2005 and 2004, which will comply with the requirements of the IFRS
framework.
In order to provide investors with consistent financial information in
respect of 2005, the Vallourec Group will publish half-year financial
statements using the same IFRS transaction measurement and
recognition rules as those that will be applied to the financial
statements for the year ended 31 December 2005, but will limit the
detail in the notes to the financial statements to that required
under French regulations. A comparative information under IFRS in
respect of the period from 1 January to 30 June 2004 and a reconcili-
ation with the financial statements for that same period previously
prepared under French GAAP will be presented together with the
half-year financial statements for the period ended 30 June 2005.
1.2 Impact of transition to IFRS
In accordance with IAS 1 “Presentation of financial statements”, the
presentation of Vallourec’s consolidated balance sheet complies
with the classification of assets and liabilities as current or non-current.
The assets and liabilities in the French GAAP balance sheet have been
reclassified in accordance with these criteria (see 2.5.1).
The main differences between the presentation of the income
statement under IFRS and under French GAAP are detailed in 2.5.2.
The differences in the recording and measurement methods and their
impact are described in notes 1 to 9 in 2.5.3.
1. Presentation of the quantitative impact of the transition to IFRS
Financial statements
117Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
118
1.2.1 Consolidated balance sheet reconciliation as at 1 January 2004 The exemptions to retrospective application used in the preparation of the opening balance sheet as at 1 January 2004 are detailed in 2.4.
in € thousand
Notes Published Consolidated Other IFRS Consolidatedconsolidated balance sheet reclassi- restatements balance
balance under French GAAP fications that affect sheet under sheet under at 31/12/2003 - shareholders’ IFRS at
French GAAP IFRS presentation equity 01/01/2004at 31/12/2003 of current/
non-current items(see 2.5.1)
ASSETSNet intangible fixed assets 1 13,102 13,102 -1,196 650 12,556Goodwill 2 48,973 48,973 1,111 50,084Net tangible fixed assets 3/4 572,748 572,748 4,780 162,713 740,241Investments in equity affiliates 62,868 62,868 -11,439 51,429Other long-term investments 37,484Other non-current assets 38,018 38,018Deferred tax assets 7 29,190 3,734 -13,949 18,975
Fixed assets CRC reg. no. 99-02 / Total non-current assets IFRS 735,175 764,899 8,429 137,975 911,303
Inventories and work-in-progress 3 462,430 462,430 -3,972 -303 458,155Operating receivables 521,660Other receivables 83,773Trade receivables 459,198 459,198Other current assets 9 116,511 -1,331 115,180Cash and cash equivalents 425,890 425,890 425,890
Total current assets CRC reg. no. 99-02 / Total current assets IFRS 1,493,753 1,464,029 -3,972 -1,634 1,458,423
Assets held for sale
TOTAL ASSETS 2,228,928 2,228,928 4,457 136,341 2,369,726
LIABILITIES AND SHAREHOLDERS’ EQUITYCapital 194,605 194,605 194,605Additional paid-in capital 94,914 94,914 94,914Consolidated reserves 465,469 465,469 -123,227 71,970 414,212Translation reserve -123,227 -123,227 123,227 0Own shares -13,686 -13,686 -13,686
Shareholders’ equity - Group share 618,075 618,075 - 71,970 690,045
Total minority interests 414,429 414,429 - 18,033 432,462
Total shareholders’ equity 1,032,504 1 032,504 - 90,003 1,122,507
Borrowings and bank debt 499,063 202,002 202,002Post-employment and other long-term employee benefits 5 162,243 3,075 28,940 194,258Other provisions 7,038 402 -6,189 1,251Deferred tax liabilities 7 9,727 3,734 23,386 36,847Other long-term liabilities 1,820 1,820
Total non-current liabilities NA 382,830 7,211 46,137 436,178
Provisions for contingencies and losses 238,526 59,518 -2,754 56,764Bank overdrafts and other short-term borrowings 297,061 201 297,262Operating payables 390,864Trade payables 250,737 250,737Other liabilities 67,971Tax liabilities 44,265 44,265Other current liabilities 162,013 162,013
Total current liabilities NA 813,594 -2,754 201 811,041
Liabilities held for sale
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,228,928 2,228,928 4,457 136,341 2,369,726
Vallourec 2005 Annual Report
1.2.2 Consolidated balance sheet reconciliation as at 31 December 2004in € thousand
Notes Published Consolidated Other IFRS Consolidatedconsolidated balance sheet reclassi- restatements balance
balance under French GAAP fications that affect sheet under sheet under at 31/12/2004 - shareholders’ IFRS at
French GAAP IFRS presentation equity 31/12/2004at 31/12/2004 of current/
non-current items(see 2.5.1)
ASSETSNet intangible fixed assets 1 11,357 11,357 -1,031 523 10,849Goodwill 2 43,610 43,610 1,031 2,695 47,336Net tangible fixed assets 3/4 554,649 554,649 6,116 172,745 733,510Investments in equity affiliates 64,161 64,161 - -12,106 52,055Other long-term investments 29,145Other non-current assets 33,532 33,532Deferred tax assets 7 27,996 624 -10,945 17,675
Fixed assets CRC reg. no. 99-02 / Total non-current assets IFRS 702,922 735,305 6,740 152,912 894,957
Inventories and work-in-progress 3 600,221 600,221 -6,116 -601 593,504Operating receivables 716,787Other receivables 93,458Trade receivables 639,874 639,874Other current assets 9 137,988 -801 137,187Cash and cash equivalents 484,969 484,969 484,969
Total current assets CRC reg. no. 99-02 / Total current assets IFRS 1,895,435 1,863,052 -6,116 -1,402 1,855,534
Assets held for sale
TOTAL ASSETS 2,598,357 2,598,357 624 151,510 2,750,491
Capital 197,399 197,399 197,399Additional paid-in capital 97,428 97,428 97,428Consolidated reserves 450,221 450,221 -123,227 72,895 399,889Translation reserve -136,328 -136,328 123,227 -94 -13,195Net income (loss) for the financial year 135,720 135,720 9,304 145,024Own shares -13,686 -13,686 -13,686
Shareholders’ equity - Group share 730,754 730,754 - 82,105 812,859
Total minority interests 478,587 478,587 - 21,094 499,681
Total shareholders’ equity 1,209,341 1,209,341 - 103,199 1,312,540
Borrowings and bank debt 430,429 189,815 189,815Post-employment and other long-term employee benefits 5 171,743 27,137 198,880Other provisions 10,884 -7,514 3,370Deferred tax liabilities 7 9,635 624 28,688 38,947Other long-term liabilities 1,530 1,530
Total non-current liabilities NA 383,607 624 48,311 432,542
Provisions for contingencies and losses 257,221 64,959 64,959Bank overdrafts and other short-term borrowings 240,614 240,614Operating payables 601,972Trade payables 402,753 402,753Other liabilities 99,394Tax liabilities 78,803 78,803Other current liabilities 218,280 218,280
Total current liabilities NA 1,005,409 - - 1,005,409
Liabilities held for sale
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,598,357 2,598,357 624 151,510 2,750,491
Financial statements
119Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
120
1.2.3 Shareholders’ equity reconciliation as at 1 January 2004 and 31 December 2004
in € thousand
SHAREHOLDERS’ EQUITY - GROUP SHARE MINORITY TOTALNotes 1 Jan. Net Dividends Increase Other Translation 31 Dec. INTERESTS CONSOLIDATED
2004 income paid in capital/ difference 2004 SHARE-(loss) for add. paid-in HOLDERS’the year capital EQUITY
Shareholders’ equity under French GAAP 618,075 135,720 -15,136 5,308 -112 -13,101 730,754 478,587 1,209,341
Restatement of fixed assets, depreciation and amortization 3 110,447 5,780 -423 115,804 57,464 173,268
Restatement of retirement and similar benefits (actuarial gains and losses) 5 -17,007 1,114 -40 -15,933 -11,204 -27,137
Restatement of investments in equity affiliates 8 - -12,106 -12,106
Share option plans 6 -912 912 - -
Recognition of deferred tax offsettable against deferred tax liabilities 7 7,920 4,502 12,422 - 12,422
Other restatements 1,713 2,716 13 369 4,811 4,011 8,822
Total IAS/IFRS adjustments before tax 721,148 148,920 -15,136 5,308 813 -13,195 847,858 516,752 1,364,610
Tax impact on IAS/IFRS adjustments -31,103 -3,896 -34,999 -17,071 -52,070
Shareholders’ equity under IFRS 690,045 145,024 -15,136 5,308 813 -13,195 812,859 499,681 1,312,540
Vallourec 2005 Annual Report
1.2.4 Consolidated income statement reconciliation for the period from 1 January to 31 December 2004in € thousand
2004 IFRS Total 2004Notes French Reclass. adjust. IFRS
GAAP
Sales 3,037,759 3,037,759 Sales
Change in finished goods 64,813 246 246 65,059 Change in finished goodsOther operating revenues 26,069 26,069 Other operating revenues
Purchases consumed 3 -1,245,525 3,232 3,232 -1,242,293 Purchases consumedTaxes and duties -65,290 17,484 17,484 -47,806 Taxes and dutiesPayroll costs 6 -615,006 -2,973 -911 -3,884 -618,890 Payroll costsOther operating costs -767,233 -3,433 3,098 -335 -767,568 Other operating costsProvisions, net of reversals -10,891 11,872 1,296 13,168 2,277 Provisions, net of reversals
EBITDA 424,696 22,950 6,961 29,911 454,607 EBITDA
Amortization and depreciation 3 -94,792 -2,602 8,347 5,745 -89,047 Amortization and depreciationImpairment of assets and goodwill -12 -252 -264 -264 Impairment of assets and goodwillAsset disposals and restructuring costs -8,061 -1,955 -10,016 -10,016 Disposals of assets and restructuring costs
OPERATING INCOME (LOSS) 329,904 12,275 13,101 25,376 355,280 OPERATING INCOME (LOSS)
Financial revenues 17,351 17,351 Financial revenuesInterest costs -18,625 -288 -288 -18,913 Interest costsNet financial costs -1,274 -288 -288 -1,562 Net financial costsOther financial revenues and costs 9,945 9,945 Other financial revenues and costsOther discounting costs 5 -9,270 -9,270 -9,270 Other discounting costs
FINANCIAL INCOME (LOSS) 8,671 -9,270 -288 -9,558 -887 FINANCIAL INCOME (LOSS)
INCOME (LOSS) BEFORE TAX INCOME (LOSS) BEFORE TAXAND EXTRAORDINARY ITEMS 338,575 3,005 12,813 15,818 354,393
EXTRAORDINARY INCOME (LOSS) -11,506 11,506 11,506 NA
Employee profit sharing -2,973 2,973 2,973Income tax -69,660 -17,484 -2,304 -19,788 -89,448 Income taxNet income (loss) of equity affiliates 166 131 297 297 Net income (loss) of equity affiliates
NET INCOME OF CONSOLIDATED NET INCOME (LOSS)COMPANIES 254,436 166 10,640 10,806 265,242 OF CONTINUING ACTIVITIES
Goodwill amortization (net) -2,758 2,758 2,758 NANet income (loss) of equity affiliates 166 -166 -166Net income (loss) of discontinued operations Net income (loss) of discontinued operations
CONSOLIDATED NET INCOME 251,844 13,398 13,398 265,242 CONSOLIDATED NET INCOME
Minority interests 116,124 4,094 4,094 120,218 Minority interests
Group share 135,720 9,304 9,304 145,024 Group share
Group share:Net income per share 14.3 15.2Diluted net income per share (1) 13.9 15.1
(1) For the purpose of calculating diluted earnings per share, the Vallourec Group has opted to use the “investment of funds” method under French GAAPand the “treasury stock” method under IFRS, in accordance with IAS 33.
The presentation rules applicable to the income statement under IFRS are detailed in 2.5.2.
Financial statements
121Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
122
The effects of the transition to IFRS on the “consolidated net income” (Group share and minority interests) for the period from 1 January
to 31 December 2004 are as follows:
in € thousand
Net income (loss) under French GAAP for year ended 31 December 2004 251,844
Restatement of fixed assets, amortization and depreciation 10,484Restatement of retirement and similar benefits (actuarial gains and losses) 1,843Restatement of provisions for major repairs 1,021Restatement of leases 45Cancellation of goodwill amortization charge 2,758Share-based and similar payments -912Other restatements 479Deferred taxation -2,320
13,398
Net income (loss) under IFRS for year ended 31/12/2004 265,242
Net impact on “Consolidated net income” 13,398
of which Group share 9,304of which minority interests 4,094
2. Recognition, measurement and presentation principles applied by the Group under IFRS
2.1 Preliminary comments
The purpose of the recognition, measurement and presentation
principles applied by the Group under IFRS as described below is to:
– identify and summarize the differences compared with the
principles and methods applied by the Group under French GAAP
(see notes to the consolidated financial statements for the year
ended 31 December 2004 - section V paragraph 5.1.0 of the
Reference Document),
– inform the reader of the options made by the Group, as regards
both the options left open by certain IFRS and the specific
procedures proposed by IFRS 1 for the preparation of the opening
balance sheet as at 1 January 2004.
2.2 IFRS principles applied by Vallourec
The Vallourec Group has defined its IFRS accounting principles on the
basis of the IFRS framework that was approved by the IASB and is
mandatory for accounting periods beginning on or after 1 January
2005 (the so-called “stable platform”). This framework has been
transposed into the European Commission’s European Regulations
with the exception of certain provisions of IAS 39 “Financial Instruments:
Recognition and Measurement”, and of IFRS 4 “Insurance Contracts”
which do not affect the Vallourec Group.The following principles will
serve as a basis for the preparation of the 2005 IFRS financial
statements and have as a result been used as a basis for the
restatement of the opening balance sheet as at 1 January 2004 and
the comparative information as at 31 December 2004.
Vallourec has not applied early any standards or interpretations
approved up to now by the IASB that are mandatory for accounting
periods commencing after 1 January 2005.
However, the Vallourec Group reserves the right, when it publishes
the final and definitive version of its first financial statements
prepared in accordance with IFRS, to amend certain accounting
choices and principles used in this memorandum.
Vallourec 2005 Annual Report
2.3 Non-application of IAS 32 and IAS 39to the 2004 financial statements restatedunder IFRS
In accordance with the interim provisions specifically provided for by
IAS 32 “Financial Instruments: Disclosure and Presentation”, IAS 39
“Financial Instruments: Recognition and Measurement” and IFRS 1
“First-time Adoption of IFRS”, the Vallourec Group must apply
IAS 32 and IAS 39 as from 1 January 2005, but is making no
restatements in accordance with these standards in the presentation
of its opening balance sheet as at 1 January 2004 and that of its
comparative 2004 financial statements.
As a result, the presentation and accounting treatment of financial
instruments and hedging transactions in the 2004 consolidated
financial statements restated under IFRS remain the same as that in
the financial statements prepared under French GAAP.
A qualitative assessment of the main effects expected by Vallourec
as a result of the application of IAS 32 and IAS 39 as from 1 January
2005 is provided in paragraph 3 below.
2.4 Principles used in the preparationof the opening IFRS balance sheet asat 1 January 2004 and exemptionsto the general principle of retrospectiveapplication
In accordance with IFRS 1, the Vallourec Group’s opening consolidated
balance sheet under IFRS, prepared on the transition date of
1 January 2004, enables an opening position to be established for
assets and liabilities that are recorded and measured in accordance
with IFRS and as if these standards had been applied from the time
the Group first prepared consolidated financial statements (excluding
the impact of financial instruments – see 2.3). All adjustments
required as a result of the retrospective application of the IFRS
framework are accounted for within shareholders’ equity as at
1 January 2004 in accordance with IFRS 1.
However, the Vallourec Group has made use of the following
exemptions authorized by IFRS 1:
■ All actuarial gains and losses calculated as at 1 January 2004 in
respect of retirement and similar commitments in accordance with
IAS 19 “Employee Benefits” have been booked to opening
shareholders’ equity as at 1 January 2004.
As a result, the provision for retirement commitments recognized in
the opening balance sheet corresponds to the amount of commit-
ments to employees, net of plan assets, measured in accordance with
IAS 19 as at 1 January 2004 (see note 5 on financial impact).
The recognition of residual actuarial gains and losses in the opening
balance sheet resulted in a reduction of € 29 million (before tax) in
shareholders’ equity as at 1 January 2004.
■ The accumulated “Translation reserve” as at 1 January 2004
resulting from the translation of the financial statements of foreign
operations in accordance with the closing-rate method has been
reclassified within “Consolidation reserves”.
The translation reserve thus reclassified is no longer transferred to
the income statement in the event of a disposal after 1 January 2004
of the foreign operations concerned.
The translation reserve reclassified as at 1 January 2004, which repre-
sented a net unrealized exchange loss, amounted to € 123 million.
■ Business combinations that occurred before 1 January 2004
have not been restated.
The main transactions covered by this exemption are:
– the contributions made by MRW (Mannesmannröhren-Werke)
when V & M TUBES (55%-owned by the Vallourec Group and
45%-owned by MRW) was created in 1997,
– the acquisition of V & M do BRASIL by V & M TUBES in May 2000,
– the acquisition of V & M STAR by V & M TUBES in July 2002.
The main consequences of this exemption are:
– the retention of the values assigned under French GAAP to the
assets and liabilities of these companies at the time of acquisition,
to the extent that the residual assets and liabilities at the transition
date are eligible to be recognized under IFRS,
– no effect on goodwill, other than in certain limited cases in
which the amounts involved are not material, from the
reclassification of certain business goodwill items as goodwill.
However, in accordance with the general principle of retrospective
application, a review was performed of the assets acquired and
liabilities assumed of the acquired companies on the transition
date to ensure that they are recognized and measured in accordance
with IFRS rules.
Financial statements
123Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
124
In accordance with IFRS 2 “Share-based Payment”, only those
share subscription and share purchase option plans set up after
7 November 2002 and in respect of which the rights had not been
vested at 1 January 2005 have been restated.
As a result, only one share purchase option plan, set up by the Group
after 7 November 2002, was measured in accordance with IFRS 2.
The application of IFRS 2 had no impact on the opening balance
sheet. However, payroll costs in respect of this plan will be recognized
under IFRS as from the financial year 2004 (see note 6 for the financial
impact).
The impact of the legal revaluation of tangible fixed assets carried
out in 1976 by some French companies and the contribution values
of tangible fixed assets transferred by Vallourec to some Group
companies in 1986 and 1987 have been retained. These represent
exemptions to the general rule of recording fixed assets at acquisition
cost, applied retrospectively to property, plant and equipment in
accordance with the provisions of IAS 16.
No development expenditure has been capitalized in respect of
projects in progress at 1 January 2004, since the Group’s information
systems are not able to determine retrospectively as at 1 January
2004 those development costs that should have been capitalized in
accordance with IAS 38 “Intangible Assets” (see 2.5.3 note 1 below).
A qualitative review of the main Research and Development projects
in progress nevertheless revealed that no major projects met the
recognition criteria of IAS 38 at 1 January 2004.
2.5 Principles used by Vallourec in its IFRSfinancial statements: differences fromFrench GAAP/IFRS options/Main impacts
This analysis is organized by main topic and focuses on the standards
that will have the most material effect on the restatement of the 2004
financial statements under IFRS.
The foreseeable impact of IAS 32 and IAS 39, which will apply as from
1 January 2005, are dealt with separately (see 3).
2.5.1 Balance sheet presentation under IFRS
2.5.1.1 Presentation principles
In accordance with IAS 1 “Presentation of Financial Statements”, the
presentation of Vallourec’s consolidated balance sheet under IFRS
complies with the classification of assets and liabilities as current or
non-current. The assets and liabilities in the balance sheet prepared
under French GAAP have been reclassified according to these
criteria.
An asset is classified as current if it meets any of the following criteria:
– the realization, sale or consumption of the asset forms part of the
entity’s operating cycle;
– it is held primarily for trading purposes or for the short term and
is expected to be realized within twelve months after the balance
sheet date; or
– it is cash or a cash equivalent and there is no restriction on its
usage.
All other assets are classified as non-current.
A liability is classified as current if it satisfies either of the following
criteria:
– it is expected to be settled in the entity’s normal operating cycle;
or
– it is due to be settled within twelve months after the balance sheet
date.
All other liabilities are classified as non-current.
Vallourec 2005 Annual Report
2.5.1.2 Main reclassifications in the consolidated balance sheets as at 1 January and 31 December 2004
For the purposes of IFRS presentation, assets have been analyzed as follows:
At 1 January 2004 in € thousand
CRC reg. no. 99-02 IFRSDescription Amount Description Classification Amount
Advances and deposits paid on orders 2,865
Trade receivables, net 456,333 Trade receivables, net Current 459,198
459,198 459,198
Other operating receivables, net 62,462 Other operating receivables, net Current 62,462
Operating receivables 521,660
Sundry receivables, net 49,151 Sundry receivables, net Current 49,151
Prepaid expenses 4,100 Prepaid expenses Current 4,100
Expenses to be amortized over several years 1,332 Expenses to be amortized over several years Current 1,332
Amounts reclassified as other non-current assets -534
Other current assets 116,511
Deferred tax assets 29,190 Deferred tax assets Non-current 29,190
Other receivables 83,773
At 31 December 2004 in € thousand
CRC reg. no. 99-02 IFRSDescription Amount Description Classification Amount
Advances and deposits paid on orders 4,304
Trade receivables, net 635,570 Trade receivables, net Current 639,874
639,874 639,874
Other operating receivables, net 76,913 Other operating receivables, net Current 76,913
Operating receivables 716,787
Sundry receivables, net 59,132 Sundry receivables, net Current 59,132
Prepaid expenses 5,528 Prepaid expenses Current 5,528
Expenses to be amortized over several years 802 Expenses to be amortized over several years Current 802
Amounts reclassified as other non-current assets -4,387
Other current assets 137,988
Deferred tax assets 27,996 Deferred tax assets Non-current 27,996
Other receivables 93,458
Financial statements
125Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
126
For the purposes of IFRS presentation, liabilities have been analyzed as follows:
At 1 January 2004 in € thousand
CRC reg. no. 99-02 IFRSDescription Amount Description Classification Amount
Borrowings and bank debts 499,063 Borrowings and bank debts (due in more than one year) Non-current 202,002
Bank overdrafts and other short-term borrowings Current 297,061
499,063
Provisions for contingencies and losses 238,526 Post-employment and other long-term employee benefits Non-current 162,243
Deferred tax liabilities Non-current 9,727
Long-term provisions Non-current 7,038
Other provisions (within the context of the Group’s normal operations) Current 59,518
238,526
Operating payables 390,864 Trade payables/advances and deposits Current 250,737
Other liabilities 67,971 Tax liabilities (income tax) Current 44,265
Other current liabilities (including those due to social bodies) Current 162,013
Non-current liabilities Non-current 1,820
458,835 458,835
At 31 December 2004 in € thousand
CRC. reg. no. 99-02 IFRSDescription Amount Description Classification Amount
Borrowings and bank debts 430,429 Borrowings and bank debts (due in more than one year) Non-current 189,815
Bank overdrafts and other short-term borrowings Current 240,614
430,429
Provisions for contingencies and losses 257,221 Post-employment and other long-term employee benefits Non-current 171,743
Deferred tax liabilities Non-current 9,635
Long-term provisions Non-current 10,884
Other provisions (within the context of the Group’s normal operations) Current 64,959
257,221
Operating payables 601,972 Trade payables/advances and deposits Current 402,753
Other liabilities 99,394 Tax liabilities (income tax) Current 78,803
Other current liabilities (including those due to social bodies) Current 218,280
Non-current liabilities Non-current 1,530
701,366 701,366
Vallourec 2005 Annual Report
2.5.2 Income statement presentation under IFRS
As in the French GAAP, the consolidated income statement format used
by the Group under IFRS employs a classification based on the nature
of expenses.
Operating income (loss) under IFRS is calculated differently from
operating income (loss) under French GAAP: it is the difference
between pre-tax revenues and costs other than those of a financial
nature or relating to the income or losses of equity affiliates, and
excluding any income or losses arising from operations that have been
or are being discontinued. Operating income (loss) under IFRS
comprises the majority of the items included in “Extraordinary income
(loss)” under French GAAP. “Employee profit sharing” has been
reclassified under IFRS within payroll costs.The “German tax” included
in “Taxes and duties (other than income tax)” in operating income (loss)
under French GAAP is included within income tax under IFRS.
EBITDA is an important indicator for the Group, since it enables its
recurring performance to be measured. It is calculated by deducting
from operating income (loss) before amortization and depreciation
certain operating revenues and costs that are of significant value and
that are also unusual in their nature or are not expected to occur
frequently, i.e.
■ impairment provisions relating to goodwill or fixed assets and
identified during impairment reviews,
■ material restructuring costs relating to events or decisions of major
importance,
■ capital gains and losses on disposals,
■ other revenues and costs such as those resulting from litigation
involving substantial amounts or significant roll-out or capital
operations (e.g. costs of integrating a new activity, etc.).
Financial income (loss) under IFRS incorporates the impact of the
discounting of retirement benefits and other similar costs (interest
payable) and revenues from the expected return on plan assets, which
are included in operating income (loss) under French GAAP.
2.5.3 Recognition and measurement principles
NOTE 1 Research and development costs
Principles applied under French GAAP
Research and development costs are written off in the year in
which they are incurred.
IFRS
In accordance with IAS 38 “Intangible Assets”, research costs are
written off and development costs must be capitalized as intangible
assets as soon as the entity can demonstrate:
– it intends and has the financial and technical resources necessary
to complete the project,
– it is probable that the future economic benefits attributable to the
development expenditure will flow to the enterprise,
– it is able to reliably measure the cost of the asset during its develop-
ment phase.
Impact on the Group financial statements
No impact has been recognized in the opening balance sheet as at
1 January 2004 (see 2.4 below).
In 2004, a review of the main research and development projects
was performed on the basis of the information available from the
central departments co-ordinating the projects, in order to identify
and analyze those projects in progress that had entered their
development phase as defined in accordance with IAS 38.
As a result of this review, no major projects were identified as
being in their development phase during 2004. The Group’s
development efforts, the aim of which is to improve product design
and develop new or improved manufacturing processes, fulfil the
criteria for classification as assets under IAS 38 only at a very late
stage. It is very difficult to prove the existence of additional, long-
term future economic benefits that can be clearly distinguished
from the normal expenditure on maintaining and enhancing
production facilities and products with a view to preserving the
Group’s technological and competitive advantage.
The Group therefore considered that it would be inappropriate to
capitalize any development costs at 31 December 2004.
Financial statements
127Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
128
The Group has undertaken during 2005 to improve the consistency
and reliability of its project monitoring procedures with a view to:
– correctly assessing and categorizing the various phases (research/
development) of those projects identified as major by the Group’s
management,
– where relevant, measuring the associated development costs in
accordance with IAS 38.
NOTE 2 Goodwill
Principles applied under French GAAP
Goodwill represents the part not allocated to specific balance sheet
items of the difference between the acquisition price of consolidated
companies and the Group’s share in the assets and liabilities acquired,
measured at their fair value on the acquisition date.
Positive goodwill is amortized in the income statement in accordance
with an amortization schedule and over a useful life (of between five
and twenty years) estimated on the acquisition date. The criteria
used to validate the carrying amount of goodwill and the amortization
period depend on the characteristics of the company acquired: its
activity, the country in which it is located, the residual useful life of its
assets, its problems, profitability, etc.
If certain events are likely to result in goodwill becoming impaired, an
exceptional write-down must be made. The value in use of goodwill
is assessed by reference to discounted future cash flows.
IFRS
Under IFRS 3 “Business Combinations”, goodwill is no longer
amortized. In accordance with IAS 36 “Impairment of Assets”, an
impairment review of goodwill is performed at least once a year or
more frequently if there is evidence that the goodwill may be
impaired. The review procedures aim to determine whether the
recoverable amount of the cash-generating unit to which the
goodwill is related or allocated is at least equal to its net book value
(see note 4: Impairment of intangible and tangible fixed assets). If any
impairment is noted, an irreversible provision is recognized in the
income statement.
Impact on the Group financial statements
At 1 January 2004, goodwill (after reclassification within this
heading of € 1 million of business goodwill) is disclosed at its
value, net of amortization, of € 50 million, which becomes its new
carrying amount under IFRS.
The impairment reviews performed at 1 January 2004 and
31 December 2004 as required under IAS 36 “Impairment of Assets”
did not identify any impairment losses (see note 4).
The cancellation of the goodwill amortization charge resulted in a
positive impact of € 2.8 million on the 2004 income statement
restated under IFRS.
NOTE 3 Property, plant and equipment
Principles applied under French GAAP
Other than in certain specific cases detailed above (business
combinations, revaluations or certain internal transfers), property,
plant and equipment are recorded in the balance sheet at their
acquisition or production cost.
In most cases, maintenance and repair costs are written off. Provisions
for major repairs are only raised in respect of highly targeted
overhaul expenses incurred in connection with overhaul programmes
lasting several years (e.g. overhauls of blast furnaces).
The various categories of fixed assets are depreciated over periods
based on accepted practice and custom in France, using the straight-
line or reducing-balance method depending on the type of fixed asset
(see notes to the consolidated financial statements for the year ended
31 December 2004).
Additional, irreversible provisions are raised in respect of fixed
assets for which the value in use appears to be significantly less than
the net book value.
Fixed assets acquired under finance leases are not shown as an asset
on the balance sheet as the amounts concerned are not material.
IFRS
The implementation of IFRS has resulted in significant restatements
in respect of tangible fixed assets (see below for the financial
impact – Impact on the Group financial statements).
Vallourec 2005 Annual Report
a. Leases
A review of leasing contracts in accordance with the criteria of
IAS 17 “Leases” resulted in the capitalization of certain leases
(of insignificant value) that were previously treated, under French
GAAP, as operating leases.
b. Measurement of tangible fixed assets at cost net
of depreciation and impairment losses
Tangible fixed assets continue to be recorded in the balance sheet
at acquisition or production cost. They are not revalued. At each
balance sheet date, the acquisition cost is reduced by the accumulated
depreciation and any provisions for impairment losses determined
in accordance with IAS 36 “Impairment of Assets” (see note 4).
c. Acquisition or production cost
The costs of loans used to finance assets over a long period of
commissioning or manufacture are not capitalized as part of the cost
of the fixed assets concerned. Instead, they are written off in the
period in which they are incurred (the same rule was applied in the
French GAAP financial statements).
The main differences between the determination of the acquisition
cost of fixed assets under IFRS compared with that under French
GAAP relate to the following elements that have been retrospectively
restated in the opening balance sheet as at 1 January 2004 and for
the purposes of IFRS 2004 comparative information:
– Application of the component approach
The main components of a fixed asset whose useful life is shorter than
that of the main asset (furnaces, heavy industrial equipment, etc.),
have been identified by the technical departments so that they
may be depreciated over their own specific useful lives.
Subsequent expenditure on the replacement of the component (i.e.
the cost of the new component) will now be capitalized provided that
future economic benefits are still expected to be derived from the
main asset.
The component approach is also applied to expenditure on major
overhauls that are planned and carried out at intervals of more than
one year. Such expenditure is identified as a component of the
acquisition price of the fixed asset and depreciated over the period
between two overhauls.
Expenditure incurred during major overhauls is capitalized provided
that economic benefits continue to be derived from the use of the
main asset. The overhaul costs identified at the outset are then
removed from fixed assets.
In practice, such expenditure is capitalized only on the basis of
historic information about earlier identified overhauls (e.g. for
furnaces) and documented by means of supplier invoices or estimates.
As a result of the use of the component approach, it is no longer
possible to raise provisions in respect of major repairs in keeping with
those booked by some subsidiaries and accepted under French
GAAP.
– Dismantling costs
Foreseeable dismantling and site renovation costs (in the mining
business, for example) must in future be added to the cost of the
tangible fixed asset with a corresponding liability being recorded to
reflect the obligation existing at the balance sheet date. Such
amounts are discounted if necessary. The cost thus identified is
depreciated over the useful life of the related asset. The capitalization
of dismantling costs did not, however, have a material impact on the
opening balance sheet at 1 January 2004 or on the 2004 financial
statements restated under IFRS.
d. Depreciation
As part of the component approach, a detailed review was performed
by the technical departments and the Investment Department of the
conditions of use and useful lives of fixed assets. This review resulted
in depreciation schedules being amended, in accordance with the
requirements of IAS 16 “Property, plant and equipment”: use of the
straight-line method has become the standard and new useful lives
have been defined by asset category.The new depreciation schedules,
which significantly increase the useful lives of certain groups of fixed
assets, have been applied retrospectively to the acquisition cost
determined in accordance with IAS 16 (see above) or to the fair value
recorded when control was assumed in respect of fixed assets
acquired as part of a business combination.
Financial statements
129Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
130
The new useful lives under IFRS are summarized below. The impact is shown in the following table:
Main categories of fixed assets Straight-line depreciation - Useful life
BuildingsAdministrative and commercial buildings 40Industrial buildings/Infrastructure 30
Fixtures and fittings 10
Technical installations, equipment and toolsNew industrial installations 25Specific production equipment 20Standard production equipment 10Other (automatons, etc.) 5
Other tangible fixed assetsMotor vehicles 5Office equipment and furniture 10Computer equipment 3
Impairment tests have been performed in accordance with IAS 36 “Impairment of Assets” (see note 4) in order to ensure that the new carrying
values of fixed assets obtained under IFRS remain lower than the recoverable amounts. No provisions for impairment losses were
recognized at 1 January 2004 or 31 December 2004.
Impact on the Group financial statements
The main effects of the changes in the rules for the recognition and/or measurement of tangible fixed assets are detailed below, excluding
any tax effect.in € thousand
Impact at Impact at1 January 2004 31 December 2004
Capitalization of finance leases Fixed assets, net value 3,001 2,845Liabilities -201
Shareholders’ equity 2,800 2,845
of which Group share 2,800 2,845of which minority interests - -
Component approach/restatement of useful lives Fixed assets, net value 160,362 170,423
Shareholders’ equity 160,362 170,423
of which Group share 107,446 112,959of which minority interests 52,916 57,464
Reclassification of inventories as fixed assets (a) Fixed assets, net value 3,972 6,116Inventories, net value -3,972 -6,116
Cancellation of provisions for major repairs Provisions 6,317 7,338
Shareholders’ equity 6,317 7,338
of which Group share 3,450 4,007of which minority interests 2,867 3,331
(a) Within the context of the transition to IFRS, the accounting and presentation rules in respect of tools, spare parts and reserve parts have been clarifiedand harmonized, in accordance with the respective provisions of IAS 16 “Property, Plant and Equipment” and IAS 2 “Inventories”.
As a result, certain specific reserve parts and/or tools with a useful life of more than one year and which satisfy the criteria for classification as fixed assetshave been reclassified from inventories under French GAAP to the appropriate fixed asset categories under IFRS.
Vallourec 2005 Annual Report
NOTE 4 Impairment of tangible and intangible assets
Principles applied under French GAAP
The rules relating to impairment of tangible assets and goodwill under
French GAAP have been summarized in notes 2 and 3.
In the case of intangible assets, if there is evidence of impairment
at the balance sheet date, an exceptional write-down must be
recognized if the net book value exceeds the carrying amount of the
asset (the higher of the market value and the value in use), equal to
the amount of the excess.
IFRS
Under IAS 36 “Impairment of Assets”, the value in use of tangible
and intangible assets is tested as soon as there is any evidence of
impairment, such evidence being reviewed at each balance sheet
date. This review is performed at least once a year in the case of
assets with an indefinite useful life, i.e. mainly goodwill in the case
of the Vallourec Group.
For this test, fixed assets are grouped into cash-generating units
(CGUs). These CGUs are uniform groups of assets whose continuing
use generates cash inflows that are largely independent of the
cash inflows generated by other groups of assets. The value in use
of these units is determined on the basis of the present value of net
future cash flows.
Where the value in use is less than the net book value of the CGU,
an impairment loss is recognized. When a CGU includes goodwill,
the impairment loss generally reduces the goodwill first, i.e. before
any write-down is recognized in respect of any other fixed assets of
the CGU.
However, in some cases, the appearance of impairment factors that
relate to certain specific assets (linked to internal factors or events
or decisions that cast doubt on the continuing operation of a site,
for example) may be such that they prompt an impairment review to
be performed and justify a write-down of these assets independently
of the CGU to which they hitherto belonged.
The main CGUs within the Group’s current structure and organization
are V & M Europe,V & M do BRASIL,V & M North America, the CGU
comprising the Automotive and Industry activities, Valtimet and
Valinox Nucléaire. Those entities not part of these CGUs are tested
on the basis of their own cash flows.
Impact on the Group financial statements
A precise methodology for determining values in use was established
by the Group within the context of the first-time application of IAS 36.
The impairment tests did not result in any additional write-downs
compared with the financial statements prepared under French
GAAP at both 1 January 2004 and 31 December 2004 (see also
notes 2 and 3).
NOTE 5 Employee benefits
Differences between IFRS and French GAAP
The process of identifying and classifying retirement and similar
benefit schemes did not bring to light any new obligations as defined
by IAS 19 “Employee Benefits”.
The methods used by the Vallourec Group under French GAAP for
measuring retirement and similar commitments did not identify any
material variance compared with the provisions of IAS 19 (see
note 13 of the notes to the consolidated financial statements for the
year ended 31 December 2004).
As is the case under French GAAP, the Group applies the “corridor”
approach, which results in the deferred recognition of actuarial
gains and losses. However, when preparing the opening balance sheet
as at 1 January 2004, the Vallourec Group decided to recognize all
actuarial gains and losses on that date as a reduction in shareholders’
equity (see 2.4).
The charges recognized during the financial year comprised:
– additional rights acquired in respect of an additional year’s service,
– the change in existing rights at the beginning of the year as a result
of discounting,
– past service costs recognized during the period,
– the expected return on plan assets,
– the effects of any plan curtailments or settlements,
– the amortization of actuarial gains and losses.
The total net charge for the year was included in operating costs under
French GAAP. In the IFRS financial statements, the part relating to the
discounting of rights is henceforth recorded in financial income
(loss) and the return on plan assets is recorded in financial revenues.
Financial statements
131Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
132
Impact on the Group financial statements
At 1 January 2004 in € thousand
Provisions for retirementand similar benefits
French GAAP 162,243
Recognition of actuarial gains and losses 28,940
Reclassification 3,075
IFRS 194,258
The recognition of all actuarial gains and losses excluding any tax
effect reduced consolidated shareholders’ equity by € 29 million at
1 January 2004, of which € 17 million was deducted from shareholders’
equity – Group share and € 12 million was deducted from minority
interests.
At 31 December 2004 in € thousand
Provisions for retirementand similar benefits
French GAAP 171,743
Recognition of actuarial gains and losses 27,137
IFRS 198,880
The impact of the restatements and reclassifications made during the
financial year ended 31 December 2004 concerning the net charge
in respect of retirement and similar benefits is shown in the following
table:
Financial year 2004 in € thousand
French GAAP IFRS IFRSOperating Operating Financial
income income income(loss) (loss) (loss)
Charge for the period -22,141 -10,936 -9,270
The difference between the charges under French GAAP and the
charges under IFRS (€ 1.8 million) corresponds to the amortization
of the actuarial gains and losses recognized under French GAAP but
cancelled under IFRS.
The charge recognized in operating income (loss) under IFRS
represents rights acquired during the period.
The impact on the financial income (loss), i.e. a reduction of
€ 9.3 million, comprises:
– the discounting charge of € 12.3 million for the financial year 2004,
– revenues of € 3 million, being the expected return on plan assets.
NOTE 6 Share-based payment (share options)
Principles applied under French GAAP
Share purchase or share subscription plans that give their beneficiaries
the right to buy an existing share or to subscribe for a capital increase
at an agreed price are not measured and recognized under French GAAP.
Details of the existing share option plans are provided in the notes
to the consolidated financial statements.
IFRS
IFRS 2 “Share-based Payment” requires such plans to be measured
and recognized.
Under IFRS 2, options must be measured on the date they are
granted.
However, in the case of the first-time adoption of IFRS and in
accordance with the transitional provisions specifically provided
for by IFRS 1 and IFRS 2, the Group has chosen to restate only those
plans established after 7 November 2002 the rights of which had
not been vested by 1 January 2005: only one share purchase option
plan was therefore restated in the IFRS financial statements. The pre-
7 November 2002 plans are not measured or recognized, as was the
case under French GAAP, until the options are exercised.
The Group retrospectively measured, on the grant date, the share
purchase option plan that falls within the scope of IFRS 2, in
accordance with the Black & Scholes model. Changes in value
subsequent to the grant date do not affect the initial measurement
of the option.The number of options taken into account in measuring
the plan is adjusted at each balance sheet date to take account of
the probability that the beneficiaries will still be employed by the
Group at the end of the holding period.
The benefit measured in accordance with IFRS 2 is equivalent to
remuneration paid to the beneficiaries: it is therefore recognized
within payroll costs, on a straight-line basis over the vesting period,
the corresponding amount being booked as an increase in
shareholders’ equity.
Vallourec 2005 Annual Report
Impact on the Group financial statements
Details of the share option plan restated in accordance with IFRS 2
are as follows:
– grant on 11 June 2003 of 193,500 share purchase options,
– one option gives the holder the right to acquire one Vallourec share,
– the exercise price of each option is € 53.65,
– the options may be exercised during the three years from 11 June
2007 to 10 June 2010, at the end of a four-year holding period
(vesting period).
The impact of the treatment of this plan in accordance with IFRS 2
is as follows:
in € million
Period Valuation Impact of recognition
From 11 June 2003
to 1 January 2004 0.5 None
From 1 January 2004 € 0.9 thousand increase in payrollto 31 December 2004 0.9 costs and shareholders’ equity
From 1 January 2005 Increase in payroll costs andto 11 June 2007 2.0 corresponding increase in shareholders’
equity for each accounting period
Total 3.4
NOTE 7 Deferred taxation
Principles applied under French GAAP
The main bases used in the calculation of deferred taxation are
temporary (timing) differences:
– of a recurring nature: provisions for paid holidays, solidarity social
security contributions, etc.,
– of a non-recurring nature: cancellation of regulated provisions,
employee profit sharing, non-tax deductible provisions for
contingencies and losses and any restatements to ensure the
conformity of company or consolidated accounts with Group
practices,
– that are long-term recurring differences: non-tax deductible
provisions for retirement commitments.
The following items are recognized in accordance with the liability
method:
– long-term deferred tax assets (provisions for retirement commit-
ments – French companies) which are likely to be recovered in the
foreseeable future,
– deferred tax assets for recurring items (provision for paid holidays,
etc.) which are likely to be recovered in the foreseeable future,
– deferred tax liabilities, notably temporary differences in the
treatment of provisions for diminution in value of securities
between tax groups and the consolidated financial statements.
Deferred tax liabilities are recognized except where there are
known deferred tax assets of the same maturity,
– losses carried forward, long-term capital losses and non-recurring
differences (provisions for losses on orders, etc.) are recognized
only for companies and tax groups in which recovery in the
foreseeable future is reasonably certain,
– the rates used are the recovery rates known at the date the
accounts are closed.
Deferred taxes other than those recognized on a discounted basis
have not been discounted to the extent that the timing of their
reversal cannot be determined with certainty.
Net amounts per tax entity of deferred tax assets and liabilities are
shown either under assets as “other receivables” or under liabilities
as “provisions for contingencies and losses”.
IFRS
The IFRS deferred tax recognition rules differ little from the rules
applied by Vallourec in its French GAAP consolidated financial
statements.
However, the restatements made in the IFRS financial statements (in
particular concerning the net value of tangible fixed assets) resulted
in the recognition of additional deferred tax liabilities compared with those
recognized in the French GAAP consolidated financial statements.
The possibility of recovering deferred tax assets (in particular those
linked to tax losses) was thus re-examined under IFRS, as a result of
their offsetting in particular against deferred tax liabilities of known
maturity.
Deferred tax balances are never discounted under IFRS, unless they
are calculated on a discounted basis (e.g. provisions for retirement
and similar benefits).
In the IFRS balance sheet, current tax assets and liabilities relating
to the same taxable entity (e.g. tax consolidation group) are offset.
Net deferred tax assets and net deferred tax liabilities are shown
under separate headings in the balance sheet, respectively within
non-current assets and non-current liabilities.
Financial statements
133Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
134
in € million
1 January 2004 31 December 2004
Deferred tax assets under French GAAP 29.2 28.0
Deferred tax liabilities under French GAAP -9.7 -9.6
Net deferred tax 19.5 18.4
Deferred tax on provisions for retirement and similar benefits (see note 5) 10.4 9.7
Deferred tax on restatement of fixed assets – component approach, amortization,depreciation and leasing (see note 3) -54.4 -60.3
Recognition of deferred tax offsettable against deferred tax liabilities 7.9 12.4
Deferred tax on other restatements -1.2 -1.4
Deferred tax assets under IFRS 19.0 17.7
Deferred tax liabilities under IFRS -36.8 -38.9
Net deferred tax -17.8 -21.2
Impact on the Group financial statements
The reconciliation between the IFRS and French GAAP deferred tax
balances is given below.
In the 2004 consolidated income statement, the tax charge increased
from € 69.6 million under French GAAP (i.e. an effective tax rate of
21.5%) to € 89.4 million under IFRS (i.e. an effective tax rate of
25.2%).
NOTE 8 Investments in equity affiliates
Investments in equity affiliates held indirectly by minority shareholders
have been consolidated under IFRS at their share of the net assets of
such companies, not at their historical cost as was the case under
French GAAP.As a result, the value of investments in equity affiliates
decreased by € 11.4 million at 1 January 2004 and by € 12.1 million
at 31 December 2004, the corresponding amount being a reduction
in minority interests.
This new method did not have a material impact on the income
statement.
NOTE 9 Other restatements
Headings relating to expenses to be amortized over several years that
were acceptable in the French GAAP balance sheet represent mainly
the costs of starting up new businesses. However, such items have
been written-off under IFRS since they do not comply with the
definition of an asset.
The impact of this restatement is a € 1 million reduction in
shareholders’ equity at 1 January 2004 and a € 0.5 million increase
in net income for 2004 (elimination of the amortization charge).
2.6 Levels of segment reporting usedby the Vallourec Group
The application of IAS 14 “Segment Reporting” caused very little
change to the organization and analysis of the segment information
presented in the 2004 French GAAP consolidated financial statements
since primary and secondary segment reporting formats in these
financial statements are based respectively on the Group’s business
and the geographical areas in which the Group operates (see note 30
of the notes to the consolidated financial statements).
Given the fundamental organizational and management structure
of the Vallourec Group, the primary segment reporting format used
in accordance with the provisions of IAS 14 “Segment Reporting”
is based on the following two sectors of activity:
– the V & M TUBES reporting format segment, which brings together
all the entities with production and marketing facilities dedicated
to the Group’s main activity, i.e. the production of hot-rolled
seamless carbon and alloy steel tubes, both smooth and threaded,
for the oil and gas industry.This activity is characterized by a highly-
integrated manufacturing process, from the production of the steel
and the hot-rolling right through to the final stages, facilitating
production of products that are suitable for a variety of markets
(oil & gas, power generation, chemicals and petrochemicals,
automotive and mechanical engineering, etc.);
Vallourec 2005 Annual Report
3. Main impact of the application of IAS 32 and IAS 39 starting 1 January 2005
The Group will apply IAS 32 and IAS 39 concerning the presentation
and recognition of financial assets and liabilities as from 1 January
2005. As a result, the financial statements for the year ended
31 December 2004, restated under IFRS, do not incorporate the
expected impact of the implementation of these standards. The
impact of IAS 32 and IAS 39 mainly concerns the effects of the
implementation of hedge accounting in respect of trade-related
purchases and sales in foreign currencies.
In this regard, the Group has decided to apply hedge accounting in
the following manner:
– hedging of future transactions (backlog and forecasts): application
of the Cash Flow Hedge method, with the recognition in
shareholders’ equity of changes in the fair value of the effective
portion of the hedging derivatives until the actual realization of
the transaction; on that date, changes in the fair value of the
derivatives are recognized in the income statement, either within
sales or purchases, depending on the nature of the hedged item,
– hedging of receivables and payables: application of the Fair Value
Hedge method, under which changes in the values of derivatives
are recognized directly in the income statement.
In addition, the Vallourec Group decided that the time and/or
interest components (premium and discounts) of the derivatives
would be systematically regarded as ineffective and thus recognized
directly in financial income (loss).
To be eligible for hedge accounting as defined in accordance with
IAS 39, the Vallourec Group has developed its cash management and
invoicing systems to facilitate the traceability of hedged transactions
throughout the duration of the hedging instruments.
These systems have been in operation since 1 January 2005. Specific
measures were implemented during the second half of 2004 so that
all hedging instruments in existence at 1 January 2005 could meet
the criteria for hedge accounting as defined in accordance with
IAS 39.
As a result, changes in the fair value of these instruments will be
recognized in shareholders’ equity at 1 January 2005.
– the Automotive, Industry and Stainless Steel reporting segment,
which comprises the entities grouped around ValTubes. This
segment incorporates primarily the specific forming and machining
activities (in particular, the production of precision tubes and
automotive components), that exhibit certain similarities in terms
of risks and performance due to their business cycles.This segment
also incorporates a number of other activities, such as the
production of stainless steel tubes and forged products, whose
characteristics are very different from those described above, but
which are not presented separately due to their relative
insignificance. Such treatment is authorized by IAS 14.
The secondary segment reporting format is geographical and
distinguishes four geographical sectors, determined on the basis of
an analysis of the specific risks and rewards they present. The four
segments are as follows:
– the European Union,
– North and Central America (USA, Mexico and Canada),
– South America (Argentina and Brazil),
The rest of the world (mainly the Middle East and Asia).
Financial statements
135Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
136
5.1.1 Company financial statements of Vallourec SA
Balance sheet in € thousand
ASSETS 31/12/2003 31/12/2004 31/12/2005
NON-CURRENT ASSETS
Intangible assets 79 79 79
Property, plant and equipment 185 150 142
Participating interests 499,979 503,704 1,057,383
Own shares 14,366 14,366 14,194
Receivables, loans and other 56,705 39,393 21,192
Total I 571,314 557,692 1,092,990
CURRENT ASSETS
Trade receivables 168 263 229
Other receivables 3,148 909 6,211
Marketable securities 217,107 171,796 6,105
Cash and cash equivalents 91 116 344
Translation differences - - 412
Total II 220,514 173,084 13,301
TOTAL ASSETS (I+II) 791,828 730,776 1,106,291
LIABILITIES AND SHAREHOLDERS’ EQUITY 31/12/2003 31/12/2004 31/12/2005
SHAREHOLDERS’ EQUITY
Capital 194,605 197,399 212,007
Additional paid-in capital 98,603 101,118 210,223
Revaluation reserve 53 53 636
Reserves 186,031 226,507 184,528
Net income for the financial year 56,780 30,064 14,145
Total I 536,072 555,141 621,539
Provisions for liabilities and charges 957 315 319
Bank loans and other borrowings 229,466 150,617 462,394
Trade payables 1,586 3,088 2,055
Other payables 23,747 21,615 19,572
Translation differences - - 412
Total II 255,756 175,635 484,752
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (I+II) 791,828 730,776 1,106,291
Vallourec 2005 Annual Report
Income statement in € thousand
2003 2004 2005
Sales
Provision reversals and charges transferred 243 435 402
Other revenues 1,854 2,037 1,512
External services -3,624 -9,130 -9,283
Taxes, duties and similar payments -154 -179 -93
Payroll costs -748 -782 -788
Other operating costs -247 -276 -390
Amortization, depreciation and provisions -108 -62 -27
Operating income (loss) -2,784 -7,957 -8,667
Financial income 75,161 41,187 22,357
Participating interests 73,872 31,230 4,830
Other long-term securities and receivables 11 11 13
Other interest and similar income 48 89 256
Provision reversals and charges transferred 680 4,000 15,389
Exchange gains 6 3 4
Net income on disposal of marketable securities 544 5,854 1,865
Financial charges -19,547 -9,241 -10,158
Financial depreciation and provisions -11,980 -276 -136
Interest and similar charges -7,564 -8,933 -10,012
Exchange losses -3 -32 -10
Net charges on disposal of marketable securities - - -
Net financial income 55,614 31,946 12,199
Operating income (loss) before tax 52,830 23,989 3,532
Exceptional income 1,169 79,100 754
Exceptional charges -412 -78,852 -172
Net exceptional income 757 248 582
Income tax credit (charge) 3,193 5,827 10,031
NET INCOME 56,780 30,064 14,145
Financial statements
137Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
138
Notes to the Company financial statementsfor the year ended 31 December 20051
In thousands of euros (€ thousand) unless stated otherwise
Notes to the balance sheet (before allocation) for the year ended
31 December 2005, which totals € 1,106.3 million, and to the
income statement, which shows net income of € 14.1 million.
The financial year covers a period of 12 months, from 1 January to
31 December.
Vallourec prepares consolidated financial statements.
I - SIGNIFICANT EVENTS, VALUATIONMETHODS AND COMPARABILITYOF FINANCIAL STATEMENTS
On 23 June 2005, Vallourec acquired all of the shareholdings in
VALLOUREC & MANNESMANN TUBES (V & M TUBES)2 held by
Mannesmannröhren-Werke, a 100% subsidiary of Salzgitter AG.The
acquisition price fixed for this transaction was € 545 million.This price
included the dividend due in respect of 2004.
The transaction consisted of the linked and simultaneous acquisition:
i. By Vallourec of the 45% stake in V & M TUBES for € 534.4 million,
ii. By V & M TUBES of 1% of the capital of V & M DEUTSCHLAND
GmbH for € 3.6 million, and
iii. By V & M Holdings Inc., a subsidiary of V & M TUBES, of 33.33%
of the capital of V & M TUBES CORPORATION for € 7 million.
Following this transaction, Vallourec controls directly 100% of
V & M TUBES and indirectly 100% of V & M DEUTSCHLAND GmbH
and V & M TUBES CORPORATION.
In addition, Vallourec sold 10% of the shares in the HKM steel mill
(Germany) for € 22 million to Mannesmannröhren-Werke. Following
this sale,V & M TUBES retains a 20% stake in HKM, which continues
to be accounted for as an equity affiliate.
The acquisition was financed by the available cash of Vallourec,
V & M TUBES and V & M Holdings Inc. and by a bank loan of
€ 460 million taken out by Vallourec. Of this loan, € 311.2 million
had been drawn down by 31 December 2005, of which € 260 million
was used to finance this acquisition. Details of the loan, including the
main covenants, are provided in the note entitled “Bank loans and
other borrowings”.
In addition, a rights offering, the aim of which was to partially
finance this acquisition, was launched on 20 June 2005 (subscription
period from 20 June to 1 July 2005 inclusive). Proceeds of the
rights issue of € 123 million were received on 13 July.
Preferential subscription rights were granted to all Vallourec’s
shareholders.
The new shares (706,312 shares) were issued at a price of € 176.95
(nominal value of € 20 and premium of € 156.95) and were admitted
to trading on the Euronext Paris Eurolist on 13 July 2005.
In addition, the measurement and presentation methods used in the
preparation of the financial statements for the financial year take into
account regulations CRC 2002-10, CRC 2003-07 and CRC 2004-06
applicable in France as from 1 January 2005, and the measurement
and recognition rules relating to assets and the rules relating to
amortization, depreciation and impairment have been amended.
This change in accounting method did not have a significant impact
on the financial statements.
Vallourec 2005 Annual Report
1. The notes to the Company financial statements for the years ended31 December 2003 and 31 December 2004 figure in chapter 5.1.1 of the2003 and 2004 Reference Documents deposited with the French financialmarkets authority (AMF).
2. The acquisition by Vallourec of the 45% stake in V & M TUBES terminatedthe joint venture agreement signed between Vallourec and Mannesmannröhren-Werke in 1997, and in particular the change of control clause (see note 33of section 5 of the 2004 annual report).
II - ACCOUNTING PRINCIPLES
The annual financial statements are prepared in accordance with
current French accounting regulations (CRC regulation no. 99-3) and
the fundamental accounting concepts (true and fair view, comparability,
going concern, accuracy, reliability, prudence and consistency of
accounting methods).
Property, plant and equipment
Property, plant and equipment are valued at their acquisition cost.
Property, plant and equipment acquired before 31 December 1976
were legally revalued in 1977 and 1978.
Buildings are depreciated using the straight-line method over a
40-year period for all buildings allocated to non-operating activities.
Participating interests
The gross value of participating interests comprises their purchase
cost excluding associated expenses and the amount of any associated
capital increases.
Securities acquired in foreign currencies are recorded at their
acquisition price converted into euros at the rate applicable at the
date of the transaction.
Provisions for impairment of participating interests are normally
calculated with reference to their value to the Group, which takes
account of various criteria such as their consolidated net worth,
profitability, share price and the company’s growth prospects.
Own shares
Own shares are valued at the lower of acquisition cost and market
value (defined as the average price over the previous month).
They were acquired on 5 July 2001 as part of the Group’s strategy
of increasing the capital available for employees. At its meeting on
31 March 2003, the Management Board noted that the conditions
for the full or partial disposal of own shares held by the Company
had not been met since 5 July 2001 and accordingly it would not
exclude future recourse to alternative uses of these shares.
On 8 March 2005, the Supervisory Board approved the Management
Board’s proposal to allocate the 269,749 own shares held to share
option schemes for certain of the Group’s employees, managers and
corporate officers.
Receivables and payables
Receivables and payables are valued at their nominal value.
Provisions may be made against receivables to take account of
specific collection difficulties. Such provisions are assessed on a
case-by-case basis.
Marketable securities
Investment securities are valued at acquisition cost increased by
accrued income for the period, or at market value if lower.
Translation of foreign currency denominatedtransactions and financial instruments
Revenues and costs denominated in foreign currencies are recorded
using the exchange rate applicable on the transaction date. Foreign
currency denominated receivables, cash and cash equivalents and
payables at the balance sheet date are translated using the exchange
rate applicable at that date.
Unrealized losses resulting from the translation into euros are
shown, net of any associated foreign exchange cover, as a provision
for exchange risk.
The Company uses various financial instruments to reduce its
exchange rate and interest rate risk. All positions are taken by
means of instruments traded either on organized markets or on over-
the-counter markets and are valued at their market value and
recognized as off-balance-sheet items at each balance sheet date.
Provisions for liabilities and charges
Retirement pensionsPensions are paid by an external organization and the Company
therefore has no commitment in this respect.
Retirement gratuitiesCommitments in respect of gratuities paid to retiring employees are
based on an actuarial calculation and provided for as a liability in
the balance sheet.
The actuarial assumptions used vary depending on the specific
requirements of the applicable retirement plans and collective
agreements.
Financial statements
139Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
140
The following assumptions have been used:
■ Discount rate of 4% (including inflation),
■ Inflation rate of 2%
■ Staff turnover rate variable in accordance with age and category,
■ INSEE98 mortality table.
Actuarial differences arising as from the financial year 2004 are
amortized using the “corridor” method over the average residual
period of service for employees.
Other provisionsAll disputes (technical, tax audit, etc.) and risks have been provided
against to the extent of the likely cost to be incurred estimated at
the year-end.
Share options
The options to subscribe for Vallourec shares (originally authorized
by the Extraordinary General Meeting held on 15 June 2000) that
were exercised in 2005 resulted in an increase in Vallourec’s share
capital and additional paid-in capital as a result of the funds paid
up by the subscribers.
Exceptional income and charges
In general, exceptional income and charges comprise those amounts
of an exceptional nature, i.e. those that fall outside the scope of the
Company’s ordinary activities.
Vallourec 2005 Annual Report
III - NOTES TO THE BALANCE SHEET
Movements in non-current assets
Movements in the values of non-current assets
31/12/2004 Additions Disposals 31/12/2005 Of which Of whichCharge Reversals revaluation affiliated
reserve companies
Intangible assets 79 - - 79 - -
Trademarks 79 - - 79 - -
Property, plant and equipment 150 -8 - 142 26 -
Land 133 - - 133 26 -
Buildings 174 - - 174 - -
Depreciation of buildings -157 -8 - -165 - -
Investments 503,704 537,679 16,000 1,057,383 611 1,057,383
Participating interests 519,980 537,814 - 1,057,794 611 1,057,794
Provisions on participating interests -16,276 -135 16,000 -411 - -411
Own shares 14,366 - -172 14,194 - -
Receivables, loans, other 39,393 21,192 -39,393 21,192 - 21,192
Receivables and other 38,112 21,192 -38,112 21,192 - 21,192
Loans 1,281 - -1,281 - - -
TOTAL 557,692 558,863 -23,565 1,092,990 637 1,078,575
On 23 June 2005, Vallourec purchased the 45% stake in V & M TUBES for € 537.8 million including interim interest of € 3.4 million.
Movements in loans during 2005 correspond to the repayment by V & M TUBES in June of a loan of € 38.1 million and the setting in place
in September of a new interest-bearing loan of USD 25 million maturing in December 2010.
The provision for diminution in value of ValTubes’ shares (€ 16 million) was reversed in full due to the results of its subsidiaries.
Marketable securities
31/12/2004 31/12/2005 Valuation Unrealized 31/12/2005 gain
Mutual and investment funds 171,796 6,105 6,105 -
TOTAL 171,796 6,105 6,105 -
Cash is invested in risk-free money market funds. In addition,Vallourec only enters into financial transactions with first-rate financial institutions.
Financial statements
141Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
142
Receivables and payables
Assets at 31/12/2005 Net Provision Gross Of which Gross Gross value value affiliated value value
companies -1 year +1 year
Receivables, loans and other financial investments 21,192 - 21,192 21,192 - 21,192
Trade receivables 229 1,062 1,291 - 229 1,062
Accounts receivable 3 1,062 1,065 - 3 1,062
Other trade receivables 226 - 226 - 226 -
Other receivables 6,211 - 6,211 6,211 6,211 -
Sundry receivables 6,211 - 6,211 6,211 6,211 -
TOTAL 27,632 1,062 28,694 27,403 6,440 22,254
Loans granted during the year: € 21,192 thousand
Loans repaid during the year: € 39,393 thousand
Receivables represented by commercial paper: nil.
Liabilities at 31/12/2005 Gross Of which Of which -1 year +1 year +5 yearsvalue accrued affiliated
payables companies
Bank loans and other borrowings 462,394 1,108 - 1,122 201,238 260,034
Bank borrowings 462,299 1,107 - 1,107 201,192 260,000
Other borrowings 95 1 - 15 46 34
Trade payables 2,055 1,171 466 2,055 - -
Accounts payable 1,752 969 466 1,752 - -
Tax and social liabilities 303 202 - 303 - -
Other liabilities 19,572 - 1,058 19,572 - -
Tax liabilities (income tax) 559 - - 559 - -
Sundry liabilities 19,013 - 1,058 19,013 - -
TOTAL 484,021 2,279 1,524 22,749 201,238 260,034
Loans drawn down during the year: € 434,192 thousand
(including € 123 million in respect of the rights offering refinancing, which was repaid in July 2005).
Loans repaid during the year: € 123,000 thousand
Liabilities represented by commercial paper: nil.
Accrued charges within “Bank borrowings” represent accrued interest at the period end.
Vallourec 2005 Annual Report
Translation differences on foreign currency denominated receivables and payables
31/12/2004 31/12/2005 Of which offset Provisions for by exchange foreign exchange
rate hedge losses
UNREALIZED FOREX LOSSES - 412 412 -
UNREALIZED FOREX GAINS - 412 412 -
The unrealized forex gains and losses are set off between a financial receivable and a USD 25 million borrowing of the same amount and
maturity.
Bank loans and other borrowings
In 2003, the Company entered into a five-year € 150 million credit
facility with the Crédit Agricole group maturing in September 2008.
In order to convert this variable-rate borrowing into a fixed-rate
borrowing,Vallourec has used hedging instruments (swaps). The loan
contract requires the Group to maintain its ratio of consolidated net
debt to consolidated shareholders’ equity at less than 75%.
In March 2005, a seven-year € 460 million credit facility was made
available to Vallourec by a syndicate of banks to finance the
acquisition of the 45% stake in V & M TUBES.
This facility requires the Group to maintain its ratio of consolidated
net debt to consolidated shareholders’ equity at less than or equal
to 75% calculated on 31 December each year and for the first
time on 31 December 2005. A change of control of Vallourec could
result in the repayment of the loan if so decided by a two-thirds
majority of the participating banks. It is also provided that the loan
would become immediately repayable if the Group failed to make
a repayment in respect of one of its other borrowings (“cross
default”), or if a significant event occurred affecting the Group’s
business or financial situation and ability to repay its borrowing.
On 31 December 2005, tranches of € 260 million and USD 25 million
were drawn down for respectively seven and five years.A tranche of
€ 30 million was drawn down for six months on 12 October 2005.
Vallourec used hedging instruments (swaps) to hedge its variable-
rate borrowing at a fixed interest rate.
Information on interest rate risks
The fair value of interest rate hedges (swaps and caps) on the
bank loans and other borrowings of € 301.2 million amounted to
€ -1.3 million at 31 December 2005.
Financial statements
143Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
144
Shareholders’ equityThe changes in shareholders’ equity are shown below:
Number Capital Profit (loss) Additional Shareholders’ of shares for the paid-in capital equity
financial year and reserves
As at 31/12/2003 9,730,226 194,605 56,780 284,687 536,072
Effects of actuarial surpluses on retirement benefits not recognized at 31 December 2003,recognized at 1 January 2004 - - - 230 230
Net income (loss) for 2003 - - -56,780 56,780 -
Share subscription options 139,730 2,794 - 2,516 5,310
2.5% exceptional tax on regulated long-term capital gains equity reserve - - - -1,398 -1,398
Dividend paid - - - -15,137 -15,137
Change 139,730 2,794 -56,780 42,991 -10,995
As at 31/12/2004 9,869,956 197,399 30,064 327,678 555,141
Net income (loss) for 2004 - - -30,064 30,064 -
Rights offering 706,312 14,127 - 108,674 122,801
Share subscription options 24,064 481 - 430 911
Revaluation reserve - - - 584 584
Dividend paid - - - -30,721 -30,721
Interim dividend - - - -41,322 -
Change 730,376 14,608 -30,064 67,709 93,575
AS AT 31/12/2005 10,600,332 212,007 14,145 395,387 621,539
Vallourec’s share capital comprised 10,600,332 ordinary shares
with a nominal value of € 20 per share fully paid up as at 31 December
2005 compared with 9,869,956 shares as at 31 December 2004.
The increase was due to the issue of 730,376 new shares as a result
of the transactions described in the following two paragraphs.
Firstly, the rights offering was launched on 20 June 2005 and paid
up on 13 July in the amount of € 122.8 million.The aim of the rights
offering was to partially refinance the acquisition of the 45% stake
in V & M TUBES. The new shares (706,312 shares) were issued at
the price of € 176.95 (nominal value of € 20 and premium of
€ 156.95) and were admitted to trading on the Euronext Paris
Eurolist on 13 July 2005. The capital increase costs amounting to
€ 2.2 million were deducted from the issue premium.
Secondly, the share subscription options exercised at € 38 after
1 January 2005 resulted in the issue of 24,064 new shares (compared
with 139,730 shares in 2004), i.e. an increase of € 911 thousand,
premium included.
Vallourec 2005 Annual Report
Share subscription options
The Extraordinary General Meeting held on 15 June 2000 (first resolution) authorized the Management Board to grant subscription options
to managers and/or employees of the Group’s companies, for a period of five years and up to a limit of 4% of Vallourec’s share capital.
A first tranche of options was granted under this authorization on 15 June 2000. The main characteristics of these options are shown in
the table below.
Plan
Date of General Meeting 15 June 2000
Date of Management Board Meeting 15 June 2000
Total number of options granted 178,500
- of which number of options granted to the members of the ExecutiveCommittee (as at 31 December 2005) 31,000
- number of senior managers involved 7
- exercise price (*) € 38.00
- exercise price adjusted after rights offering on 13 July 2005 (note 11) € 37.43
Number of options cancelled since date granted (**) 6,750
Date from which options may be exercised 15 June 2004
Expiry date 14 June 2007
Number of shates subscribed as at 31/12/2004 (1 option = 1 share) 139,730(of which number of shares subscribed by members of the Executive Committee) 30,250
Number of options that could be exercised at 31/12/2004 32,020(of which number of options that could be exercised by members of the Executive Committee) 750
Number of shares subscribed in 2005 (1 option = 1 share) 24,064(of which number of shares subscribed by members of the Executive Committee) 750
Adjustment in the number of options following the rights offering (note 11) 218
Number of options that could be exercised at 31/12/2005 8,174(of which number of shares subscribed by members of the Executive Committee) -
(*) 95% of the average price for the 20 trading sessions preceding the grant date.(**) option holders who have left the Group.
Financial statements
145Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
146
Share purchase options
The second resolution of the Extraordinary General Meeting held on 15 June 2000 also authorized the Management Board, during a five-year
period and up to a limit of 10% of the share capital, to grant purchase options concerning existing shares that would first have to be bought
on the stock exchange in accordance with the share repurchase authorizations given by the General Meeting.
A first tranche of options was granted under this authorization on 11 June 2003, on the basis of one share for each option. The main
characteristics of these options are shown in the table below.
Plan
Date of General Meeting 15 June 2000
Date of Management Board meeting 15 June 2003
Total number of shares employees may purchase 193,000
- of which number of shares that the members of the Executive Committee(as at 31 December 2005) may purchase 54,000
- number of senior managers involved 7
- exercise price (*) € 53.65
- exercise price adjusted after the rights offering on 13 July 2005 (note 11) € 52.85
Number of options cancelled since date granted (**) 2,750
Number of shares that employees may purchase, as at 31/12/2004 190,750
Options cancelled in 2005 500
Adjustment in the number of options following the rights offering (note 11) 2,896
Number of shares that employees may purchase as at 31/12/2005 193,146
- of which number of shares that those employees who were membersof the Executive Committee as at 31 December 2005 may purchase 54,819
- number of senior managers involved 7
- exercise price adjusted after rights offering on 13 July 2005 (note 11) € 52.85
Date from which options may be exercised 11 June 2007
Expiry date 10 June 2010
Number of shares purchased as at 31/12/2005 -
(*) average price for the 20 trading sessions preceding the grant date, not discounted.(**) option holders who have left the Group.
Provisions for liabilities and charges
The change in provisions for liabilities and charges is shown below:
31/12/2004 Charge Reversals Reversals 31/12/2005used not used
Provisions for liabilities and charges 274 - - - 274
Provisions for retirement commitments 21 18 - - 39
Provisions for long-service awards 5 - - - 5
Other provisions for charges 15 - - -15 -
TOTAL 315 18 - -15 318
Vallourec 2005 Annual Report
Provision for liabilities and charges
Disputes are provided for to the extent of the likely cost to be
incurred estimated at the year end, in application of CRC regulation
no. 2000-06 on liabilities.
The legal proceedings instituted on 22 June 2001 in the Trenton (New
Jersey) court by two US companies, MTI and Net Shape Inc.,
concerning the sale of a license by MPS, a 99.7%-owned subsidiary
of Vallourec, to Carpenter Technology ended in December 2004
when the judge ruled that the law suit filed against Vallourec was
inadmissible. No appeal has been lodged and the case is closed.
Retirement provisions
The total commitment in respect of retirement plans as at
31 December 2005 is € 122 thousand.
The provision recognized in the balance sheet amounted to
€ 39 thousand. The actuarial deficit not recognized therefore
totalled € 83 thousand. The commitments not recognized in the
balance sheet correspond to changes in or the non-crystallization of
assumptions, the effect of which is amortized over time using the
“corridor” method.
The main changes in relation to the valuations used in the previous
year’s financial statements concern the base salary used in the
calculation of retirement benefits and the discount rate.
IV - NOTES TO THE INCOME STATEMENT
Operating revenues
The Company invoices fees for the use of its brand name.This revenue
is included under “Other operating revenues” and amounted to
€ 1,494 thousand.
Financial charges and incomeconcerning affiliated companies
Financial charges:nil
Financial income: € 4,830 thousand
Net exceptional income
Net exceptional income for the year amounted to € 582 thousand.
This amount includes a profit on disposal of preferential subscription
rights in respect of the own shares held at the time of the rights
offering amounting to € 525 thousand.
V - OTHER INFORMATION
Average number of employees
The Company employs five people.
Tax
Tax groupSince 1 January 1988 the Company has been a member of a tax
group constituted under the provisions of article 223A of the CGI
(Code Général des Impôts – General tax code). This agreement
has been renewed automatically for five-year periods since 1999.
In 2005, the tax group comprised Vallourec, Setval, Assurval,
ValTubes, Cerec, Escofier Technologie, Interfit, Spécitubes, Starval, MPS,
Vallourec Précision Etirage, Vallourec Précision Soudage, Vallourec
Composants Automobiles Vitry, Vallourec Composants Automobiles
Hautmont, Valti, Valsept, Sopreneuf and Valinox Nucléaire.
The tax group agreement requires subsidiaries of the tax group to
record a tax charge equivalent to the amount they would have
borne in the absence of the tax group.
The saving resulting from the allocation to the combined income of
losses generated by subsidiaries, i.e. companies that pay their tax to
Vallourec, is not recognized in the income statement but as other
liabilities.
Any profits resulting from the tax group that are recorded by
Vallourec correspond mainly to the allocation to the combined
income of losses generated by Vallourec itself and tax losses carried
forward definitively belonging to Vallourec.
Financial statements
147Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
148
In respect of 2005:
The net tax credit in the income
statement amounted to: € 10,031 thousand
It can be broken down as follows:
- Tax charge relating to Vallourec € 0 thousand
- Tax credit relating to the tax group € 10,031 thousand.
At 31 December 2005, the saving recognized by Vallourec against
tax due, which may become payable by the Group if the companies
in question return to profitability before their deficits are fully
utilized, amounted to € 17,949 thousand.
The Vallourec tax group is now in a profit-making situation and had
no losses available for carry forward at the end of 2005.
Vallourec itself has tax losses available for carry forward of
€ 24,406 thousand.
Increase and reduction in future tax liabilities
Nature of temporary difference Amount 31/12/2005 (base)
Increase -
Reductions
Provision for retirement commitments 39
Provision for paid holidays 40
Solidarity social security contribution provision 2
Unrealized gains on UCITS -
Breakdown of income tax between operating income (loss) and exceptional income (loss)
Income before tax Tax due Net income
Operating income (loss) 3,532 - 3,532
Exceptional income (loss) 582 - 582
Sub-total 4,114 - 4,114
Income relating to the tax group - 10,031 10,031
TOTAL VALLOUREC 4,114 10,031 14,145
The income relating to the tax group corresponds mainly to the loss generated by Vallourec, the head of the tax group, which constitutes
a tax saving realized for the financial year.
Remuneration of members ofadministrative and management bodies
Administrative bodiesBoard attendance fees paid during the year amounted to
€ 230 thousand.
Management bodiesThis information is not provided as it is not relevant in relation to the
assets and liabilities, financial position and net income of Vallourec.
Off-balance-sheet commitmentsOff-balance-sheet commitments are as follows:
Retirement gratuities: € 83 thousand (actuarial deficit).
The Company has not issued any form of collateral against its liabilities.
Vallourec 2005 Annual Report
5.1.2 Total earnings per share
See 5.1.0 above (note 12).
Subsidiaries and participating interests as at 31 December 2005 are shown in section 8.6.
5.2 Auditors’ remuneration
in € thousand
2005 (*) (*)Ernst & Young Deloitte K.P.M.G.
Audit
Certification of the financial statements 1,218 150 374
Other services associated with the audit 180 97 39
Sub-total 1,398 247 413
Other services not associated with the audit 7 - 9
TOTAL 1,405 247 422
(*) Statutory auditors of the Group consolidated financial statements.
Auditors’ remuneration in respect of the financial year 2004 was as follows: in € thousand
2004 (*) (*)Ernst & Young Deloitte K.P.M.G.
Audit
Certification of the financial statements 1,457 204 379
Other services associated with the audit 97 60 7
Sub-total 1,554 264 386
Other services not associated with the audit 24 12 5
TOTAL 1,578 276 391
(*) Statutory auditors of the Group consolidated financial statements.
Financial statements
149Vallourec 2005 Annual Report
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 5
6.1 Composition and operation of Administration,Management and Supervisory bodies
The Ordinary and Extraordinary General Meeting held on 14 June 1994 approved the adoption of a management structure with a
Management Board and a Supervisory Board.
6.1.0 Composition of Administration, Management and Supervisory bodies
6.1.0.1 Management Board
Year of birth Date of appointment Date on which to the Management Board appointment ceases
Chairman
Pierre Verluca 1944 12/12/2000 General Meeting2007 financial statements
Member
François Fabre 1941 12/12/2000 General Meeting2007 financial statements
On 10 June 2004,Vallourec’s Supervisory Board renewed the appointments of two members of the Management Board, Messrs Pierre Verluca
and François Fabre, for a period of four years, expiring at the close of the General Meeting called to approve the financial statements for
the financial year 2007. Mr Pierre Verluca, who had until that date been Executive Vice-President, was appointed Chairman of the
Management Board to replace Mr Jean-Claude Cabre who had reached the statutory age-limit under the provisions of Vallourec’s By-laws.
Mr François Fabre, who had until then been Executive Vice-President, was appointed a member on the same date.
On 7 March 2006, the Supervisory Board decided to appoint, with effect from 1 April 2006, Messrs Bertrand Cantegrit, Marco Antônio Castello
Branco and Jean-Pierre Michel as members of the Management Board in addition to the existing members Messrs Pierre Verluca and François
Fabre. The expiry of their terms of office is also set as the close of the General Meeting called to approve the financial statements for the
financial year 2007.
Section 6Corporate governance
150 Vallourec 2005 Annual Report
Sect
ion
5
6.1.0.2 Supervisory Board
Year of birth Date of first Date on which Other main appointmentappointment appointment (as Director ceases
or Supervisory Board member)
Chairman
Jean-Paul Parayre 1937 13/06/1989 General Meeting ■ Member of the Supervisory Board 2005 financial statements of Peugeot SA and of the Board
of Directors of Stena International
Vice-Chairman
Patrick Boissier 1950 15/06/2000 General Meeting ■ Chairman and CEO of Chantiers2005 financial statements de l’Atlantique
Members
Luiz-Olavo Baptista 1938 11/06/2002 General Meeting ■ Lawyer and Professor of International Law2007 financial statements
Vincent Bolloré 1952 10/06/2004 General Meeting ■ Chairman and CEO of Bolloré group2009 financial statements
Wolfgang Eging 1949 08/03/2005 General Meeting ■ Chairman of the Executive Board 2005 financial statements of Mannesmannröhren-Werke GmbH
Michel de Fabiani 1945 10/06/2004 General Meeting ■ Director of BP FRANCE2009 financial statements
Heinz Jörg Fuhrmann (*) 1956 14/12/2005 General Meeting ■ Member of the Executive Board and CFO 2005 financial statements of Salzgitter AG
Denis Gautier-Sauvagnac 1943 07/02/1997 General Meeting ■ President and Managing Director of UIMM2005 financial statements
François Henrot 1949 08/06/1999 General Meeting ■ Managing Partner of Rothschild & Cie Banque2010 financial statements and Rothschild & Cie
Wolfgang Leese 1946 11/06/2002 General Meeting ■ Chairman of the Executive Board 2007 financial statements of Salzgitter AG
Jean-Claude Verdière 1938 01/07/2001 General Meeting ■ Member of the Management Board 2006 financial statements of Vallourec until 30 June 2001
Société Financière de Sainte-Marine represented by Mr Thierry Marraud 1946 10/06/2004 General Meeting ■ CFO of Bolloré group
2009 financial statements
(*) Mr Heinz Jörg Fuhrmann was appointed on 14 December 2005 to replace Mr Kunibert Martin who resigned due to his retirement. Mr Heinz Jörg Fuhrmann,Member of the Executive Board and CFO of Salzgitter AG, has spent his entire career in the steel industry.
The Annual General Meeting to be held on 1 June 2006 will be asked to approve the renewal of the appointments of Messrs Patrick Boissier,
Wolfgang Eging, Heinz Jörg Fuhrmann, Denis Gautier-Sauvagnac and Jean-Paul Parayre for a period of five years.
Corporate governance
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
6
151Vallourec 2005 Annual Report
152 Vallourec 2005 Annual Report
6.1.0.3 Executive Committee As at 1 April 2006, the Executive Committee of the Vallourec Group comprised the following members:
Bert Becher Chairman of the Management Board, V & M DEUTSCHLAND GmbH,
Vice-President Sales & Marketing, Hot-Rolled Tubes Division
Bertrand Cantegrit Member of the Management Board
Chairman, Automotive and Industry Division
Marco Antônio Castello Branco Member of the Management Board,
Chairman, Hot-Rolled Tubes Division,
Chairman, V & M do BRASIL SA
Jean Charpentier Vice-President, Human Resources
François Fabre Member of the Management Board
Alain Honnart Chairman, Stainless Steel Division,
Vice-President, Industrial Policy
Marc Karako Chief Financial Officer: Finance, Legal and External Communication
Jean-Pierre Michel Member of the Management Board,
Vice-President, Controlling, Marketing and Purchasing,
Chairman, Oil & Gas activities
Pierre Verluca Chairman of the Management Board
The Executive Board meets each week.
6.1.1 Operation of Administration, Management and Supervisory bodies
6.1.1.1 Internal regulations of the Supervisory Board
During its meeting on 17 April 2003, the Vallourec Supervisory
Board drew up internal regulations designed to formalize its
operating rules and working methods.
The Supervisory Board meets at least four times a year.
In addition to the restrictions on the powers of the Management
Board as stipulated in Article 9, section 3 of the By-laws (see 3.2.0
above), it is also stipulated that the following actions must receive
the prior approval of the Supervisory Board:
■ the repurchase by the Company of its own shares and the granting
to employees of options to subscribe for or to purchase the
Company’s shares as authorized by the General Meeting.
■ any significant transaction of a type likely to modify substantially
the activity or financial structure of the Company and the Group
that it controls or the nature of the risks incurred.
Once a quarter, the Management Board, in accordance with the
provisions of section 4 of Article L. 255-68 of the French Code de
Commerce, submits a report to the Supervisory Board describing as
comprehensively as possible the Company’s current performance.
The Management Board consults the Supervisory Board about the
dividend to be proposed to the General Meeting of shareholders.At
the end of the year it submits the budget, forecast capital expenditure
programme and financing plan for the following year.
In the performance of its duties, the Supervisory Board is regularly
informed by the Management Board of any significant event
concerning the Group’s performance. It ensures that the latter keeps
it informed of all matters that it judges useful and necessary in the
exercise of its supervisory role. In order to ensure the process
operates correctly, the Chairman of the Supervisory Board, assisted
by all members of the Board, ensures that such information is
provided.The specific information required by each of the Committees
of the Supervisory Board is assembled by the Chairman of each of
the Committees in collaboration with the Management Board.
Sect
ion
5
In addition, each member of the Supervisory Board is required to:
■ have converted into registered form all of the Vallourec shares he
holds. The minimum holding requirement, as stipulated by the
By-laws, is fifty shares,
■ regard himself at all times as being in possession of insider
knowledge and as such, in particular, to comply with the provisions
agreed unanimously by the Supervisory Board at its meeting on
11 December 2001 concerning the periods during which members
in possession of insider knowledge may not buy, sell or take
positions in the Company’s shares, i.e. a period of 30 calendar days
preceding the publication of the annual and half-year results
and a period of 15 calendar days preceding the publication of the
quarterly sales figures,
■ comply with the regulations of the french financial markets
authority (Autorité des Marchés Financiers) published on
24 November 2004 as regards the obligation to disclose
transactions carried out by company officers on financial
instruments issued by the Company.
6.1.1.2 Meetings of the Supervisory Board duringthe year ended 31 December 2005
Eight meetings of the Supervisory Board were held in 2005. The
attendance rate was very high and members who were not able to
attend a meeting always appointed a proxy to represent them
(see 8.2 below).The average duration of meetings is about three hours.
6.1.1.3 Independent members and membersassociated with the Company
At its meeting on 17 April 2003, the Supervisory Board examined the
situation of each of its members individually with regard to the criteria
of the “Bouton report”. At its meeting on 2 March 2004, during
which it decided to propose that the General Meeting appoint
three new members, it also examined the situation of these new
members with regard to the same criteria. It based its examination
on the recommendations made by the Appointments and Remuneration
Committee (see 6.1.1.4 below).
As a result of these examinations, the Supervisory Board decided to:
■ consider as independent members Messrs Baptista, Boissier,
de Fabiani, Gautier-Sauvagnac and Henrot.
■ consider as members related to the Company:
– after taking account of the participating interest in Vallourec held by
Salzgitter AG through its subsidiary Salzgitter Mannesmann GmbH
(formerly Mannesmannröhren-Werke):
■ Mr Wolfgang Eging, Chairman of the Executive Board
of Mannesmannröhren-Werke GmbH
■ Mr Wolfgang Leese, Chairman of the Executive Board
of Salzgitter AG
■ Mr Heinz Jörg Fuhrmann, Member of the Executive Board
and CFO of Salzgitter AG.
– after taking account of the participating interest in Vallourec held
by the Bolloré group through its various subsidiaries:
■ Mr Vincent Bolloré, Chairman and CEO of Bolloré group
■ Mr Thierry Marraud, representing Société Financière
de Sainte-Marine and CFO of Bolloré group.
– Mr Jean-Paul Parayre, who was first appointed as a Director more
than 12 years ago, on 13 June 1989.
– Mr Jean-Claude Verdière, member of the Management Board
of Vallourec until 30 June 2001. Mr Verdière will be considered
as independent as from the end of June 2006.
Thus, only five out of the twelve members of the Supervisory Board
are currently regarded as being independent. This proportion is
slightly lower than 50% but the Board considered it important that
its composition should take account of the composition of the
shareholder structure – as the consolidated Vienot/Bouton report
recommends – and, in particular, the existence of two major
shareholders (Salzgitter and Bolloré). The same applies as regards
the composition of the Committees set up within the Board. The
Board has, in this regard, followed the recommendation of the
Appointments and Remuneration Committee.
Corporate governance
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
6
153Vallourec 2005 Annual Report
154 Vallourec 2005 Annual Report
6.1.1.4 Committees set up withinthe Supervisory Board
The Supervisory Board has two Committees:
■ The Finance Committee
■ The Appointments and Remuneration Committee
The Strategy Committee, which was set up in 2000, was abolished
in 2002 since the Board considered that matters coming within this
domain should be examined at full meetings of the Board.
The Committees’ regulations were approved by the Supervisory
Board at its meeting on 17 April 2003.
Finance Committee:
The Finance Committee (formerly called the Audit Committee) was
set up on 5 March 2002. It advises the Supervisory Board on the
relevance and consistency of accounting methods adopted for the
preparation of Vallourec’s Company and consolidated financial
statements, particularly at the time of publication of the annual or
interim financial statements.
This Committee is informed of changes in the earnings, cash,
indebtedness, financial risks and corresponding forecasts for the
Company and its main subsidiaries. It is also kept informed on off-
balance sheet liabilities. More generally, the Finance Committee also
reviews the various elements of the Group’s financial strategy.
The Chairman of the Supervisory Board may decide to refer to the
Finance Committee any issue requiring the Board’s prior approval
(transactions affecting the share capital, the issue of convertible
bonds, bond or other loans, redemptions, etc.), as well as any
proposed acquisitions of significant value.
The Finance Committee supervises the selection of the Auditors, gives
its opinion as to the level of fees charged for the performance of the
statutory audit and submits the results of this selection process to
the Supervisory Board.
It reports to the Supervisory Board in respect of all its duties.
The Finance Committee is composed of Messrs Michel de Fabiani
(Chairman), Thierry Marraud, Jean-Claude Verdière and Heinz Jörg
Fuhrmann who replaced Mr Kunibert Martin on 14 December 2005.
The Finance Committee met four times in 2005. All members were
present at each meeting. One of its main duties was to review the
financial statements for the year ended 31 December 2004 and for
the half-year ended 30 June 2005.
The Statutory Auditors attended two Finance Committee meetings
(preparatory meetings concerning the annual and half-year financial
statements) in respect of the financial year 2005. They submitted a
report on the work performed in accordance with their commitment
to the Supervisory Board.
Among the important subjects examined in 2005, the Finance
Committee paid particular attention to the financing of the acquisition
of the 45% stake in V & M TUBES and its partial refinancing by a
rights offering in cash which was carried out in July, the financial
aspects of the acquisition of OMSCO, and, more generally, the
review of Vallourec’s financial structure and debt in the context of
the Group’s development policy. The Finance Committee also steered
the assessment process of candidates for the renewal of the
appointment as Statutory Auditors.
Appointments and Remuneration Committee:
The Remuneration Committee, set up in 1994 when Vallourec
adopted a management structure with a Management Board and
a Supervisory Board, was renamed the Appointments and Remuneration
Committee on 17 April 2003. Since 8 March 2005, it has been
composed of Messrs Jean-Paul Parayre (Chairman), Patrick Boissier,
Vincent Bolloré, Denis Gautier-Sauvagnac and Wolfgang Leese.
The duties of the Appointments and Remuneration Committee are
as follows:
■ Appointments:
– Preparation of the procedure used to select members of the
Supervisory Board and Management Board and the criteria to
be used.
– Drawing up proposals for appointments and reappointments.
The Committee’s choice of candidates for appointment as members
of the Board must be guided by the interests of the Company and
all its shareholders. It must take into account, in particular, the
desired balance of the composition of the Board in view of the
composition of, and changes in, the Company’s shareholder base.
■ Remuneration:
– Proposals concerning the amount and allocation of attendance
fees paid to Board members as well as the remuneration of
members of the Committees.
– Proposals concerning the remuneration of the Chairman of the
Supervisory Board.
Sect
ion
5
– Remuneration of members of the Management Board: the
Committee is responsible for recommending to the Board the
structure and level of the remuneration paid to each member
of the Management Board (fixed part, variable part and benefits
in kind).
– Share subscription and share purchase options for members of
the Management Board. To this effect, the Committee issues a
notice on the policy for granting share subscription and share
purchase options and reviews each plan that the Management
Board envisages implementing for the benefit of the Group’s
managers and/or employees.
In addition, as regards members of the Executive Committee, the
Committee is informed of their appointment, remuneration and
the arrangements for subsequent appointments.
The Committee met twice in 2005. Its main duties involved preparing
and reviewing information to aid the Supervisory Board take decisions
on the following matters:
■ Review of the composition of the Management Board and the
appointment of new members, in anticipation, in particular, of the
retirement of Mr François Fabre.
■ Revision of the remuneration packages of the members of the
Management Board.
■ Consideration of a draft additional pension scheme entitled
“income guarantee scheme for the retired employees of Vallourec
and Setval”, the aim of which is to supplement the retirement
income of the Group’s managerial staff (whether corporate
officers or not) and to reward their loyalty to the Group.
■ Approval of the implementation of a plan to allocate free shares
to the Group’s employees and corporate officers. This plan was
implemented by the Management Board on 16 January 2006.
6.1.1.5 Remuneration principles■ Remuneration of Management Board members:
The remuneration of Management Board members is composed of
a fixed part and a variable part. The variable part is calculated on the
basis of the consolidated net income (Group share) as adjusted for
exceptional items.The calculation is verified by the Statutory Auditors.
■ Remuneration of Supervisory Board members:
The maximum annual Board Members’ attendance fees for allocation
by the Supervisory Board is € 230,000 (eighth resolution of the
Ordinary General Meeting held on 11 June 2002). The Ordinary
General Meeting to be held on 1 June 2006 (fifteenth resolution) will
be asked to approve an increase in the amount of the annual
attendance fee budget to € 400,000 until further notice. This
increase is justified, in particular, by the fact that, since 2002,
membership of the Board has increased from 10 to 12 members, the
members of the Finance Committee receive an additional attendance
allowance and the position of Censeur (non-voting consulting
Director), which will be created this year (sixth resolution of the
Extraordinary General Meeting to be held on 1 June 2006), may be
remunerated.
The principle adopted is that the same amount is paid to each
Board member, calculated pro rata in the case of an appointment or
termination of an appointment during the year.
In addition to the attendance fees allocated to him, the Chairman
of the Supervisory Board receives remuneration, the amount of
which was increased by the Supervisory Board, as recommended by
the Appointments and Remuneration Committee, to € 85,000 per
year with effect from 1 January 2003.
■ Remuneration of Committee members:
Members of the Finance Committee receive additional attendance
fees set at € 4,700 for 2005.
Membership of the Appointments and Remuneration Committee is
not remunerated.
6.1.1.6 Corporate governanceIn view of the above, Vallourec considers that it complies fully with
the corporate governance provisions currently in force in France.
Corporate governance
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
6
155Vallourec 2005 Annual Report
156 Vallourec 2005 Annual Report
6.2 Managers’ interests
6.2.0 Remuneration and benefits in kind
In accordance with the requirements of Article L. 225-102-1 of the
French Code de Commerce, the total of all remuneration and
benefits of any kind paid to each Company officer during the
financial year 2005, directly or indirectly, by Vallourec or by any
company in the Group, is shown in the Management Board’s
management report (“Remuneration of Company officers”), which
forms an integral part of this Reference Document.
6.2.1 Options granted over Vallourecshares
See 6.3.2. below and the special report on options prepared by the
Management Board in accordance with the requirements of Article
L. 225-184 of the French Code de Commerce.
6.2.2 Transactions with members ofthe Administration, Managementand Supervisory bodies
None.
6.2.3 Loans and guarantees
None.
6.3 Employee profit sharing
6.3.1 Profit sharing and incentive plans
Profit sharing
The amounts paid in respect of special reserves for profit sharing
during the last five financial years are as follows (in € million):
2001 2002 2003 2004 2005
6.40 7.24 1.89 2.97 11.28
Incentive plans
Most companies in the Group have incentive plans enabling employees’
compensation to be related to the company’s performance. Such
performance is determined as a function of operating income or loss
in relation to sales.
Amounts paid in this respect during the last five financial years are
as follows (in € million):
2001 2002 2003 2004 2005
9.07 8.95 5.41 15.8 44.25
Company savings plan:
In France, in 1989, the Vallourec Group formed a Company savings
plan to help employees build up capital over the medium and long
term. In 2005, these arrangements were supplemented by the
implementation, by agreement, of a group retirement savings plan
(Plan d’Epargne Retraite Collectif – PERCO).
Employees’ voluntary payments are topped up by the Company in
accordance with a scale updated each year in relation to the Group’s
performance.
The amounts paid by way of Company contributions over the last five
years were as follows (in € million):
2001 2002 2003 2004 2005 2005PEE PERCO
0.62(*) 0.79 0.61 0.48 0.56 0.93
(*) € 0.52 million in respect of voluntary payments and incentive plans and€ 0.10 million in respect of the employee shareholding plan.
Sect
ion
5
6.3.2 Options
■ Share subscription options
PlanDate of General Meeting 15 June 2000Date of Management Board Meeting 15 June 2000
Total number of options granted 178,500
■ of which number of options granted to those employeeswho were members of the Executive Committeeas at 31/12/2005 31,000
■ number of senior managers involved 7
■ exercise price (*) € 38
■ exercise price adjusted after rights offering on 13/07/2005 € 37.43
Number of options cancelled since date granted (**) 6,750
Adjustment in the number of options following the rights offering on 13/07/2005 218
Date from which options may be exercised 15 June 2004
Expiry date 14 June 2007
Number of shares subscribed as at 31/12/2005(1 option = 1 share) 163,794
■ of which number of shares subscribed by members of the Executive Committee 31,000
Number of options that could be exercised as at 31/12/2005 8,174
(*) 95% of the average for the 20 trading sessions preceding the grant date.
(**) option holders who have left the Group.
■ Share purchase options
PlanDate of General Meeting 15 June 2000Date of Management Board Meeting 15 June 2003
Total number of shares employees may purchase 193,000
■ of which number of shares that those employees who were members of the Executive Committee as at 31/12/2005 may purchase 54,000
■ number of senior managers involved 7
■ exercise price (*) € 53.65
■ exercise price adjusted after the rights offering on 13/07/2005 € 52.85
Number of options cancelled since date granted (**) 2,750
Adjustment in the number of options following the rightsoffering on 13/07/2005 2,896
Number of shares that employees may purchase as at 31/12/2005 193,146
Date from which options may be exercised 11 June 2007
Expiry date 10 June 2010
Number of shares purchased as at 31/12/2005 ---
(*) average of the last 20 prices for the 20 trading sessions preceding thegrant date, not discounted.
(**) option holders who have left the Group.
6.3.3 Employee shareholding
The Extraordinary General Meeting held on 30 January 2001
authorized the Management Board to increase Vallourec’s share
capital on one or more occasions by issuing new shares reserved for
employees of the Group’s French and German companies, within the
framework of the Group savings plan and the legislation concerning
employee savings.
Under the same conditions, that General Meeting also authorized the
intervention of a financial institution, in this case Crédit Agricole
Indosuez Cheuvreux (CAIC), to offer employees the possibility of
benefiting from a leveraged plan.
The Management Board, in full agreement with the Supervisory
Board, decided on 30 January 2001 to use this authorization to
launch the capital increase, which took place on 5 July 2001.
The subscription price was set at € 42.61, corresponding to the
average of the opening Vallourec share prices for the 20 stock
exchange trading sessions prior to 30 January 2001, less a 20%
discount.
The transaction was the subject of a prospectus authorized by the
COB (former French stock exchange authority) on 30 April 2001 under
number 01-477.
The total number of shares subscribed to by employees, directly or
indirectly through company investment funds (FCPE), was 199,755,
i.e. 2.05% of the capital as at 5 July 2001 after the capital increase,
comprising 170,595 shares in France and 29,160 in Germany. The
total number of subscribers was 3,876, i.e. 36.4% of the potential
beneficiaries concerned, which may be considered entirely satisfactory
for a first transaction. In addition, in order to provide the leverage
effect in Germany and based on the number of subscriptions from
employees in that country, CAIC subscribed for 262,440 shares.
Accordingly, a total of 462,195 new Vallourec shares, i.e. 4.75% of
the capital as at 31 December 2001, were issued on 5 July 2001.
Except in the event of early redemptions as provided for by law, the
shares purchased are subject to a lock-up period of five years, until
5 July 2006.
As at 31 December 2005, 15,270 shares were the subject of early
redemptions and the number of shares held by employees, directly
or indirectly via company investment funds (FCPE), amounted to
181,759.
Corporate governance
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
7Se
ctio
n 8
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
6
157Vallourec 2005 Annual Report
7.1 Recent developments and outlook
The favourable environment from which the Group’s activities have
benefited over the last two years looks set to continue. This results,
in particular, in long order books in the oil & gas (excluding North
America) and power generation sectors. Fundamentals in these
markets remain very positive, sustained overall by energy consumption
requirements.
Within this context, Vallourec decided to increase its 2006 gross
capital expenditure budget by around 30% in order to boost
significantly its high value-added finishing capacity: the Group’s
heat treatment capacity is expected to increase eventually by 15%,
whilst production at the Changzhou plant in China (finishing of tubes
for power plants) will begin during the year.
The demand for drill pipes and well equipment is driven by the
increase in oil company exploration and production costs and by the
increasingly difficult well extraction conditions (deep wells, offshore,
deviated wells, etc.). Under these conditions, prices of products for
these markets are expected to remain high, or even be further
increased in the case of high value-added products such as drill pipes,
for example.
The strong demand for products for power plants reflects the
significant number of programmes to build new plants and refurbish
existing plants.
Consolidated sales for the first quarter of 2006 amounted to
€ 1,318.6 million, up 46.4% compared with sales for the first
quarter of 2005, which totalled € 900.8 million. At constant
consolidation scope, i.e. excluding the acquisition of OMSCO whose
results have been consolidated since 1 October 2005, the increase
in consolidated sales would be 43.6%.
Under these conditions, as compared with the first half of 2005,
consolidated sales in the first half of 2006 should continue to grow
at a rate close to the 41.8% annual growth achieved in 2005, and
the EBITDA / sales ratio for the first half of 2006 is expected to be
slightly higher than the 24.6% achieved for the full year 2005.
As regards the second half of 2006, demand currently remains
strong and sales are expected to remain at the high level achieved
in the first half of 2006.
Since the start of 2006, Vallourec has continued to manage its
portfolio of activities in a dynamic manner, announcing:
■ the acquisition of SMFI, which has enabled the Group, following
the purchase of OMSCO, to continue to strengthen its position in
the oil & gas drilling market. SMFI will be consolidated into the
financial statements of the Vallourec Group as from 1 April 2006
and its full-year 2006 sales are estimated at more than
€ 60 million.
■ the signing, on 31 March 2006, of a contract for the sale of its
subsidiary Spécitubes, the only company in the Vallourec Group
operating in the aerospace sector (sales of € 27 million in 2005).
■ the establishing of a presence in India via the acquisition, on
5 April 2006, of 75% of CST (estimated full-year sales of around
€ 15 million after the planned capital expenditure).
Section 7Information on recent developments and outlook
158 Vallourec 2005 Annual Report
159Vallourec 2005 Annual Report
Sect
ion
6Se
ctio
n 5
7.2 Statutory Auditors’ report on the profit forecasts
This is a free translation into English of a report issued in the French language and is provided solely for the convenience of English speaking
readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing
standards applicable in France.
To the Chairman of the Management Board,
In our capacity as Statutory Auditors of your Company and in accordance with EC Regulation no. 809/2004, we have prepared this report
on Vallourec’s profit forecasts included in section 7 of the Company’s Reference Document dated 26 April 2006.
These forecasts and the significant assumptions on which they were based are your responsibility, in accordance with the provisions of
EC Regulation no. 809/2004 and the CESR recommendations on profit forecasts.
It is our responsibility, on the basis of our procedures, to express an opinion, in accordance with the terms specified in appendix I, point 13.3
of EC Regulation no. 809/2004, as to whether said forecasts have been properly prepared.
We carried out our work in accordance with professional standards applicable in France.This work comprised an assessment of the procedures
implemented by Management for the preparation of the forecasts and the implementation of procedures to verify the consistency of the
accounting methods used with those adopted for the preparation of Vallourec’s historical information. Our procedures also included gathering
such information and explanations as we considered necessary in order to obtain reasonable assurance that the forecasts were properly
prepared on the basis of the assumptions as set out.
We would remind you that, since forecasts are, by their very nature, subject to uncertainties, actual results sometimes differ significantly
from the forecasts presented and that we do not express any opinion on the likelihood, or otherwise, of the actual results being in line with
these forecasts.
In our opinion:
■ the forecasts have been properly prepared in accordance with the basis indicated;
■ the accounting principles used in the preparation of these forecasts are consistent with the accounting policies applied by Vallourec.
This report is issued solely for the purposes of filing the Reference Document with the French financial markets authority (Autorité des Marchés
Financiers – AMF) and may not be used in any other context.
Neuilly-sur-Seine, 26 April 2006
The Statutory Auditors
BARBIER FRINAULT & AUTRES CALAN RAMOLINO et ASSOCIES
Ernst & Young
Philippe HONTARREDE Christine STAUB Bertrand de FLORIVAL Bernard SCHEIDECKER
Information on recent developments and outlook
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
8Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 7
160 Vallourec 2005 Annual Report
8.1 MANAGEMENT BOARD REPORTS 161
8.1.1 Management report of the Management Board to the Ordinary General Meeting on 1 June 2006 161
■ Trends in the Vallourec Group’s markets 163
■ Research and Development 170
■ Information provided in accordance with Article L. 225-102, Section 4,of the French Code de Commerce:
– Information on the social implications of the Group’s activities 171
– Information on the environmental consequences of the Group’s activities 179
■ Consolidated financial statements 181
■ Vallourec (Holding Company) 182
■ Remuneration of Company officers 182
■ Information on the breakdown of capital 183
■ Regulated agreements 183
■ Allocation of net income 184
■ Supervisory Board 185
■ Statutory Auditors 185
■ Attendance fees 185
■ Share buy-back programme 185
■ Appendix to the Management Board’s management report: List of other positions held by Vallourec Company officers 186
8.1.2 Special report of the Management Board on options 203
8.2 REPORT OF THE CHAIRMAN OF THE SUPERVISORY BOARD 204
on the conditions governing the preparation and organization of the Supervisory Board’s work and on the internal control procedures
8.3 STATUTORY AUDITORS’ REPORTS 208
8.3.1 Statutory Auditors’ general report on the annual statutory accounts 208
8.3.2 Statutory Auditors’ special report on certain related party transactions 210
8.3.3 Statutory Auditors’ report on the consolidated financial statements 212
8.3.4 Statutory Auditors’ report on the report of the Chairman of the Supervisory Board on internal control procedures 214
8.4 SUPERVISORY BOARD REPORT 215
8.5 RESOLUTIONS PROPOSED BY THE MANAGEMENT BOARD 216
8.6 SUBSIDIARIES AND PARTICIPATING INTERESTS AS AT 31 DECEMBER 2005 220
8.7 COMPANIES CONTROLLED DIRECTLY OR INDIRECTLY AS AT 31 DECEMBER 2005 221
8.8 EVALUATION OF SECURITIES PORTFOLIO AS AT 31 DECEMBER 2005 222
8.9 FIVE-YEAR FINANCIAL SUMMARY 223
Section 8Specific documents for the Ordinary General Meeting on 1 June 2006
Sect
ion
5
8.1 Management Board reports
8.1.1 Management report of the Management Board to the Ordinary General Meetingon 1 June 2006
After an excellent year 2004, 2005 was likewise a year that broke
all records, both in terms of activity and results. 2005 also saw the
achievement of an essential step in the Group’s development with
the acquisition of the 45% stake in V & M TUBES previously held by
Mannesmannröhren-Werke. Thanks to this acquisition, Vallourec
now has full control over the implementation of strategy in its main
subsidiary.
Consolidated sales for the year totalled € 4,307.4 million,
41.8% up on 2004 sales which were themselves at record levels.
At € 3,037.8 million, 2004 sales were up 27.9% compared with
2003 and, for the first time, broke through the symbolic € 3 billion
barrier.
Whilst in 2004 the rise reflected mainly an increase in volumes
(+14.6%), the 41.8% increase in 2005 was mainly due to a mix,
price and currency effect of 35.7%, the volume effect being limited
to 6%, with most of the Group’s production facilities operating at
full capacity since 2004. The scope effect was insignificant (-1.5%).
The mix, price and currency effect was mainly due to the fact that
Vallourec, benefiting from a favourable economic climate, was able
to continue to apply further selling price increases in 2005, particularly
in Brazil and the United States, and to constantly improve its product
mix, whilst the full effect of price increases negotiated in 2004
was felt throughout 2005.
In the oil & gas sector,Vallourec achieved very strong growth in 2005
in North America and the rest of the world thanks to high volumes
and a sharp rise in selling prices, particularly in the case of high value-
added products. Sales increased by 65.4% over the year as a whole
and were 35.7% higher in the second half than in the first. Sales in
the power generation sector were 55.0% higher in 2005 than in
2004, reflecting the strength of this market, particularly in China,
which continues to represent more than 50% of Vallourec’s sales in
this sector. In the rest of the world, sales also increased due to
renovation and maintenance programmes. Overall, oil & gas and
power generation activities together represented 59.3% of Vallourec’s
consolidated sales in 2005, illustrating the Group’s policy of focusing
increasingly on the energy sectors. By comparison, these activities
accounted for only 34.6% of total annual sales in 2000.
Mechanical engineering, which is essentially a European business,
benefited from the strong world demand for raw materials and
energy, which created a very favourable environment for our
applications. Over the year as a whole, sales in this sector increased
by 33.9% compared with 2004. In the chemicals and petrochemicals
sector, where Vallourec is becoming increasingly involved in major
projects, sales increased by 38.0% in 2005. Tubes and components
for the automotive industry, by contrast, suffered in 2005 from the
fact that the number of new cars registered in Western Europe
remained virtually stable (down 0.7%) and, more particularly, from
the fall in the number of vehicles sold by PSA and Renault, the
Group’s two main customers in this market.At constant consolidation
scope, Vallourec’s sales nevertheless grew by 12.3%.
In terms of geographic breakdown, the global character of the
Group’s activities is becoming more apparent each year. France’s share
of 2005 consolidated sales was less than 10% (9.5%) and sales
outside the enlarged, 25-member European Union represented
more than 60% (61.3%) of the total, due, in particular, to increases
in Asia and North America. Five years ago, in 2000, sales in France
accounted for 22.7% of consolidated sales and those outside the
Europe "of 15" accounted for only 41.6%.
Operating costs increased by 27.8%. This increase was due, on the
one hand, to a 36.8% rise in purchases of raw materials and, on the
other hand, to a 20.1% rise in all other operating costs. The increase
in purchases of raw materials, which was significantly greater than
the 14.6% increase in volumes, was due mainly to the sharp rise in
their prices. Even though they tended to stabilize this year, average
purchase prices were significantly higher than those of 2004.The rise
in other operating costs was due, in particular, to the increase in
transportation and energy costs.
The increase in selling prices and the enhanced product mix were the
main causes of growth in EBITDA, which increased by 133.3% to
€ 1,060.6 million compared with € 454.6 million in 2004. EBITDA
therefore achieved the record level of 24.6% of sales compared with
15.0% the previous year, which was itself a record.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
161Vallourec 2005 Annual Report
162 Vallourec 2005 Annual Report
The effective tax rate was 32.8% compared with 25.2% in 2004,
since the Group had already used up almost all of its tax credits.
Total consolidated net income for 2005 was € 632.4 million,
i.e. 14.7% of sales, compared with € 265.2 million, i.e. 8.7% of sales,
in 2004, representing an increase of 138.5% over the previous year.
Due, in particular, to the positive effect of the acquisition of the 45%
stake in V & M TUBES, which was effective as from 1 July 2005, net
income, Group share, more than tripled to € 473.0 million compared
with € 145.0 million in 2004. If the acquisition had taken place on
1 January 2005, Vallourec’s net income, Group share, would have
been € 576.7 million in 2005, instead of € 473.0 million, although
total net income would have remained almost unchanged.
In this context, it should be noted that the total amount of employee
profit sharing (both statutory and non-statutory profit sharing plans)
allocated to the Group’s employees rose sharply to € 55.5 million
this year compared with € 18.8 million in 2004.
Despite an increase in gross capital expenditure of 86% to
€ 192.4 million in 2005, and financial investments totalling
€ 651.3 million (acquisition of the 45% stake in V & M TUBES and
OMSCO’s assets), the Group’s total net debt grew by only
€ 259.3 million in 2005 because the rights offering in July 2005,
which generated a net amount of € 123 million, enabled the Group
to limit its recourse to debt.
The Group’s cash position thus changed from positive net cash of
€ 54.6 million at 31 December 2004 to net debt of € 204.7 million
at 31 December 2005, representing gearing (net debt / shareholders’
equity) of 13.6%. It is important to note that the preservation of a
sound financial structure is one of the key elements of Vallourec’s
strategy since it guarantees that the Group will be able, at all times,
to manage its development independently and, in particular, to
seize any opportunities for growth that may arise.
Capital expenditure in 2005 totalled € 192.4 million, up sharply
(+86%) compared with the € 103.1 million incurred in 2004.
The main items making up this total were as follows:
■ In Brazil, increases in production capacity in respect of steel and
tubes as a result of the modernization of the steel mill’s continuous
caster, the commissioning of a new furnace, modifications to the
piercer and the downstream equipment of the continuous rolling
mill and increases in drawing capacity.Additional resources were
also allocated to mining and forest cultivation.
■ As regards boiler tubes for the energy sector, the increase in
production capacity in Europe in respect of large and small tubes
and the commencement in China of construction work on a
machining and finishing workshop, which will become operational
as from mid-2006.
■ In the stainless steel sector, increases in Changzhou Valinox
Great Wall Co. Ltd’s capacity in respect of condenser tubes by the
commissioning of additional welding machines.
More generally, the very high utilization of the Group’s production
tools since 2004 has resulted in extremely significant levels of
expenditure on maintenance and upgrading at all plants.
The continuing improvements in safety and working conditions as
well as compliance with environmental standards has also resulted
in a material increase in expenditure in these areas.
Details of the main investments made during 2005 and the two
preceding financial years are provided in section 4, paragraph 4.4.1,
of the Reference Document for the financial year 2005, of which this
report is an integral part.
As regards 2006, a further strong rise in capital expenditure, of more
than 30%, is being considered, particularly in order to significantly
increase the finishing capacity in respect of high value-added
products.
As regards financial investments, in addition to the acquisition of full
control of V & M TUBES already detailed above, a significant strategic
investment was also made in 2006 with the acquisition of the
assets of OMSCO, a division of Shawcor Ltd (Canada), which is based
in Houston (USA) and specializes in the manufacture of steel drill
pipes for the oil & gas industry. The company OMSCO Inc. has been
consolidated into the financial statements of the Vallourec Group since
1 October 2005. This acquisition has enabled Vallourec to become
the world number two in this sector, a position further strengthened
by the acquisition, completed on 21 March 2006, of SMFI (Société
de Matériel de Forage Industriel), a company based in Cosne-sur-Loire
in France, which specializes in the manufacture of drill collars, heavy
weight drill pipes and high-tech products for oil & gas drilling.
V & M TUBES made these two acquisitions.
In November 2005,Valtimet entered into a joint-venture agreement with
the Chinese company Baoti to form Xi’an Baotimet Valinox Tubes Co. Ltd,
in Xi’an, in the Chinese province of Shaan’Xi. During 2006, this company
will start producing welded titanium tubes for the Chinese power and
chemicals markets.
Sect
ion
5
At the beginning of April 2006, Valtimet announced the acquisition
of 75% of CST Ltd, an Indian company located in Hyderabad, which
specializes in tubes for power plant condensers for the Indian market.
The company was renamed CST Valinox Ltd.
As regards divestments, of note is the disposal referred to above at
the beginning of 2005 of the automotive assembly and components
activities in the Mercosur region, which no longer formed part of
the Group’s long-term development strategy. At the end of March
2006 the sale was announced, to one of its main customers, of the
subsidiary Spécitubes, which specializes in tubes for the aerospace
sector. The affiliation with its new shareholder will enable Spécitubes
to strengthen its position as European leader, whilst developing
complementary activities for major aerospace customers.
TRENDS IN THE VALLOUREC GROUP’S MARKETS
■ Oil & gas
In 2005, the Group achieved sales in the oil & gas market of
€ 1,829.0 million compared with € 1,106.0 million in 2004, i.e.
an increase of 65.4%. Excluding the scope effect resulting from
the acquisition of OMSCO’s assets, which was effective as from
1 October 2005, the increase would have been 62.8%.This increase
was achieved as a result of high volumes and a significant increase
in selling prices, particularly for high value-added products. The oil
& gas market’s contribution to the Group’s total consolidated sales
has increased significantly: from 36.4% in 2004 to 42.5% in 2005,
clearly confirming that this remains the Group’s key market.
The tubes produced by Vallourec for the oil & gas industry are largely
threaded tubes designed for so-called “vertical” uses. They are used
in wells, either during drilling operations or for equipping and operating
the wells.These products are referred to as Oil Country Tubular Goods,
abbreviated to OCTG.Vallourec also supplies line pipes for collecting
and transporting petroleum products, especially offshore.
The whole of the petroleum industry has been, for the last two years,
and continues to be driven by an increased demand and the soaring
price of oil and natural gas. Having increased by 8.5% in 2004,
worldwide capital expenditure on hydrocarbon exploration and
production increased by nearly 13% in 2005, according to the
French Oil Institute (l’Institut Français du Pétrole - IFP). No significant
fall is expected in the short or medium term and 2006 will doubtless
be a similar year with, also according to the IFP’s projections, a further
8-10% increase in worldwide exploration/production expenditure.
During most of 2005, oil prices fluctuated between USD 55 and
USD 65 a barrel with historical highs of close to USD 70 or even
occasionally slightly above that level, depending on circumstances
(hurricanes in the United States or social or political tensions in,
notably, Iraq, Iran, Nigeria and Venezuela). At the beginning of
April 2006, tensions between the international community and
Iran concerning the latter’s nuclear policy once again sent oil prices
towards earlier record levels.
The price of gas has developed in a similar manner to that of oil and
has been increasing incessantly in recent years, to reach an average
of USD 8.99/Mbtu in 2005, up 45.4% compared with the average
price of USD 6.19/Mbtu in 2004. It was USD 5.50 in 2003 and
USD 3.36 in 2002.
Currently no expert, whether a pessimist or optimist depending on
the viewpoint one takes, thinks that oil prices will fall significantly
in the near future. Regardless of short-term tensions, this situation
is expected to last at least until the shortfall in investment in recent
years, in terms of both production and exploration, has been
made good.
In the case of exploration in particular, several factors lead one to
assume that activity could remain at the top of the cycle for a fairly
long period, contrary to past experience: the need to obtain additional
sources of supply and to reduce the dependency on production
zones considered to be at risk, the high level of oil & gas prices that
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
163Vallourec 2005 Annual Report
164 Vallourec 2005 Annual Report
make virtually all drilling programmes profitable and the need to
rebuild reserves, which are currently considered to be totally
insufficient to meet future needs. In this regard, the International
Energy Agency, in a study published recently, predicts that world
demand for oil will increase by 46% between 2003 and 2030 and
demand for natural gas by 76%. Including coal, in 2030 these
three sources are expected to still be supplying more than 80% of
the world’s energy. These requirements will result in colossal
investment, in terms of both production capacity and infrastructure.
To return to the present, the number of rigs in operation, which is
a significant indicator for Vallourec of the demand for its OCTG
products, significantly increased once again in 2005.
In this regard it is important to note – and this remark is valid for
the entire oil & gas market – that the rate of growth in demand for
OCTG products, in terms of both volumes and quality, is greater than
that for drilling products since growth in the activity is taking place
in conditions that are becoming increasingly difficult from a technical
point of view, in the case of both deep wells and off-shore. In
addition, a major part of the recent development in the activity has
concerned drilling for gas, which requires products that are more
technically advanced (in terms of resistance to leaking and corrosion)
in which Vallourec, through, in particular, its VAM® range, has
recognized expertise.At the beginning of 2006 in the United States,
around 85% of drilling was for gas.
In addition, as regards exploration, the discovery of new reserves
implies the implementation of increasingly extensive programmes and
this phenomenon can only become more pronounced with time.
Another way of boosting reserves is better exploitation of oil & gas
fields that have already been identified (enhanced recovery) or
improved effectiveness of the production process and the
development of increasingly sophisticated products, associated with
an increased frequency of risks of corrosion.
This being the case, the number of rigs in operation in the United
States (the benchmark zone) was on average 1,381 in 2005 compared
with 1,190 in 2004 (+16%), 1,031 in 2003 and 831 in 2002, a poor
year. In March 2006 the number of rigs in operation in this zone was
1,551, i.e. over double the low point of 750 in April 2002. The level
of drilling is also very high in Canada, with an average of 458 rigs
in operation in 2005, 24% higher than in 2004.
In the EAME region (Europe,Africa, the Middle East and the Far East,
excluding Iraq and on-shore China), drilling has continued to increase
steadily, although at a slower rate than in the North American
region.The number of rigs in operation was on average 592 in 2005,
8.6% higher than in 2004 (545).At the beginning of 2006 there were
640 in operation, close to the highest level during the last fifteen
years. There is, however, scope for improvement as regards our
OCTG products, as is illustrated, for example, by the targets for capital
expenditure on production equipment announced recently by Aramco.
It is important to note the strong performance of the North Sea
market which, after a catastrophic 2003 and an upturn in 2004,
experienced a record year in 2005 thanks to the increasing power
of the independents, which are increasingly replacing the large
companies in this mature market. 2006 is expected to be better still,
unless increased taxes imposed on the oil companies by the British
government have a negative impact on activity.
In Brazil, drilling continues to grow significantly, particularly deep
off-shore drilling, where world records are regularly beaten.
In total, the number of rigs in operation worldwide (excluding
on-shore China, Iraq and the former USSR) was on average 2,746
in 2005, compared with 2,395 in 2004 (+14.7%), 2,174 in 2003
and 1,829 in 2002. In February 2006, the number stood at 3,193,
and there is no indication of a fall in the near future.
Sect
ion
5
■ Power generation
The products manufactured by the Group in this sector include
carbon steel tubes, alloy and stainless steel or titanium tubes. These
products, which are designed for power generation plants, include
specialties for which there are few competitors, such as tubes for
nuclear steam generators and header pipes for classic thermal
power generation plants, the diameter of which may reach 1.5 m and
the thickness 30 cm. All these tubes have highly sophisticated
technical features and must, in particular, be capable of withstanding
the extreme temperatures, pressures and corrosion that are found
in all power generation plants.
In the field of electric power generation, whether conventional
(fossil fuel) or nuclear, the average construction period is several years
and our products are used in the second phase of the construction.
This explains why the consequences of changes in market trends are
lagged.After the low point reached in 2003, at which time the sector
was still suffering from the repercussions of the South-East Asian
monetary crisis in 1997 and the Enron affair, the energy sector has
enjoyed a significant upturn since 2004, driven by the enormous
worldwide requirements for energy, which are constantly increasing,
particularly in China. The International Energy Agency states that, in
order to be able to meet this growing demand, particularly in the
emerging countries, between now and 2030 additional power
generation capacity of around 4,700 GW will be required, in the form
of either new or refurbished plants. Current installed capacity is about
4,000 GW. As regards the capital expenditure in respect of this
additional capacity, approximately 75% will be allocated to
conventional thermal power generation plants, whether combined
cycle or nuclear, in which area Vallourec is directly involved, with the
remaining 25% being apportioned between hydroelectric, wind
and other alternative sources of power generation.
It should be noted that, in the case of electricity generation plants,
one of the main concerns of operators is, of course, to improve returns
and performance, which depend mainly on operating conditions that
are becoming increasingly difficult, in terms of both temperature and
pressure.Vallourec is very well placed to take advantage of this trend
due to its unique range of special, high-tech products (boiler pipes
in special alloys, header pipes and U-bent feedwater heaters) in which
the Group is indisputably the world number one with a significant
lead over its immediate competitors.
For a large number of products, the complexity of the technology,
industrial protection (patents) and the certification and accreditation
processes, particularly where lengthy performance testing is involved,
are significant barriers to their entry into the market.
In 2005, Vallourec’s sales in the power generation sector totalled
€ 724 million, 55% higher than in 2004 (€ 467 million). Sales in this
sector have been increasing since the end of 2003. Sales in the
second half of 2005 were 36.6% higher than in the first half and the
contribution of this sector to consolidated Group sales has continued
to rise, accounting for 16.8% in 2005 compared with 15.4% in 2004.
The market for boiler tubes has remained buoyant and continues to
be driven by Chinese demand.After the strong surge in 2004/2005,
Chinese demand in 2006 has remained at its extremely high level.
It should be noted that, in mid-2005, the Group approved the
construction, on the Changzhou site in China where Valtimet already
has a presence, of a plant specializing in the machining and cold
finishing of large-diameter tubes (steam headers) produced in
Germany for power generation plants.
Some other countries in the Middle East and Far East (South Korea,
Thailand, Burma and Japan, among others) also have high levels of
demand for electricity. The outlook as regards the Indian market, in
particular, is constantly improving. The Indian programme for the
construction of new thermal power plants within the 2007-2012
budget has been increased and now provides for the commissioning
during that period of additional capacity of 89 GW. This increase,
although not on the scale of that experienced in China, is nevertheless
significant in comparison with the previous budget.
In Europe and North America, the large number of moderately
significant projects concerning the maintenance or renovation of
combined-cycle power plants enabled activity levels in 2005 to
remain high.
The European market is improving constantly.V & M TUBES has just
been awarded the order to supply tubes for the power plant
constructed for RWE in Neurath, in Germany. Some of these tubes
will be manufactured in the new grade of steel (VM12) developed
and patented by V & M TUBES for the so-called “ultra supercritical”
power plants. V & M TUBES has also been nominated supplier for
the Lagisha project in Poland – the world’s largest “circulating
fluidized bed” power plant (injection of limestone into the coal for
sulphur capture).
The US market is also improving. One of the recent highlights was
the passing of the new law on energy, which, as regards electricity
production, provides finance and tax incentives designed to boost
the construction of plants using clean coal technology. After years
of waiting, this should facilitate the reappearance of fossil-fuelled
thermal power plants in the country.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
165Vallourec 2005 Annual Report
166 Vallourec 2005 Annual Report
In the case of stainless steel and titanium tubes produced by
Valtimet for the power generation sector, demand also remained
buoyant in 2005, mainly as a result of the high requirements of the
Chinese market.Valtimet benefited significantly from its presence in
the country for nearly 10 years. In Changzhou, the additional capacity
commissioned at the end of 2004 was fully used from day one.
Installation is underway of a new production line that will increase
capacity by a further 15%. This new production line will be
operational shortly.
With the aim of strengthening further the Group’s presence in this
key market, at the end of 2005 Valtimet entered into a joint-venture
agreement with Baoti, the leader in the Chinese titanium market, to
manufacture in China welded titanium tubes for the local electricity
and chemicals markets. The company, which has been named
Xi’an Baotimet Valinox Tubes Co. Ltd, is 60%-controlled by Valtimet.
Production is planned to start during the second half of 2006.
The main difficulty Valtimet experienced in 2005 concerned titanium
supplies. The price of titanium soared in 2005 due to high demand
from the aerospace sector and the shortage of “sponge”, the first
stage in the processing of the ore. This situation is expected to last
at least until the end of 2006 – the timescale needed for the
commissioning of the additional production capacity currently being
generated. The renegotiation of supply contracts proved to be very
difficult but Valtimet was able to capitalize on its long-standing
relationships with suppliers to obtain the quantities it required and
therefore to gain a competitive advantage. Fortunately, the company
was able to pass on virtually all of the price increases, but, in view
of the levels of such prices, there is a risk that some customers may
seek to replace titanium with alternative products.
As regards nuclear power, the “renaissance” looks set to continue.
Due to the ecological preoccupations surrounding other types of
energy, nuclear power seems increasingly to be the only credible
economic and industrial solution that will facilitate a reduction in
greenhouse gas emissions. All market signals confirm that the
upturn in nuclear power is not a passing phenomenon and that
demand for tubes could continue to increase. The almost daily
emergence of new projects confirms this trend. It is now definite that
additional power plants will be built in the United States starting from
2010. In Asia and Europe, where new projects are already underway,
the momentum is continuing. In addition, the maintenance
requirements in respect of the equipment installed in the 1970s and
1980s and the postponement of planned closures of power plants
will also generate significant requirements over the long term.
As regards the immediate future, Valinox Nucléaire’s order book is
full until the end of 2007 and 60% of its significantly-increased
production capacity has already been reserved until 2010.
Finally, it is important to note that the “Pôle Nucléaire Bourgogne”
association chaired by Valinox Nucléaire, which comprises around fifty
companies within the sector including Framatome, EDF, DMV and
Eramet, has been designated a “competitiveness cluster” by the
French government. This recognition will make the Group eligible for
support in terms of Research and Development and training.
■ Mechanical engineering
This is Vallourec’s business line that is the most closely linked to the
general economic trend. It has a very strong European dimension -
about 80% of sales are made in Europe.
Sales are mainly associated, on the one hand, with industrial
investment in general for all products incorporating sophisticated
tubular parts that offer a technical advantage and, on the other hand,
with the automotive industry (requirements of sub-contractors
manufacturing mechanical components).
With a wide range of hot-finished or cold-drawn tubular products
from 5 to 1,500 millimetres, the Group is involved in all of the sector’s
applications, including mechanical engineering, mining, lorry axles,
mine drilling equipment, off-shore platforms, cranes, lifting equipment
and hydraulic circuits. In addition, in order to be able to meet its
customers’ needs, Vallourec has developed, under registered
trademarks (Mecaplus®and Ecoval®), a range of grades of
fine-grained micro-alloyed carbon steel that respond perfectly to the
problems specific to the sector and also facilitate bespoke solutions.
Vallourec is thus world leader in all tubular steel applications for the
mechanical engineering sector with customized products and
recognized quality.
2005 confirmed the significant recovery experienced in 2004, after
four years of continuously falling sales. In 2005, sales in the
mechanical engineering sector totalled € 573 million compared with
€ 428 million in 2004, i.e. an increase of 33.9% after the increase
of 30.5% already achieved the previous year. The contribution
made by the sector to the Group’s consolidated sales nevertheless
fell slightly, from 14.1% in 2004 to 13.3% in 2005, due to the
significant growth in the two markets linked to energy (oil & gas and
power generation), but was higher than that of the automotive
market, which suffered from both the mediocre European economic
Sect
ion
5
climate in this sector in 2005 and the disposal of the components
activities in the Mercosur region.
Demand for tubes for mechanical engineering, industry and general
uses remained buoyant in 2005 with the exception of a slowdown
in the middle of the year due to the prudent policy adopted by traders
and distributors fearing that increased energy costs would adversely
affect economic activity. However, the effects of this policy remained
limited since neither distributors nor end customers had excessively
high inventory levels, due to the curtailment measures adopted in
2004 and again at the beginning of 2005 because production
equipment was operating at full capacity. Nevertheless, sales in
the second half were slightly lower (6.5%) than those of the first half,
which was amplified by the summer seasonal effect.
Overall, taking 2005 as a whole, sales benefited from the strong
world demand for raw materials and energy that created a very
favourable environment for our applications with our European
customers who are major exporters. High levels of exports were made
to the North American market and major orders have been received
from the Chinese market, to meet, in particular, the needs of crane
builders. Finally, mining exploration tubes continued to be the
subject of strong demand, in a very favourable economic climate
boosted by high raw material prices.
At the beginning of 2006, demand overall was at a very satisfactory
level and the Group’s policy is to focus on high value-added products
without jeopardizing the comprehensive service provided to
customers.
■ Automotive
The Group’s sales in the automotive sector in 2005 totalled
€ 483 million compared with € 501 million in 2004, i.e. a fall of
3.6%. The contribution from the automotive activity to the Group’s
consolidated sales also fell from 16.5% in 2004 to 11.2% in 2005.
It should however be noted that the Group sold, with effect from
1 January 2005, its automotive components activities in the Mercosur
region (Vallourec do Brasil Autopeças Ltda in Brazil and Vallourec
Argentina in Argentina). The sales achieved by these two companies
totalled € 71 million in 2004. At comparable consolidation scope,
2005 sales in the automotive sector increased by 12.3%.
The Vallourec Group’s products for the automotive industry are
manufactured in Europe and Brazil and supplied almost exclusively
to these two markets, for reasons that relate mainly to the constraints
of the just-in-time methodology. Most of the products consist of
precision tubes (drawn or welded) used by carmakers or their parts
manufacturers and the rest consists of components or sub-assemblies
designed to be mounted directly onto vehicles.
In the European automotive market (26 countries), despite a general
fall of 0.7% compared with 2004, the number of new vehicles
registered in 2005 remained comfortably above the 15 million
barrier. With sales of passenger cars totalling 15.2 million in 2005,
it proved itself to be a mature market, without significant annual
increases but with a very sound base in terms of volume, despite
economic uncertainties. Without the countries that recently joined
the European Union, which have seen their activity slide overall by
10% entailed by the slump in the Polish market (down 26%
compared with 2004), the former Western Europe would have
recorded activity levels that remained more or less stable from one
year to the next.
The 2005 figures confirm the downturn experienced by the two
French carmakers that are also Vallourec’s main customers in this
activity. Renault saw its annual sales fall by 5.2%. The relaunch of
the Clio (version III) did not mask the problems surrounding the
Modus, sales of which were below even the most pessimistic targets,
and customers’ increasing disaffection with the Megan and its
spin-off, the Scenic, both of which are former flagship models that
have come to the end of their careers. The situation is rather more
mixed at PSA where Citroën’s good performance (+1.3%) has to
some small extent offset Peugeot’s sudden decline (-6%). For the year
as a whole, the PSA group recorded a downturn of 2.9%. It suffered
not only from the very disappointing sales of the 1007 but also from
a drop in sales of the 407 which, after a good start (1,000 vehicles
per day), fell to around 700, whilst average sales once production
was fully underway were budgeted at 1,200 per day.
Despite this unfavourable environment, the Group held up relatively
well thanks to its specialist products such as tubes for airbag
inflators, high-pressure injection beams, in respect of which Vallourec
has entered into three-year contracts with the main players in the
European market, and stainless steel products. The automotive
components activity benefited from the success of the new product,
the engine add-on, which consists of a tubular structure that offers
smart crash behaviour through programmed deformation placed in
the front of the engine cradle and designed to absorb energy in the
event of violent impact. This high-tech solution is already used in the
Peugeot 407 and Citroën C4, as well as the new 207 model.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
167Vallourec 2005 Annual Report
168 Vallourec 2005 Annual Report
Renault, which until now has chosen to develop its own system, has
just begun using this product to equip one of its new models. The
outlook for this new product is extremely encouraging. Finally,
demand for suspension systems for the Peugeot 807/Citroën/Fiat
people carriers remains stable.
It is undoubtedly the case that Vallourec’s automotive business
suffered during the second half of the year as a result of the
problems of its two main customers: although, at comparable
consolidation scope, sales for 2005 as a whole grew by 12.3%, as
detailed above, sales for the second half were more than 15%
lower than those of the first half.
Trends in the bearing tubes market were similar to those in the
automotive activity.
In Brazil, after a record year in 2004, the automotive manufacturing
market (cars and lorries) remained buoyant in 2005, with growth of
around 5% as a result, in particular, of exports and in spite of the
strength of the domestic currency.The agricultural machinery market,
by contrast, suffered a significant downturn.
During the first quarter of 2006, the European automotive market
experienced a 3.4% increase in new car registrations. The French
carmakers continued to struggle but the PSA group fared a little
better with growth of 0.3% compared with the first quarter of
2004 whilst Renault suffered a 9.2% fall. Peugeot is placing a lot
of hope on the new 207, which it began to market at the beginning
of April 2006. The company intends to manufacture more than
600,000 models, i.e. 3 100 per day, a significantly higher volume than
that of its direct competitors in a segment that is crucial since it
represents one-third of the European market. Vallourec has a
considerable interest in the future of this vehicle, for which it
supplies the add-ons directly and the tubes for seats indirectly
through Faurecia.
■ Chemicals and petrochemicals
After years of stagnation, in 2005 the chemicals and petrochemicals
market clearly confirmed the upturn already seen in 2004, particularly
in the second half of the year.
The Group’s sales in the sector totalled € 461 million, i.e. an
increase of 38% compared with sales of € 334 million in 2004,
which were themselves 22.3% up on the preceding year. Sales in the
sector have been increasing for two years now, with each half year
recording higher sales than the one before, and sales in the second
half of 2005 were 14.4% higher than in the first half of the year.
The relative contribution of the chemicals and petrochemicals activity
to Group consolidated sales has nevertheless fallen slightly, to 10.7%
compared with 11% last year, due to the very good performance of
the oil & gas and power generation markets, as described above in
this Reference Document.
In this sector, the Vallourec Group is developing a wide range of
products in carbon steel, alloys or stainless steel and titanium that
meet the specific requirements for each type of use: low or high
temperatures, corrosive atmospheric conditions and particular
constraints. The most popular products are line pipes, smooth, riffled
or finned heat exchanger tubes, furnace tubes, and fittings used in
oil refineries and chemical and petrochemical production plants,
whether as new equipment or for maintenance.
Vallourec’s main outlet in this activity is the petrochemicals market.
It is also a world market. Sales in North and South America, where
the Group has two subsidiaries V & M STAR and V & M do BRASIL,
constitute about half of total sales, whilst sales in all other regions
(Europe, the Middle East, the Far East, North Africa and Southern
Africa, and Australasia) constitute the other half.
Although capital expenditure in the market has remained stagnant for
a number of years, despite the obvious need for such investment, 2005
seems to have marked a turning point, particularly in the petrochemicals
sector.The major problems associated with the excess of the demand
for energy over the available supplies in the long-term are not
regarded as straightforward economic problems but are now seen as
one of the main reasons for the current high prices of oil & gas products.
In the refining sector, world installed capacity is no greater today than
it was at the beginning of the 1980s whilst consumption of refined
products has continued to grow steadily during the intervening
period. In the United States, where no additional capacity has been
created for 30 years, hurricane Katrina was the catalyst (although none
should have been needed) that brought this inadequacy to public
attention.Work is due to begin on a significant number of projects in
the near future. These projects involve both the renovation and
updating of existing capacity and the construction of additional
capacity since the problems associated with the geographical location,
which had been one of the major obstacles, appear to have been
resolved. In the rest of the world there are a large number of projects
at the draft stage or in progress, particularly in the Middle East (Abu
Dhabi, Iran, etc.). For the same reasons, the significant maintenance
and upgrading programmes announced recently by the oil companies
Sect
ion
5
are expected to result in substantial investment in coming years,
particularly in Europe.
In addition, faced with the fear of a gradual depletion of conventional
oil supplies, the oil companies are focusing on “non-conventional”
crude oil (extra-heavy, tar sands, etc.) the exploitation of which is now
profitable given the surge in the oil price. The reserves in Canada are
huge but there are also reserves in Venezuela (Orinoco), Iran, Brazil,
China and Russia and their exploitation will necessitate significant
investment as regards both production and processing.
In view of the above, and since refining margins are higher than they
have been for 30 years, the upturn in demand experienced at the end
of 2004 looks set to continue and the outlook has every reason to
remain positive for the foreseeable future.
■ Others
This heading comprises mainly the construction and aerospace
markets. Their respective contributions to Vallourec’s consolidated
sales decreased from 6.6% in 2004 to 5.5% this year and is
expected to fall in 2006 with the disposal of Spécitubes, which is due
to take place during the first half of the year. Spécitubes is the
European leader in the production of stainless steel and titanium
tubes for the aerospace sector with sales of € 27 million in 2005.
The company is to be acquired by one of its main customers.
The affiliation with its new shareholder will enable Spécitubes to
strengthen its position as regards major customers in the aerospace
sector and develop its range of products for this sector. 2005 was
a very good year for the aerospace sector and nothing seems to
dampen the sector’s optimism in the short term.
In the case of construction, the Group provides a complete range of
very high quality structural tubes and sectioned shapes for large
construction projects. Such projects have become more numerous in
recent years and have led to buoyant demand for these types of
products. Steel is being used increasingly in modern architecture,
either on its own or in conjunction with other materials, especially
glass. The significant technological progress achieved as regards the
strength of steel now enables building projects to combine boldness
and aesthetics in a way that would previously have been impossible.
The Group’s products are being used in an increasing number of
impressive projects: Bangkok airport, the new central station in
Berlin, Wembley stadium in London, the Bernabeu stadium in
Madrid, covered football stadiums in Düsseldorf and Gelsenkirchen,
Swiss Re’s head office in London, etc.
In 2005, after a difficult start to the year due to some destocking and
the inclement winter weather, activity quickly returned to a buoyant
level. In addition to the traditional markets, demand for structural
tubes also benefited from the requirements for the construction of
the metal structures of oil rig platforms currently being built in
South East Asia. The projects associated with preparations for the
2008 Olympic Games in Beijing and the World Fair to be held in
Shanghai in 2010 are likewise generating growing volumes of
business.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
169Vallourec 2005 Annual Report
170 Vallourec 2005 Annual Report
RESEARCH AND DEVELOPMENT
■ The development of technologies for oil & gas exploitation results in
the production of new types of steel and new threaded connections,
thereby strengthening V & M TUBES’ position as leader: deep sea
wells, deep drilling and highly corrosive environments.
A growing number of projects are underway in Brazil, the United
States, Africa and Indonesia.
VAM® Riser, designed for deep-sea applications, continues its
development and was used successfully in Brazil, the United States
and Indonesia.The fatigue constraints to which these products are
subject necessitate cutting edge technology and specific testing
procedures.
The interest of the main oil and gas drilling companies in the
expansion of columns of casing pipes in wells has become more
apparent. The connection specially designed for this high-tech
application, the VAM® ET, has been the subject of numerous
developments. This product enables engineering in wells to be
simplified and oil & gas production to be increased.
CLEANWELL® is a non-polluting coating developed for the
threaded connections that replaces the grease normally used,
whilst protecting effectively against corrosion. Demand for these
environmentally-friendly products is strong, particularly in the
North Sea.
The VAM® HTF joint enables the Group to offer its customers an
optimal solution under conditions of limited space, combined
loads and very high torque. The product line that has been
developed is now being marketed.
The drilling sector, which has recently been strengthened within
the Group, is pursuing innovative developments in partnership with
its customers.
■ In the automotive sector, the Group is continuing the development
of a significant number of tubular solutions for use especially for
chassis, suspension and car body structure. The large number of
uses, particularly in the field of safety, demonstrates the high
potential for steel and tubing in the automotive industry.
The development of tubular components with “smart” crash
behaviour (programmed deformation absorbing energy in the
event of a high-speed frontal collision) is continuing. These
tubular safety components are very innovative and competitive,
as can be seen from their use in a large number of vehicles.
The Group has experienced continuing growth in the use of
welded stainless steel for tank filler pipes and hydroformed
applications such as exhaust gas recirculation systems.
■ In the power generation sector, 2005 saw strong demand in
China for the construction of thermal power generation plants that
need significant quantities of tubes in a large variety of diameters
and grades. The Group is the world leader in these products.
The development for this sector of a new grade (12% chromium)
for use in power generation plants operating at high temperatures
is continuing with long-term trials. The exceptional hot steam
oxidation resistance of this steel is of particular interest to our
customers.
■ In the construction sector, the Group is winning an increasing
number of contracts throughout the world. Innovative solutions
applied to architectural design of major public buildings, such as
Bangkok airport and the stadiums in Düsseldorf and Munich, are
also being developed for smaller buildings, particularly in Brazil.
■ The significant requirements for steel have increased the interest
in the R&D programme in Brazil concerning the cast iron/charcoal
domains.The selection of trees, the improvement of forest nutrition
programmes and the optimization of charcoal carbonization are
the main development axes of a process that is both competitive
and environmentally friendly.
The 9% and 13% chromium steel and the steel for bearings
(100C6) are regularly produced at the Saint-Saulve steel mill
due to its vacuum treatment and forging equipment. Digital
simulation continues to be used in order to improve the production
process.
Vallourec Précision Soudage continues to develop tubes with
highly sophisticated mechanical properties and tubular profiles
designed for car safety applications. Its new welding line enables
it to guarantee the high quality needed due to the exacting
requirements of the uses to which its products are put, such as
hydroforming and safety equipment.
Process communities are being set up within the Group. These
enable rapid progress by sharing best practices for the Group’s main
processes. The threading of premium joints was the first process
community approach. Other applications are now involved: steel
making and casting, thermal process, etc.
171Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Specific documents for the AGM on 1 June 2006
INFORMATION PROVIDED IN ACCORDANCE WITH ARTICLE L. 225-102, SECTION 4,OF THE FRENCH CODE DE COMMERCE
■ Information on the social implications of the Group’s activities
The employment-related indicators detailed below have been prepared on the basis of the companies fully consolidated and 100%-controlled
by the Vallourec Group.
These indicators are in accordance with the provisions of Decree no. 2002-221 of 20 February 2002.
I. WORKFORCE
At 31 December 2005, Vallourec had 17,542 permanent employees worldwide.
The Group’s production sites and sales premises are located in nine countries:
EUROPE MERCOSUR NAFTA ASIA
France 6,178 Brazil 5,256 Mexico 354 China 154
Germany 4,139 United States 1,145 Singapore 9
United Kingdom 273 Canada 34
The total workforce remained stable as compared with the previous year, but the consolidation scope changed: the automotive activities
based in Argentina and Brazil were sold and the Group’s presence in the United States strengthened by the purchase of OMSCO Inc.
The Vallourec Group now has more than 1,000 employees in the United States.
Change in workforce by geographical area
Workforce registered 2002 2003 2004 2005 Change Breakdownas at 31 December 2005/2002
Europe 10,781 10,476 10,400 10,590 -2% 60%
Mercosur 5,483 5,697 5,714 5,256 -4% 30%
Nafta 1,062 1,216 1,195 1,533 44% 9%
Asia 93 118 175 163 43% 1%
Total 17,419 17,507 17,484 17,542 0.7% 100%
Breakdown of workforce by socio-professional category
Vallourec comes within the labour-intensive industrial category:
■ workers represent 73% of the workforce,
■ office, technical and middle-management staff represent 20% of the workforce,
■ technical experts and senior managers represent 7% of the workforce.
Workforce registered as at 31 December 2004 2005 %
Workers 12,863 12,826 73
Technical and supervisory staff 3,464 3,533 20
Managerial staff 1,157 1,183 7
Total 17,484 17,542 100
172 Vallourec 2005 Annual Report
Degree of flexibility
Due to the highly cyclical nature of the Group’s activities, Vallourec’s policy is to employ a stable nucleus of permanent staff so that it is
able to handle its on-going workload and adapt to changes in the economic climate. The Group uses overtime and temporary staff to cope
during periods of very high activity.
Workforce registered as at 31 December 2002 2003 2004 2005
Permanent staff 16,776 16,911 16,808 16,776
Staff employed on fixed-term contracts 643 596 676 766
Temporary staff 516 444 829 1,037
Degree of flexibility 7% 6% 9% 11%
Breakdown of the workforce by sex
Women make up 8% of the total workforce: 3% of the workers, 24% of the technical and supervisory staff and 13% of the managerial staff.
Women mostly occupy administrative and sales positions and are beginning to occupy positions of responsibility in management and research.
In decreasing order, the areas with the largest proportion of female employees are as follows:
Proportion of women In the workforce in 2005 Hired in 2005
Asia 40% 25%
France 10% 9%
Nafta 8% 8%
Rest of Europe 7% 10%
Mercosur 7% 17%
Total 8% 12%
New employees
The Group hired 1,401 new employees during 2005, i.e. about 8% of the current workforce. There were no hiring problems affecting the
Group as a whole although some problems were experienced concerning certain types of positions and certain geographical areas.
It should also be noted that 143 apprentices were recruited in 2005, in the following three countries:
■ in Germany, where apprentices represent 24% of hirings,
■ in France (9% of hirings),
■ in Brazil (7% of hirings).
Breakdown of new employees Number %
Europe 849 61
Mercosur 371 26
Nafta 161 12
Asia 20 1
Total 1, 401 100
173Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Employees leaving the Group
In 2005, the number of employees leaving the Group – 1,343 – was slightly lower than the number of employees joining the Group.
Their reasons for leaving break down as follows:
Retired Resigned Made redundant Dismissed End of contract Other Total
France 118 61 95 92 89 30 485
Europe other than France 24 17 1 36 79 18 175
Mercosur 90 26 30 254 63 3 466
Nafta 10 52 9 113 0 7 191
Asia 0 0 1 0 3 22 26
Total 242 156 136 495 234 80 1,343
Breakdown 18% 12% 10% 37% 17% 6% 100%
The redundancies in France were due to the closure of the Laigneville premises in the Oise region (Vallourec Précision Etirage). The job
preservation plan implemented by the Group enabled more than 70% of the employees concerned to be transferred within the Group, helped
to find employment elsewhere or, in the case of those aged over 57, given early retirement.
II. ORGANIZATION OF WORKING TIME
1. Work patterns – Specific arrangements
The Group’s policy is designed to provide the maximum flexibility so that work patterns can be adapted to customer demand.
The Group endeavours to reduce the strenuousness associated with employees’ working arrangements. The solutions adopted may vary
from country to country, since the notion of strenuousness is governed by cultural as well as physiological factors.
Due to the high level of activity during the year, more than 70% of workers worked in accordance with arrangements that enabled the Group’s
facilities to operate throughout the week and a significant amount of overtime was worked.
This policy must be considered in the context of national legislation and local conditions regarding dialogue between employers and employees.
2. Annual working hours – Production staff
In Brazil, Mexico and Asia, due to the amount of holiday, public holidays and the length of the ordinary working week, the number of hours
normally worked over the year exceeds 2,000.
In the United States, the normal limit is around 1,800 hours.
In Europe, the number of hours normally worked is about 1,600.
Maximum annual capacity Number of hours normally worked per year
Asia 2,840 2,016
Brazil 2,515 2,019
France 1,952 1,527
Germany 2,116 1,564
Mexico 2,732 2,264
United Kingdom 2,047 1,687
United States 2,480 1,856
Specific documents for the AGM on 1 June 2006
174 Vallourec 2005 Annual Report
3. Part-time in France
As at 31 December 2005, in France, 78 employees worked part-time for personal or health reasons (part-time working on health grounds).
The main patterns of part-time working are half time or four-fifths time (with Wednesday as a day off).
Due to the differences in working methods, this information cannot be consolidated for the Group as a whole: the concept of part-time is
typically French and has not been developed to any great extent elsewhere in the world.
4. Absenteeism
The rate of absenteeism is calculated by comparing the total of all paid leave (including paid leave for illness, maternity and accidents at
work or while travelling to and from work) with the total number of hours worked.
Rate of absenteeism
France 4%
Europe other than France 5%
Mercosur 2%
Nafta 3%
Asia 2%
Total 3%
III. REMUNERATION
1. Payroll costs
In 2005, the Group’s payroll costs, excluding temporary staff, were 16% higher than the previous year at € 716 million. This increase resulted
from both the payment of overtime due to the high levels of activity and increased profit sharing due to the Group’s good results. It also
reflects a currency effect which increased the payroll costs of countries outside the euro zone, in particular Brazil due to the rise in the real.
The Group’s total payroll costs of € 716 million break down as follows:
■ Salaries: € 483 million, i.e. an increase of 9% compared with last year
■ Profit sharing (including statutory amounts): € 55 million, i.e. nearly 3.5 times higher than last year
■ Social security charges: € 178 million, i.e. an increase of 12.6%.
Sect
ion
5
Total payroll costs can be broken down by country as follows:
2005 Breakdown of total payroll costs Breakdown of the workforce
Brazil 13.3% 30.8%
Canada 0.2% 0.2%
China 0.1% 1.0%
France 40.0% 35.7%
Germany 30.4% 23.5%
Mexico 1.2% 2.0%
United Kingdom 2.0% 1.4%
United States 12.6% 5.4%
Total 100% 100%
2. Average salaries
Vallourec’s remuneration policy is based on the principles of employee motivation and fairness (whilst taking into account the conditions
of the local employment market), including profit sharing and incentives.
2004 2005 % %Average salaries including Average salaries including increase 2005
profit sharing and profit sharing and 2005/2004 social social security charges social security charges security
(in euros) (in euros) charges
Brazil 13,400 17,960 34% 60%
Canada 45,900 51,660 12% 17%
China 3,200 4,330 35% 16%
France 41,300 46,410 12% 42%
Germany 51,100 53,700 5% 27%
Mexico 16,900 26,200 55% 23%
United Kingdom 47,600 58,340 22% 19%
United States 72,200 95,680 32% 32%
NB: all figures have been converted into euros. The percentage increase includes the currency effect.
3. Employee profit sharing
In 2005, profit sharing amounted to € 55 million and was paid to 13,025 employees (more than two-thirds of the workforce) in France,
the United Kingdom, Mexico, Brazil and the United States.
This amount, which represented 8% of the Group payroll costs, represented 11.5% of the total payroll costs of the recipients.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
175Vallourec 2005 Annual Report
176 Vallourec 2005 Annual Report
IV. INDUSTRIAL RELATIONS –INTERNAL COMMUNICATION
■ Organization of the social dialogue
The system ensuring dialogue between employers and employees is
organized in each country in accordance with the applicable national
legislation.
In France, the Group Committee is the representative body for all
French companies.
It has 26 representatives, chosen by the trade unions from among
those elected by the works councils and meets twice a year in the
presence of the Group’s senior management. It is provided with
general information on the Group (review of financial statements,
activity, capital expenditure, etc). It is involved with the management
of provident and employee savings schemes.
In each company, the works councils, central works councils and
consultative committees, which are elected, are informed and
consulted about the economic affairs of the company or entity.
They participate in the management of budgets in respect of
employment-related matters.
The personnel representatives, who are elected by the employees of
each entity, present employees’ individual and collective claims in
respect of salaries and working regulations.
The shop stewards are appointed by each trade union and represent
employees in negotiations, in particular the statutory annual
negotiation which takes place each year concerning salaries, the
organization of working time and equal opportunities for men and
women.
When certain subjects for negotiation concern all the Group’s French
companies, a negotiation committee is set up at Group level in France.
Important negotiations concerning career development and training
were entered into in 2005 and are still underway.
In Germany, most of the workforce is governed by the provisions of
the act on co-determination in the mining and iron and steel
industries of 21 May 1951.
At European level, a European Committee gathers 30 French,
German and Scottish representatives from V & M TUBES. It is
informed about the activity, results and strategy of V & M TUBES in
Europe and the rest of the world. The European Committee meets
in full once a year; its executive board meets five times a year.
■ Internal communication
Vallourec ensures that its staff are informed on an on-going basis
of recent events concerning the Group: strategy, trends, products,
financial performance, staff changes, etc. This information is made
available to the staff concerned by means of the following
communication media:
– “Vallourec Info”: a magazine intended for all Group employees
worldwide. 20,000 copies are published, in four languages.
The magazine is published twice a year.
– “Bulletin des cadres”: a newsletter, published in three languages,
specifically for the Group’s 1,200 managerial staff. Eleven issues
are published each year.
– Corporate presentation support: slides presenting the Group’s
key figures are made available to managerial staff and updated
following the release of annual results.
In addition, the Group’s senior management presents at an annual
management meeting financial results and short, medium and
long-term strategic objectives and policies to the managerial staff.
■ Continuous improvement strategy
Vallourec endeavours to engage in active, transparent and on-going
dialogue between employers and employees at all levels of the Group,
in an atmosphere of mutual respect and consideration.
Employees throughout the Group, in all sectors and at all levels,
participate in the continuous improvement strategy. The Continuous
Improvement Teams are designed to involve employees in the
solution of problems covering the widest fields. Members of the teams
are appointed on a voluntary basis. The teams study the problems
concerned and propose and implement solutions. In 2005, there were
600 such teams in operation throughout the world.
V. HEALTH AND SAFETY CONDITIONS
A safe environment and defined working conditions are prerequisites
for stable growth, based on a strategy of risk analysis and on-
going prevention.
It is essential that staff are trained in and familiarized with safety
procedures on joining the Group and throughout their careers.
One-quarter of the total time spent on training is devoted to safety
training.
177Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
The 2005 consolidated accident frequency rate (FR, which corresponds
to the number of notifiable accidents multiplied by 1,000,000 and
divided by the number of hours worked) across all Group companies
was 7.66 – a slightly better position than in 2004 (7.96).
The 2005 consolidated accident severity rate (SR: the number of
non-working days due to accidents multiplied by 1,000 and divided
by the number of hours worked) stayed at the same level as last
year (0.42).
The Group’s senior management has set companies as a target a
safety index (calculated by the formula FR + 30SR) of less than 15.
In 2005, of the Group’s 40 industrial sites, 24 met the target and,
at 8 plants, there were no accidents at all throughout the entire year.
No fatal industrial injuries occurred during 2005.
Each year, a safety trophy is awarded to the Group entity with the
best record in this area. In 2005, it was awarded to Vallourec
Composants Automobiles Vitry, for its excellent record and its
stringent safety procedures.
VI. PROFESSIONAL TRAINING
Vallourec needs staff that are well-trained, motivated and able to
adapt to changes in the Group’s business and markets.
The Group therefore endeavours to reconcile its changing requirements
with the individual aspirations of its employees by ensuring that all
employees benefit from proper career development.
The on-going training of all of the Group’s staff is entrusted to the
companies and entities, since they are most able to assess their own
staff’s changing needs. Each company prepares an annual training plan
that may be amended during the year if additional requirements arise.
In the case of workers, priority is given to safety and vocational
training. Training on technical issues is provided where relevant
(quality, non-destructive testing, etc.).
Technical and supervisory staff are trained in the basic techniques
(vocational adjustment) and in any new techniques implemented at
the sites. Supervisory staff are given training to manage their teams.
Staff in the administrative departments (sales, planning, etc.) receive
technical training tailored to their specific tasks, and often receive
language training in view of the Group’s international dimension.
Three types of training are offered to managerial staff:
■ During their first year, new recruits receive training to introduce
them to the Group (introductory seminars on strategic aspects of
policy - financial, employment matters, etc. - run by senior
management, visits to plants, introductions to the Group’s
manufacturing processes and presentations on the markets for the
Group’s various businesses).
■ Training to enable staff to perform the tasks of their specific
position is offered throughout their career.
■ Specific training (management, communication, etc.) aimed at
improving individual performance and/or facilitating the acquisition
of additional skills enabling staff to be promoted to other positions
within the Group.
Number of hours spent on training by category in 2005
(in hours) Workers Technical and Managerial Totalsupervisory staff staff
Number of hours spent on training 207,919 92,508 36,618 337,045
Average hours of training 18 28 34 21
The average number of training hours provided by geographical area
was as follows:
(in hours) Average
France 19
Rest of Europe 18
Mercosur 25
Nafta 25
Asia 15
Amounts spent on training in 2005
The amounts spent on training totalled € 9.6 million, and break down
as follows
■ € 4.6 million represented the salary costs paid while employees
were receiving training,
■ € 5 million represented the cost of the training courses.
Specific documents for the AGM on 1 June 2006
178 Vallourec 2005 Annual Report
VII. EMPLOYMENT AND INTEGRATION OF DISABLEDEMPLOYEES
Throughout the world, the Group directly employs 829 employees
who are registered as disabled under the provisions of their national
regulations, of which:
■ 336 are in France,
■ 249 are in the rest of Europe,
■ 241 are in the Mercosur region,
■ 3 are in the Nafta region.
VIII. WELFARE
In 2005, the Group’s welfare expenditure totalled € 22.7 million.
Welfare expenditure relates to the following:
■ Housing: amount spent on accommodation (either in subsidies or
mandatory contributions).
■ Food: amount spent on meals for employees (company restaurants).
■ Transport: collecting employees and bringing them to work by
buses subsidized by the company.
■ Cultural and sporting events: sponsorship undertaken by the
Group.
■ Health insurance: amount spent in the form of subsidies or contri-
butions to welfare plans, whether mandatory or voluntary.
■ Pension scheme: amount spent on contributions or other systems
implemented by the employer voluntarily (i.e. which the employer
was under no statutory obligation to fund).
Breakdown of welfare expenditure
Brazil has a very active welfare policy, which includes financing
and providing on-going support to a large number of facilities in the
fields of medicine, education, etc.
Breakdown of welfare expenditure
The significant proportion relating to the Mercosur region is due to
the financing by the Group of health and education benefits not
funded by the state.
IX. LEVELS OF SUB-CONTRACTING
Since the end of 2005, the Group Corporate Purchasing department
has implemented a programme of purchase audits for all companies
within the Vallourec Group. This process involves the systematic
questioning of the companies audited. It relates specifically to the
compliance by suppliers with national and international requirements
concerning safety, the environment and sustainable development.
The Group has used nearly 2,200 production sub-contractors at a
cost of nearly € 190 million.
Mercosur
68%
Asia
1%
Rest of Europe
6%
France
16%Nafta
9%
Pension scheme
7%
Other
28%
Housing
1%
Cultural and sporting events
2%
Food
20%
Transport
17%
Health insurance
25%
179Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Specific documents for the AGM on 1 June 2006
■ Information on the environmental consequences of the Group’s activities
Vallourec has drafted its production policy with the aim of minimizing
the impact of its activities on the environment at all levels. Man and
his environment are at the heart of the Group’s policy, details of which
are given in the sustainable development charter published by the
Group.
Environment management
Pursuant to the management regulations applied to all aspects of
the Vallourec Group’s organization, each company’s environmental
policy is the responsibility of its management. The site manager is
responsible for implementing an effective environmental management
system, in accordance with local conditions and the nature of the
business. He must appoint an environment manager to be responsible
for all environmental matters.
In France, the Environment department, attached to the R&D and
Technology department and based at the Group’s Research Centre
in Aulnoye (Nord), is responsible for coordinating the Group’s
environmental policy. It relies on the environment managers at
each production site to communicate the Group’s policy and to
ensure that improvements continue to be made at the Group’s
offices and workshops.
Identical structures exist in Germany, Brazil and the United States:
thus, for the Group as a whole, more than 50 people at production
sites in each country specialize in environmental matters.
Communication between the various countries is improving, and
facilitates progress throughout the Group by means of the comparison
of the respective performances and solutions adopted by each.
The Environment department in France is also responsible for
coordinating and supervising this benchmarking, and, in particular,
for gathering and consolidating all the Group’s environmental data.
The environment report, which is circulated each year, summarizes
this data, measures changes in the data as compared with earlier
years in order to assess the progress achieved and highlights any
problems encountered and the solutions implemented. The report
presents by way of illustration “good examples” identified from
among Vallourec’s sites. For this purpose, all of the Group’s sites
worldwide are reviewed.
Audits and certifications
Environmental audits are organized regularly in each country, in order
to assess compliance with regulations, environmental performance
and environmental risks.
By the end of 2005, 13 of the Vallourec Group’s sites had obtained
ISO 14001 certification: Vallourec Composants Automobiles Vitry
(France),Vallourec Précision Etirage Vitry (France),V & M DEUTSCHLAND
in respect of its Mülheim, Rath, Reisholz and Zeithain plants
(Germany), V & M do BRASIL in respect of all of its facilities and
activities (mining, forestry, steel mills and pipe mills), V & M STAR
in respect of its two plants (Youngstown and Houston),VAM PTS in
Houston and VALLOUREC MANNESMANN OIL & GAS UK in respect
of its Bellshill plant (Scotland).
A certification programme covering the main French plants has
been implemented for the period 2005-2007, as a result of which
75% of Vallourec’s plants (accounting for 95% of total production)
will have ISO 14001 certification by the end of 2007.
Compliance with legislation
The compliance of the production sites’ activities with legislation and
regulations is regularly assessed, with the aid of audits.
In France, regulations are monitored by means of the intranet, via
an environment portal that can be accessed by all production sites.
The regular and systematic review of these provisions enables
regular action to be taken in terms of improvements, investment and
organization.
Environmental performance
The Group has been making sustained efforts over the past few years
to improve the use of resources (water, power and raw materials),
to optimize consumption, reduce the discharge of pollutants and the
volume of waste and ensure their systematic reprocessing and
recovery. In order to facilitate the measurement of progress, indicators
have been introduced at the various sites. The table below
summarizes some of the main indicators for 2002 to 2005 for the
Group as a whole.
180 Vallourec 2005 Annual Report
Indicator 2002 2003 2004 2005
Water consumption 11,526,990 m3 10,614,854 m3 10,352,260 m3 10,306,547 m3
Effluent discharges 5,191,214 m3 4,717,774 m3 4,483,054 m3 4,741,881 m3
Electricity 1,472 gwh 1,479 gwh 1,680 gwh 1,713 gwh
Gas 3,250 gwh 3,099 gwh 3,633 gwh 3,817 gwh
Waste 356,680 tonnes 455,425 tonnes (*) 518,145 tonnes 520,287 tonnes
CO2 675,819 tonnes 644,748 tonnes 747,533 tonnes 772,224 tonnes
(*) V & M STAR as from 2003.
Among these natural resources, water occupies an important place
as far as the Group is concerned. Our industry is a major consumer
of water, but thanks to the significant efforts made at all sites to
reduce consumption, noticeable progress has been made: in terms
of relative value (i.e. water consumption in relation to tube production)
the Group’s consumption fell between 2000 and 2005 from
3.13 m3/tonne to 2.01 m3/tonne, as shown in the following chart:
Water consumption by Vallourec’s plants
Water consumption
Water consumption in m3/tonne of production
The significant progress also made in the area of carbon monoxide
(CO2) emissions is associated with the steel-making process
implemented by V & M do BRASIL SA: charcoal is used instead of coke
in its blast furnaces. In order to produce the charcoal needed for this
process, V & M do BRASIL SA currently cultivates 130,000 hectares
of eucalyptus forests which, while growing, consume carbon dioxide
(CO2) and produce oxygen. This process contributes directly to the
reduction of greenhouse gases: the steel mill’s emissions are exactly
equal to the amounts consumed by the forests and are therefore
consumed in full by the forests.
As regards the implementation of the European Directive on managing
CO2 emissions quotas, this has only affected the Saint-Saulve steel mill
in 2005, with quotas of 92,855 tonnes. 2005 emissions, which were
verified by the APAVE, totalled 77,996 tonnes. Part (75%) of the diffe-
rence is linked to lower production in the medium term (2005-2007)
and the remainder (25%) is linked to improved performance, due,
in particular, to the optimization of the furnace loading plans.
All measurements of discharges of pollutants into the environment
are below the current statutory levels, and, generally, have improved
steadily over the past three years.
As far as the French sites are concerned, the soil is the subject of risk
characterization studies in two main circumstances: if the plant
has been involved in metallurgical processes, even if such involvement
took place before it became part of the Group, or if it possesses
equipment that may cause pollution. No sites have been identified
as requiring decontamination.
Work is being carried out at Précision Etirage’s site at Laigneville
associated with the discontinuance of production, following the
closure of the site in 2005. Soil testing is underway. The site is
currently expected to be classified as category 2: site to be monitored.
No environmental accidents occurred during 2005.
Investment related to environmental protection
In 2005, capital expenditure by the Group directly related to
environmental protection amounted to € 17.4 million, i.e. 10.6% of
total consolidated capital expenditure. This expenditure related
mainly to the following:
– Bringing equipment up to standard (filters, oil separation systems,
retention basins, etc.) and costs related to the revision of operating
licenses
– Provision of effluent separation systems
– Water recycling
– Modernization of water treatment plants
– Closed circuits for water used in ultrasonic non-destructive testing
– Filtration systems for atmospheric emissions
– Programmes aimed at reducing emissions of Volatile Organic
Compounds (VOC): new facilities for varnishing
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.002000 2001 2002 2003 2004 2005
3.5
3.0
2.5
1.5
1.0
0.5
0.0
in millions of m3 in m3 per tonne produced
Sect
ion
5
– Site clearance and rehabilitation
– Optimization of performance of heat-treatment furnaces (new
burners, regulation, etc.)
– Site security
– Improvements to storage facilities, shavings recovery, waste
sorting area, waste disposal, etc.
Between 2000 and 2005, capital expenditure related to environmental
protection amounted to 10% of total capital expenditure, as shown
in the following chart:
Capital expenditure by the Vallourec Group related toenvironmental protection
Capital expenditure related to environmental protection
% related to environmental protection
Contribution of Vallourec’s productsto the environment
Vallourec has also, for several years, been developing new products
that are in line with trends in requirements associated with
sustainable development and that are not harmful to land, air or
water. An example of this trend is the VAM® threaded joint, the world
leader as regards the safety of offshore oil wells, or the use of tubing
in the automotive industry: since it has made vehicles lighter, it has
facilitated a reduction in their fuel consumption. Many other products
made by the Group are used in the production of clean energy or the
reduction in chemical pollution.
CONSOLIDATED FINANCIAL STATEMENTS
The Vallourec Group’s consolidated sales amounted to € 4,307.4 million
in 2005 compared with € 3,037.8 million in 2004, representing an
increase of 41.8%.
There were two changes in consolidation scope during 2005: the
disposal,with effect from 1 January 2005,of the automotive components
activities in Brazil and Argentina (2004 sales: € 71 million) and the
consolidation, as from 1 October 2005, of OMSCO’s assets (2004
fourth quarter sales: € 28 million). These changes generated a
negative scope effect of 1.5%.
Operating costs before amortization and depreciation amounted to
€ 3,418.7 million, up 27.8% compared with € 2,674.3 million in
2004.
This resulted in operating income of € 965.3 million after
amortization and depreciation of € 99.2 million, up by an impressive
172% compared with operating income of € 355.2 million after
amortization and depreciation of € 89.0 million recorded in 2004.
The Group recorded a net financial loss of € 26.6 million compared
with a net financial loss of € 0.9 million in 2004.This was due mainly
to the following:
■ the net financial costs (difference between interest income and
interest charges) on the net debt of € 4.3 million,
■ the discounting charges in respect of pensions amounting to
€ 8.8 million, and
■ the cost of hedging sales in foreign currencies amounting to
€ 13.8 million.
The employees’ profit share rose from € 3.0 million in 2004 to
€ 11.3 million in 2005. Including the discretionary employee
profit-share included in payroll costs, the total allocated for 2005
would amount to € 55.5 million, a very substantial increase over the
2004 amount of € 18.8 million.
The income tax charge rose sharply in absolute terms (from
€ 89.4 million in 2004 to € 307.5 million in 2005) and in terms of
the effective rate (from 25.5% in 2004 to 32.8% in 2005) since the
Group had already used virtually all of its tax credits.
To sum up, consolidated net income was a profit of € 632.4 million,
up 138.5% on the profit of € 265.2 million in 2004.
Consolidated net income, Group share, more than tripled to
€ 473.0 million compared with € 145.0 million in 2004, due, in
particular, to the positive effect of the acquisition of the 45% stake
in V & M TUBES as from 1 July 2005. If the acquisition had taken
place on 1 January 2005,Vallourec’s net income, Group share, would
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
181Vallourec 2005 Annual Report
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
in € thousand
5.68%
6.27%
9.56%
14.52%
12.50%
10.58%
2000 2001 2002 2003 2004 2005
in %16
14
12
10
8
6
4
2
0
182 Vallourec 2005 Annual Report
have been € 576.7 million in 2005, instead of € 473.0 million,
although the total net income would have remained almost
unchanged.
In the consolidated balance sheet, despite an increase in gross
capital expenditure of 86% to € 192.4 million in 2005 and financial
investments totalling € 651.3 million (acquisition of the 45% stake
in V & M TUBES and OMSCO’s assets), the Group’s total net debt
grew by only € 259.3 million in 2005 because the rights offering in
July 2005, which generated a net amount of € 123 million, enabled
the Group to limit its recourse to debt.
The Group’s cash position thus changed from positive net cash of
€ 54.6 million at 31 December 2004 to net debt of € 204.7 million
at 31 December 2005, representing a gearing ratio (net debt /
shareholders’ equity) of 13.6%.
VALLOUREC (HOLDING COMPANY)
The holding company Vallourec posted a loss of € 8.7 million
compared with a loss of € 8.0 million in 2004. This loss is not
meaningful since it is not comparable from one year to the next.
Net financial income (the difference between financial income and
financial costs) was € 12.2 million compared with € 31.9 million
in 2004.
The income tax charge was negative once again this year and
represents a net credit of € 10.0 million (€ 5.8 million in 2004) as
a result of the transfer of tax losses in consolidated companies to
Vallourec, the company heading the tax group.
Net income for the year was € 14.1 million compared with net
income of € 30.1 million in 2004.
On the liabilities side of the balance sheet, share capital increased
from € 197.4 million to € 212.0 million and additional paid-in capital
increased from € 101.1 million to € 210.2 million due to, on the
one hand, the capital increase in cash of € 123 million on 13 July 2005
and, on the other hand, to the exercise of 24,064 share subscription
options between 1 January and 31 December 2005.
Participating interests on the assets side of the balance sheet increased
from € 503.7 million to € 1,057.4 million, due, in particular, to the
acquisition of the 45% stake in V & M TUBES.Accordingly, bank loans
and other borrowings on the liabilities side of the balance sheet
increased from € 150.6 million to € 462.4 million. Details of these
changes are provided in the notes to the Company financial
statements.
REMUNERATION OF COMPANY OFFICERS
In accordance with the requirements of Article L. 225-102-1 of the
French Code de Commerce, we inform you that the total
remuneration and any benefits in kind paid to each Company officer
during the financial year, directly or indirectly, by Vallourec or by any
company in the Group, was as follows:
■ Supervisory Board
In 2005, each member of the Supervisory Board received attendance
fees of € 17,600. In respect of their membership of the Finance
Committee, Messrs Michel de Fabiani, Thierry Marraud, Kunibert
Martin and Jean-Claude Verdière each received additional attendance
fees of € 4,700.
Mr Parayre also received a gross annual payment of € 85,000 as
Chairman of the Supervisory Board.
■ Management Board
The gross amounts of the remuneration and any benefits in kind paid
to members of the Management Board during 2005 were as shown
in the table below:
In € thousand
Fixed First Balance Totalportion instalment of 2004 paid
of 2005 variable invariable portion 2005portion
Mr Verluca 400 100 88.9 588.9
Mr Fabre 315 78.8 77.1 470.9
The balance of the 2005 variable portion paid in 2006 amounted to
€ 100 thousand in the case of Mr Verluca and € 78.7 thousand in
the case of Mr Fabre.
The variable remuneration is calculated on the basis of the
consolidated net income, Group share, as adjusted in respect of
exceptional items. The calculation is checked by the Auditors.
The members of the Management Board also each had a Company
car.
As regards pension provision, there is no specific pension scheme for
members of the Management Board who are, instead, covered by
the supplementary pension scheme for the senior management of
Vallourec and Setval, which was approved by the Supervisory Board
at its meeting on 14 September 2005.
183Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
INFORMATION ON THE BREAKDOWN OF CAPITAL
At 31 December 2005 the shareholders and their respective shareholdings were as follows:
Shareholders Shares Voting rightsNumber % Number %
Salzgitter Mannesmann GmbH 1,820,358 17.17 3,640,527 29.93
Bolloré group 1,874,402 17.69 1,874,402 15.41
Free float 6,484,011 61.17 6,495,647 53.41
Group employees 151,812 1.43 151,812 1.25
Directly held by Vallourec 269,749 2.54 - -
Total 10,600,332 100 12,162,388 100
As far as Vallourec is aware, the only two shareholders known and
declared to hold directly or indirectly more than 5% of the capital
and voting rights at this date were the German company Salzgitter
Mannesmann GmbH (formerly Mannesmannröhren-Werke), a wholly-
owned subsidiary of the German company Salzgitter AG, and the
Bolloré group.
At 31 December 2005:
■ The number of shares shown as held by Salzgitter Mannesmann GmbH
and the Bolloré group was notified to us by the two companies.
■ 1,831,805 shares registered for over four years, including
1,820,169 shares belonging to Salzgitter Mannesmann GmbH, are
entitled to double voting rights in accordance with the provisions
of Article 12 of Vallourec’s By-laws.
■ The only securities likely to give future access to Vallourec’s capital
that were in existence at 31 December 2005 were 8,174 share
subscription options granted in accordance with the conditions
described in paragraphs 3.2.4 and 6.3.2 of the Reference Document
for the financial year 2005, of which this management report forms
an integral part.
An analysis of identifiable bearer shares was carried out on
13 January 2006. The results are detailed in paragraph 3.3.1 of the
Reference Document.
REGULATED AGREEMENTS
1) Agreements authorized during the year
■ Regulated agreements
At its meetings on 20 January, 8 March, 18 April and 27 April 2005,
the Supervisory Board approved the progress and finalization of the
negotiations Vallourec held with Mannesmannröhren-Werke (MRW)
and Salzgitter AG, both of which are shareholders of Vallourec,
concerning the acquisition by Vallourec of the 45% interest held by
the two companies in the common subsidiary V & M TUBES.
The Supervisory Board gave its agreement, in particular, to the
acquisition price of the holding, set at € 545 million, and ratified the
fact that the completion of this transaction would result in the
termination of the joint venture agreement entered into by Vallourec
and MRW in 1997, and, in particular, the clauses of the contract
relating to “reserved matters” and change of control.
The Supervisory Board also gave its agreement to the parallel
disposal to Salzgitter Mannesmann of 10% of the shares in the HKM
German steel mill held by V & M TUBES, the latter retaining a 20%
holding in this steel mill as well as the rights attaching to the
holding concerning the steel produced by the mill.
The main provisions of this disposal were explained at the Annual
General Meeting held on 7 June 2005 and are disclosed in the 2004
Reference Document, in particular in section 4, paragraph 4.9
(“Agreement between Vallourec and Mannesmannröhren-Werke
concerning the acquisition of the 45% holding in V & M TUBES”) and
in the Management Board’s management report to the General Meeting.
In connection with the acquisition of the 45% holding in V & M TUBES,
the Supervisory Board also gave its agreement, at its meeting on
27 April 2005, to the signing of contracts relating to the processing
of a maximum annual volume of 132,000 tonnes of tube hollows
for drawing by Salzgitter Mannesmann, comprising a contract for
V & M TUBES to supply tube rounds to Salzgitter Mannesmann.
The contract to supply tube rounds, which expires on 31 December
2017, has a penalty clause under which V & M TUBES, in the event
of its failure to meet certain of its obligations, would be required to
pay a maximum amount of € 60 million, this amount decreasing as
from 2011.
Specific documents for the AGM on 1 June 2006
184 Vallourec 2005 Annual Report
The three members of Vallourec’s Supervisory Board who also hold
positions within the Salzgitter Mannesmann Group abstained from
voting on all the aforementioned transactions.
■ Supplementary pension scheme for seniormanagement
At its meeting on 14 September 2005,Vallourec’s Supervisory Board
examined and unanimously approved, on the basis of the report from
the Appointments and Remuneration Committee, a draft “income
guarantee scheme for the retired employees of Vallourec and Setval”.
The Supervisory Board has noted that the profit from this defined
benefit scheme (additional pension scheme) financed by the company
and in respect of which the vesting of rights is conditional on the
employee finishing his career at Vallourec and/or Setval, enables the
Group’s former managerial staff, under acceptable economic,
financial and social conditions, to supplement their income following
retirement. The Company undertakes to pay a lifetime annuity at a
predetermined level, directly proportional to the salary and in
accordance with the employee’s seniority and career development.
The annuity is capped at 20% of the average salary excluding
bonus of the last three years and limited to four times the annual
social security ceiling. The scheme is insured with AXA France Vie.
The regulation is established for an indefinite period but may be
terminated at any time.
The Supervisory Board noted that the members of Vallourec’s
Management Board are likely to benefit from rights if they work within
the Group until the end of their careers and ruled in accordance with
the provisions of Article L. 225.86 of the French Code de Commerce.
2) Agreements approved in prior years that continueto apply in the current year
■ Assistance agreement entered into with Rothschild & Cie
It should be noted that, on 20 January 2005,Vallourec’s Supervisory
Board approved the extension of the assistance agreement originally
entered into with Rothschild & Cie on 4 March 2003 until the
finalization of the acquisition of the 45% interest in V & M TUBES,
in return for the payment of an additional flat-rate commission of
€ 1,500,000, excluding taxes, half of which related to services
provided by Rothschild & Cie during the second half of 2004.
The balance of € 750,000, excluding taxes, was paid to Rothschild & Cie
in 2005.
ALLOCATION OF NET INCOME
The Management Board proposes the payment of a dividend of
€ 11.2 per share, which is much greater than the dividend paid in
respect of the financial year 2004 (€ 3.2 per share).
This dividend corresponds to a distribution rate of 25.1% of
consolidated net income, Group share. It is in accordance with the
distribution policy announced by the Group.
We therefore propose to appropriate, from the net income for the
financial year of € 14,144,934.26, € 1,460,752 to the legal reserve
and to appropriate the balance of € 12,684,182.26, increased
by an amount of € 106,039,536.14, of which € 101,916,198.73
will be deducted from retained earnings and € 4,123,337.41 will
be deducted from general reserves, to give a total amount of
€ 118,723,718.40, by way of dividend.
After taking into account the interim dividend of € 4.0 per share paid
on 12 October 2005, the balance remaining to be paid is € 7.20 per
share, which will be paid on 5 July 2006.
In addition, when the financial statements for the first half of 2006
are reviewed, consideration will be given to the possibility of paying,
during the second half of 2006, an interim dividend for the financial
year 2006.
We would like to remind you, in accordance with the provisions of
Article 47 of the law of 12 July 1965, that the dividends paid in
respect of the last three financial years were as follows:
Financial Number Net Tax Totalyear of shares dividend credit dividend
per share per share per share (in euros) (in euros) (in euros)
2002 9,730,226 2.10 1.05 (50%) 3.15
2003 9,730,226 1.60 0.80 (50%) 2.40
2004 9,869,956 3.20 None 3.20
Sect
ion
5
SUPERVISORY BOARD
We ask you to:
■ ratify the provisional appointment of Mr Heinz Jörg Fuhrmann
approved by the Supervisory Board at its meeting on 14 December
2005, to replace Mr Kunibert Martin. The appointment of
Mr Heinz Jörg Fuhrmann will come to an end, like that of his
predecessor, at the close of this General Meeting. Mr Heinz Jörg
Fuhrmann, who was born in 1956 and has a doctorate in
engineering from Berlin University of Technology, has spent his
entire career in the steel industry. He is a member of the Executive
Board and CFO of Salzgitter AG.
■ renew the appointments of Messrs Patrick Boissier,Wolfgang Eging,
Heinz Jörg Fuhrmann,Denis Gautier-Sauvagnac and Jean-Paul Parayre,
which expire at the end of this General Meeting, for a period of five
years ending at the close of the General Meeting called to approve
the financial statements for the financial year 2010.
STATUTORY AUDITORS
The appointments of the Statutory Auditors and the Alternative
Auditors expire at the close of this General Meeting.
We recommend that you appoint, for a term of six years expiring at
the close of the General Meeting called to approve the financial
statements for the financial year 2011:
As Statutory Auditors:
KPMG SA
Represented by Messrs Jean-Paul Vellutini and Philippe Grandclerc
1, Cours Valmy - 92923 Paris-La Défense Cedex
Deloitte & Associés
Represented by Messrs Bertrand de Florival and Jean-Paul Picard
185, avenue Charles de Gaulle - 92524 Neuilly-sur-Seine
As Alternative Auditors:
SCP Jean-Claude André et Autres
Les hauts de Villiers
2 bis, rue de Villiers - 92300 Levallois-Perret
Alternative for KPMG
Société BEAS
7-9, Villa Houssaye - 92524 Neuilly-sur-Seine Cedex
Alternative for Deloitte & Associés
ATTENDANCE FEES
The maximum annual Board Members’ attendance fees for allocation
by the Supervisory Board is currently set at € 230,000 euros (eighth
resolution of the Ordinary General Meeting held on 11 June 2002).
We ask you to approve an increase in the amount of the annual
attendance fee budget to € 400,000 until further notice.This increase
is justified, in particular, by the fact that, since 2002, membership of
the Board has increased from 10 to 12 members, the members of
the Finance Committee receive an additional attendance allowance
and the position of Censeur (non-voting consulting director), which
will be created this year (sixth resolution of the Extraordinary General
Meeting to be held on 1 June 2006), may be remunerated.
SHARE BUY-BACK PROGRAMME
The previous General Meeting held on 7 June 2005 invested all
powers in the Management Board to enable Vallourec, if need be,
to buy back its own shares under the terms and conditions specified
by law.
This authorization expires today. We believe it desirable to renew it
for a further period ending at the close of the next General Meeting.
The terms of this renewal are largely similar to those of the preceding
authorization except that, in view of the recent volatility of the
Company’s share price, it seems to us that it would be preferable to
set a maximum purchase price by reference to the value of the shares
at the close of the last trading session preceding the General
Meeting, increased by 50%, rather than setting the purchase price
at an absolute value. No minimum selling price is stipulated since
the setting of a minimum selling price is not mandatory.
Vallourec would be authorized to acquire a maximum of 10% of its
capital, i.e. 1,060,033 shares as at today’s date. Given that 269,749
shares (2.54%) are already held (see section 3, paragraph 3.3.1.1,
of the 2005 Reference Document) the buy-back would cover a
maximum of 790,284 shares (7.46%).
The maximum amount allocated to carrying out this programme is set
at € 750 million compared with the previous limit of € 40 million,
to take into account the increase in the share price in the intervening
period.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
185Vallourec 2005 Annual Report
186 Vallourec 2005 Annual Report
APPENDIX TO THE MANAGEMENT BOARD’S MANAGEMENT REPORT-FINANCIAL YEAR 2005List of other positions held by Vallourec Company officers
■ Members of the Supervisory Board
Jean-Paul PARAYREDate of first appointment: 13 June 1989 (at which time Vallourec was managed by a Board of Directors)Date appointment most recently renewed: 15 June 2000Date of appointment as Chairman of the Supervisory Board: 15 June 2000Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 5 July 1937
Business address: None
Expertise and managerial experience– 1977-1984: Chairman of the Management Board of PSA Peugeot-Citroën– 1984-1990: COO then Chairman of the Management Board of Dumez– 1990-1992: Vice-President and COO of Lyonnaise des Eaux Dumez– 1994-1999: Vice-President and COO of Bolloré group– 1996-1999: CEO of Saga.
Positions held in 2005Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement and SNEF
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun (until October 2005), Stena International BV and Stena Line (until June 2005)
Positions held in 2004Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement, Seabulk (until September 2004), Sea-invest France (until September 2004) and SNEF
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun, Stena International BV, Stena Line and Carillion plc (until December 2004)
Positions held in 2003Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement, SNEF, Seabulk and Sea-invest France
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun, Carillion plc, Stena International BV, Stena Line and Stena UK (until September 2003)
Positions held in 2002Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement, SNEF, Seabulk and Sea-invest France
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun, SDV Congo, Carillion plc, Stena UK, Stena International BV and Stena Line
Sect
ion
5
Positions held in 2001Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec– Member of the Supervisory Board of Peugeot SA and Vallourec – Director of Bolloré Investissement, SNEF, Seabulk and Sea-invest France
Positions and appointments held in foreign companies– Director of SDV Congo, SDV Cameroun, Carillion plc, Stena UK, Stena Line and Stena International– Member of the Advisory Board of Candover (until April 2001).
Patrick BOISSIERDate of first appointment: 15 June 2000Date of appointment as Vice-Chairman of the Supervisory Board: 18 April 2005Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 8 February 1950
Business address: Chantiers de l’Atlantique - Avenue Bourdelle - BP 61775 - 44617 Saint-Nazaire Cedex (France)
Expertise and managerial experience20 years’ managerial experience with industrial companies in the iron and steel, capital goods and shipbuilding sectors.
Positions held in 2005Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes and Stéria– Member of the Supervisory Board of Vallourec
Positions held in 2004Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes and Stéria– Member of the Supervisory Board of Vallourec
Positions held in 2003Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes and Stéria– Member of the Supervisory Board of Vallourec
Positions held in 2002Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes, Stéria and Kit Grimpe– Member of the Supervisory Board of Vallourec
Positions held in 2001Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes, Stéria and Kit Grimpe– Member of the Supervisory Board of Vallourec.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
187Vallourec 2005 Annual Report
188 Vallourec 2005 Annual Report
Luiz-Olavo BAPTISTADate of first appointment: 11 June 2002 Date on which appointment ceases: 31 December 2007 (General Meeting called to approve the financial statements for the financialyear 2007)Date of birth: 24 July 1938
Business address: Avenue Paulista 1294, 8° Andar - 01310-915 São Paulo SP (Brazil)
Expertise and managerial experience – Professor of International Law, Barrister at the São Paulo bar and International Arbitrator (WTO, ICSID, UNCC, etc.)– Doctor of International Law at the Université de Paris I– Visiting Professor at the University of Michigan, the Université de Paris I and the Université de Paris X – Professor of Law and International Trade at the Faculty of São Paulo– Has published more than twenty books on International Law and Commercial Law.
Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A (until 31 October 2005)– Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,
Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A– Legal Official of Eagle River Holdings Ltd
Positions held in 2004Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A – Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,
Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A– Legal Official of Eagle River Holdings Ltd
Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A – Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,
Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A– Legal Official of Eagle River Holdings Ltd
Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A – Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda
Sect
ion
5
– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A
– Legal Official of Eagle River Holdings Ltd
Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A (since 25 April 2001)– Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,
Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A– Legal Official of Eagle River Holdings Ltd.
Vincent BOLLOREDate of first appointment: 10 June 2004 Date on which appointment ceases: 31 December 2009 (General Meeting called to approve the financial statements for the financialyear 2009)Date of birth: 1 April 1952
Business address: Tour Bolloré - 31-32, quai de Dion-Bouton - 92811 Puteaux (France)
Expertise and managerial experience Industrialist. Chairman of Bolloré group since 1981.
Positions held in 2005Positions and appointments held in French companies– Chairman and CEO of Bolloré and Bolloré Participations – Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement, Financière de l’Odet, Bolloré Média
and Havas – Chairman of Bolloré Production (SAS) – COO of Omnium Bolloré, Financière V and Sofibol – Director of BatScap, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Compagnie des Glénans, Financière Moncey,
Financière de l’Odet, Havas and Natexis Banques Populaires– Member of the Supervisory Board of Vallourec– Bolloré Participations permanent representative on the Board of Directors of Société Anonyme Forestière et Agricole, Société des
Chemins de fer et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie desTramways de Rouen and IER
– Bolloré Participations permanent representative on the Supervisory Board of Compagnie du Cambodge– Compagnie du Cambodge permanent representative on the Supervisory Board of Société Financière HR
Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges SA– Vice-President of Nord Sumatra Investissements – Vice-President of SOGB and Bereby Finances– Director of BB Groupe SA, Centrages, Compagnie Internationale de Cultures, Financière Privée, Liberian Agricultural Company LAC,
Mediobanca, Plantations Nord Sumatra Limited, Plantations des Terres Rouges, Red Land Roses, SDV Gabon, SDV Sénégal, Socfin, Socfinaf,Socfinal, Socfinasia, Socfinco, Socfindo, Socfininter, Socfin Plantations Sendirian Berhad and Sogescol
– Bolloré Participations permanent representative on the Board of Directors of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire andImmobilière de la Pépinière
– Bolloré permanent representative on the Conseil d’Afrique Initiatives
Positions held in 2004Positions and appointments held in French companies– Chairman and CEO of Bolloré and Bolloré Participations – Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement, Financière de l’Odet and Bolloré Média – Chairman of Bolloré Production (SAS)
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
189Vallourec 2005 Annual Report
190 Vallourec 2005 Annual Report
– COO of Omnium Bolloré, Financière V and Sofibol – Director of BatScap, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Compagnie des Glénans, Financière Moncey,
Financière de l’Odet, Generali France and Natexis Banques Populaires– Member of the Supervisory Board of Vallourec– Bolloré Participations permanent representative on the Board of Directors of Société Anonyme Forestière et Agricole, Société des
Chemins de fer et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie desTramways de Rouen and IER
– Bolloré Participations permanent representative on the Supervisory Board of Compagnie du Cambodge– Compagnie du Cambodge permanent representative on the Supervisory Board of Société Financière HR
Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges SA– Vice-President of Nord Sumatra Investissements – Vice-President of SOGB and Bereby Finances– Director of BB Groupe SA, Centrages, Compagnie Internationale de Cultures, Financière Privée, Liberian Agricultural Company LAC,
Mediobanca, Plantations Nord Sumatra Limited, Plantations des Terres Rouges, Red Land Roses, SDV Gabon, SDV Sénégal, Socfin, Socfinaf,Socfinal, Socfinasia, Socfinco, Socfindo, Socfininter, Socfin Plantations Sendirian Berhad and Sogescol
– Bolloré Participations permanent representative on the Board of Directors of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire andImmobilière de la Pépinière
– Bolloré permanent representative on the Conseil d’Afrique Initiatives
Positions held in 2003Positions and appointments held in French companies– Chairman and CEO of Bolloré and Bolloré Participations – Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement, Financière de l’Odet and Bolloré Média – Chairman of Bolloré Production (SAS) – COO of Omnium Bolloré, Financière V and Sofibol – Director of BatScap, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Compagnie des Glénans, Financière Moncey,
Financière de l’Odet and Tobaccor– Bolloré Participations permanent representative on the Boards of Société Anonyme Forestière Agricole, Compagnie des Chemins de fer
et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie des Tramways deRouen, Compagnie du Cambodge and IER
– Compagnie du Cambodge permanent representative on the Board of Société Financière HR
Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges and Selective East Asiatic – Vice-President of Nord Sumatra Investissements– Vice-President of SOGB and Bereby Finances– Director of BB Groupe SA, Centrages, Compagnie Internationale de Cultures, Financière Privée, Liberian Agricultural Company LAC,
Mediobanca, Plantations Nord Sumatra Limited, Red Land Roses, SDV Gabon, SDV Sénégal, Socfin, Socfinaf, Socfinal, Socfinasia,Socfinco, Socfindo, Socfininter, Socfin Plantations Sendirian Berhad and Sogescol
– Bolloré Participations permanent representative on the Boards of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire and Immobilière de la Pépinière– Bolloré permanent representative on the Conseil d’Afrique Initiatives
Positions held in 2002Positions and appointments held in French companies– Chairman and CEO of Bolloré Participations, Bolloré and Bolloré Média– Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement and Financière de l’Odet – Chairman of Bolloré Production (SAS) – COO of Omnium Bolloré, Financière V, Sofibol and BB Investissement– Director of Compagnie des Glénans, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Financière Moncey, Financière
de l’Odet, BatScap, Seita and Tobaccor– Bolloré Participations permanent representative on the Boards of Société Anonyme Forestière Agricole, Compagnie des Chemins de fer
et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie des Tramways deRouen, Compagnie du Cambodge and IER
– Compagnie du Cambodge permanent representative on the Board of Société Financière HR
Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges, Selective East Asiatic and Socfindel Inc.– Vice-President of SOGB and Bereby Finances
Sect
ion
5
– Director of Siat, Société des Cigarettes gabonaises, Mabucig, Socfinasia, Sogescol, SDV Sénégal, SDV Gabon, Centrages, MTOA, SITAB,Socfininter, Financière Privée, Nord Sumatra Investissements, Red Land Roses, Socfin, Socfinco, Socfinaf Cy Ltd, Socfinal, Plantations NordSumatra Limited, Socfindo, Compagnie Internationale de Cultures, Socfin Plantations Sendirian Berhad, Socfin US Inc. and BB Groupe
– Bolloré Participations permanent representative on the Boards of SDV Cameroun, SDV Congo, SDV Côte-d’Ivoire, Immobilière de la Pépinièreand Liberian Agricultural Company LAC
– Bolloré permanent representative on the Conseil d’Afrique Initiatives
Positions held in 2001Positions and appointments held in French companies– Chairman of Bolloré Investissement, Financière Moncey, Financière de l’Odet, Bolloré, Rivaud Loisirs Communication and Bolloré Participations– COO of Omnium Bolloré, Financière V, Sofibol, Société Anonyme Forestière Agricole, Société Industrielle et Financière de l’Artois and
BB Investissement– Director of Compagnie des Glénans, Bolloré Investissement, Bolloré, Bolloré Participations, Financière Moncey, Financière de l’Odet,
Omnium Bolloré, BatScap, Fiat France SA, Rivaud Loisirs Communication and Seita– Bolloré Participations permanent representative on the Boards of Société Anonyme Forestière Agricole, Compagnie des Chemins de fer
et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie des Tramways deRouen, Compagnie du Cambodge, Compagnie des Caoutchoucs de Padang, IER and Société Financière des Terres Rouges
– Bolloré permanent representative on the Boards of Tobaccor and Coralma International– Compagnie du Cambodge permanent representative on the Supervisory Board of Société Financière HR
Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges Holding, Selective East Asiatic and Socfindel Inc.– Vice-President of SOGB and Bereby Finances– Bolloré permanent representative on the Conseil d’Afrique Initiatives– Bolloré Participations permanent representative on the Boards of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire, Immobilière de la Pépinière
and Liberian Agricultural Company LAC– Director of Siat, Société des Cigarettes Gabonaises, Mabucig, Socfinasia, Sogescol, SDV Sénégal, SDV Gabon, Centrages, MTOA, SAIT,
SITAR, Socfinaf, CAITA CI, Socfininter, Financière Privée, Nord Sumatra Investissements, Socfin, Socfinco, Socfinal, Société 3 I, PlantationsNord Sumatra Limited, Socfindo, Caisse Privée de Banque, Compagnie Internationale de Cultures, Socfin Plantations Sendirian Berhad,Socfin US Inc. and BB Groupe SA.
Wolfgang EGINGDate of first appointment: 8 March 2005Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 23 May 1949
Business address: Mannesmannröhren-Werke GmbH - Wiesenstrasse 36 - D-45473 Mülheim an der Ruhr (Germany)
Expertise and managerial experienceManagement, management control, finance and sales.
Positions held in 2005Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS– Member of the Supervisory Board of Vallourec SA– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (until 23 June 2005)
Positions and appointments held in foreign companies– Chairman of the Executive Board of Mannesmannröhren-Werke GmbH – Chairman of the Supervisory Board and Member of the Partners Committee of Hüttenwerke Krupp Mannesmann GmbH– Chairman of the Supervisory Board of MHP Mannesmann Präzisrohr GmbH, DMV Stainless BV and Mannesmannröhren Mülheim GmbH– Chairman of the Advisory Board of Mannesmann Line Pipe GmbH– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Executive Board of Salzgitter AG– Member of the Supervisory Board and Partners Committee of Europipe GmbH – Member of the Supervisory Board of Salzgitter Mannesmann Handel GmbH
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
191Vallourec 2005 Annual Report
192 Vallourec 2005 Annual Report
Positions held in 2004Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES
Positions and appointments held in foreign companies– Chairman of the Executive Board of Mannesmannröhren-Werke AG– Member of the Supervisory Board and of the Partners Committee of Hüttenwerke Krupp Mannesmann GmbH– Chairman of the Supervisory Board of MHP Mannesmann Präzisrohr GmbH, DMV Stainless BV, Mannesmannröhren Mülheim GmbH and
Mannesmann Robur BV– Chairman of the Advisory Board of Mannesmann Line Pipe GmbH and Salzgitter Mannesmann Altersversorgung Service GmbH– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Executive Board of Salzgitter AG– Member of the Supervisory Board and Partners Committee of Europipe GmbH – Member of the Supervisory Board of Salzgitter Mannesmann Handel GmbH, Salzgitter Mannesmann Forschung GmbH, BMB Vobarno Tubi
and Röhrenwerk Gebr. Fuchs GmbH
Positions held in 2003Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (since 1 July 2003)
Positions and appointments held in foreign companies– Member of the Executive Board of Mannesmannröhren-Werke AG (Vice-President since 1 April 2003)– Chairman of the Supervisory Board of MHP Mannesmann Präzisrohr GmbH, DMV Stainless BV, Mannesmannröhren Mülheim GmbH and
Mannesmann Robur BV– Chairman of the Advisory Board of Mannesmann Line Pipe GmbH– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Executive Board of Salzgitter AG (since 1 October 2003)– Member of the Supervisory Board and Partners Committee of Europipe GmbH
Positions held in 2002Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS
Positions and appointments held in foreign companies– Member of the Executive Board of Mannesmannröhren-Werke AG– Chairman and CEO of MHP Mannesmann Präzisrohr GmbH– Chairman of the Supervisory Board of DMV Stainless BV and Mannesmann Robur BV– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Supervisory Board and Partners Committee of Europipe GmbH
Positions held in 2001Positions and appointments held in foreign companies– Chairman and CEO of MHP Mannesmann Präzisrohr GmbH– Chairman of the Supervisory Board of Mannesmann Robur BV.
Michel de FABIANIDate of first appointment: 10 June 2004 Date on which appointment ceases: 31 December 2009 (General Meeting called to approve the financial statements for the financialyear 2009)Date of birth: 17 June 1945
Business address: None
Expertise and managerial experience – Chairman of BP France from 1995 to 2004– Vice-Chairman of BP Europe from 1997 to 2004– CEO joint-venture BP Mobil Europe from 1997 to 2001– CEO BP Europe from 1991 to 1995.
Sect
ion
5
Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of BP France, Institut Français du Pétrole and Rhodia
Positions and appointments held in foreign companies– Member of the Board of Directors of Star Oil Mali, SEMS Maroc and EBTRANS Luxembourg
Positions held in 2004Positions and appointments held in French companies– Chairman of the Board of Directors of BP France– Member of the Supervisory Board of Vallourec (from 10 June 2004)– Member of the Board of Directors of Institut Français du Pétrole and Rhodia
Positions and appointments held in foreign companies– Member of the Board of Directors of Star Oil Mali
Positions held in 2003Positions and appointments held in French companies– Chairman of the Board of Directors of BP France– Member of the Board of Directors of Institut Français du Pétrole and Rhodia (from 1 May 2003)– Member of the Board of Directors or Supervisory Board of BP Europe’s subsidiaries
Positions held in 2002Positions and appointments held in French companies– Chairman of the Board of Directors of BP France– Member of the Board of Directors of Institut Français du Pétrole– Member of the Board of Directors or Supervisory Board of BP Europe’s subsidiaries
Positions held in 2001Positions and appointments held in French companies – Chairman of the Board of Directors of BP France– Member of the Board of Directors of Institut Français du Pétrole (from 1 May 2001)– Member of the Board of Directors or Supervisory Board of BP Europe’s subsidiaries.
Heinz Jörg FUHRMANNDate of first appointment: 14 December 2005Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 4 December 1956
Business address: SALZGITTER AG - Eisenhüttenstrasse 99 - D-38239 Salzgitter (Germany)
Expertise and managerial experience – Diploma in Engineering: Rheinisch-Westfälische Technische Hochschule Aachen (Metallurgy)– Doctorate in Engineering: Technische Universität Berlin (Dr.-Ing.)– 1983-1994: Klöckner-Werke AG, Duisburg– 1995-date: Preussag Stahl AG, now Salzgitter AG– 1996-date: Member of the Executive Board of Salzgitter AG (CFO since 2001).
Positions held in 2005Positions and appointments held in French companies– Chairman of the Supervisory Board of Ets Robert et Cie SAS (since 8 June 2005)– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (until 23 June 2005)
Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Mannesmann Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke GmbH, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH, Öffentliche
Lebensversicherung Braunschweig, Öffentliche Sachversicherung Braunschweig, Hansaport Hafenbetriebsgesellschaft mbH and HSP HoeschSpundwand und Profil GmbH (since 27 May 2005)
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
193Vallourec 2005 Annual Report
194 Vallourec 2005 Annual Report
– Member of the Supervisory Board and Partners Committee of Europipe GmbH (since 9 September 2005)– Member of the Advisory Board of ThyssenKrupp Gft Bautechnik GmbH (since 17 May 2005)
Positions held in 2004Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (since 1 April 2004)
Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG – Vice-President of the Supervisory Board of Salzgitter Mannesmann Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke GmbH, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH,
Öffentliche Versicherung Braunschweig and Hansaport Hafenbetriebsgesellschaft mbH
Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS
Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke AG, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH,
Öffentliche Versicherung Braunschweig and Hansaport Hafenbetriebsgesellschaft mbH – Member of the Advisory Board of Universal Eisen und Stahl GmbH (until 4 April 2003)
Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS
Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke AG, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH,
HSP Hoesch Spundwand und Profil GmbH (until 20 June 2002) and Hansaport Hafenbetriebsgesellschaft mbH– Member of the Advisory Board of Universal Eisen und Stahl GmbH– Director of Wescol Group plc.
Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS (since 30 January 2001)
Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke AG, Salzgitter Stahl GmbH (since 23 August 2001), Salzgitter Flachstahl
GmbH (since 27 July 2001), HSP Hoesch Spundwand und Profil GmbH, Hansaport Hafenbetriebsgesellschaft mbH, Personal-, Produktions-und Servicegesellschaft mbH (until 31 December 2001), Verkehrsbetriebe Peine-Salzgitter GmbH (until 31 December 2001) andDeutsche Erz und Metall Union GmbH (until 31 December 2001)
– Member of the Advisory Board of Universal Eisen und Stahl GmbH, Hövelmann & Lueg GmbH & Co. KG (until 31 December 2001), PeinerHüttenstoffe GmbH (until 31 December 2001) and GESIS Gesellschaft für Informationssysteme mbH (from 22 January 2001 to 31 December 2001)
– Director of Steel Dynamics Inc. and Wescol Group plc.
Denis GAUTIER-SAUVAGNACDate of first appointment: 7 February 1997Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 28 May 1943
Business address: UIMM - 56, avenue de Wagram - 75017 Paris (France)
Expertise and managerial experience – Graduate of the École Nationale d’Administration (1967)– COO of an agri-food group (1979-1985) and CEO of the French subsidiary of a UK merchant bank (1990-1993).
Sect
ion
5
Positions held in 2005Positions and appointments held in French companies– President and Managing Director of UIMM – Chairman of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec– Member of the Executive Board of MEDEF
Positions held in 2004Positions and appointments held in French companies– President and Managing Director of UIMM – Chairman of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec– Member of the Executive Board of MEDEF– Chairman GPA Relations du Travail
Positions held in 2003Positions and appointments held in French companies– President and Managing Director of UIMM – Vice-President of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec
Positions held in 2002Positions and appointments held in French companies– President and Managing Director of UIMM – Vice-President of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec
Positions held in 2001Positions and appointments held in French companies– Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of Vallourec– Director of Sogeparc.
François HENROTDate of first appointment: 8 June 1999Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005) Date of birth: 3 July 1949
Business address: Banque Rothschild & Cie - 1, avenue de Matignon - 75008 Paris (France)
Expertise and managerial experience – COO then Chairman of the Management Board of Compagnie Bancaire (1985-1995)– Member of the Supervisory Board of Paribas and Chairman of the Supervisory Board of Crédit du Nord (1995-1997).
Positions held in 2005Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Eramet– Member of the Supervisory Board of Cogedim and Vallourec
Positions held in 2004Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour and Eramet– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
195Vallourec 2005 Annual Report
196 Vallourec 2005 Annual Report
Positions held in 2003Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour and Eramet– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec
Positions held in 2002Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour, Eramet and Montupet– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec
Positions held in 2001Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour, Eramet, Montupet, BP France and Teleimage International– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec
Wolfgang LEESEDate of first appointment: 11 June 2002Date on which appointment ceases: 31 December 2007 (General Meeting called to approve the financial statements for the financialyear 2007)Date of birth: 17 June 1946
Business address: SALZGITTER AG - Eisenhüttenstrasse 99 - D-38239 Salzgitter (Germany)
Expertise and managerial experience– Diploma in economics (management)– 33 years of professional experience.
Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke GmbH, Peiner Träger GmbH, HSP Hoesch Spundwand und Profil GmbH,
Salzgitter Flachstahl GmbH and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Dresdner Bank AG and Norddeutsche Landesbank
Positions held in 2004Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG, Peiner Träger GmbH and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Dresdner Bank AG and Norddeutsche Landesbank
Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG, Peiner Träger GmbH and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl
Sect
ion
5
– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Dresdner Bank AG and Norddeutsche Landesbank
Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec
Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Norddeutsche Landesbank
Positions held in 2001Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Advisory Board of Norddeutsche Landesbank.
Thierry MARRAUDDate of first appointment: 10 June 2004Date on which appointment ceases: 31 December 2009 (General Meeting called to approve the financial statements for the financialyear 2009)Date of birth: 30 April 1942
Business address: Tour Bolloré - 31-32, quai de Dion-Bouton - 92811 Puteaux (France)
Expertise and managerial experience – 30 years at the Saint-Gobain Group: Group CFO and COO mechanical paper and packaging division– 5 years as Executive Member of Crédit Lyonnais (1995-2000), CEO of Marsh Mac Lennan France (2001-2002) and CFO of Bolloré
group since 2003.
Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec, representing Société Financière de Sainte Marine– Member of the Supervisory Board of Emin Leydier– Director of Havas– Director of Bolloré Investissement and Financière V permanent representative– Bolloré permanent representative on the Board of Directors of SFDM– Compagnie du Cambodge permanent representative at IER– Financière de l’Odet permanent representative at Saga
Positions and appointments held in foreign companies– Director of Sorebol
Positions held in 2004Positions and appointments held in French companies– Chairman and CEO of Financière de Sainte Marine– Financière de l’Odet permanent representative at S.F.P.– Member of the Supervisory Board of Vallourec, representing Société Financière de Sainte Marine– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires
Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
197Vallourec 2005 Annual Report
198 Vallourec 2005 Annual Report
Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires
Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires– Chairman of the Executive Board of Marsh Mac Lennan.
Jean-Claude VERDIEREDate of first appointment: 1 July 2001 Date on which appointment ceases: 31 December 2006 (General Meeting called to approve the financial statements for the financialyear 2006)Date of birth: 11 April 1938
Business address: None
Expertise and managerial experience – 40 years in the Vallourec Group, mainly in finance / management control– Member of the Management Board and COO of Vallourec from 1994 to 2001.
Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of ValTubes
Positions held in 2004Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of Valtubes and Sopretac
Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of Valtubes and Sopretac
Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of Valtubes and Sopretac
Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec (as from 1 July 2001)– Member of the Management Board and COO of Vallourec (until 30 June 2001)– Member of the Board of Directors of Valtubes and Sopretac.
Sect
ion
5
■ Members of the Management Board
Pierre VERLUCADate of first appointment: 12 December 2000Date of appointment as Chairman of the Management Board: 10 June 2004Date on which appointment ceases: 31 December 2007 (General meeting called to approve the financial statements for the financialyear 2007)Date of birth: 22 January 1944
Business address: Vallourec - 130, rue de Silly - 92100 Boulogne (France)
Expertise and managerial experience – Head of production at Ugine Kuhlmann from 1967 to 1973– CFO of SADEC (Portugal) from 1973 to 1975– Member of the Management Board of Vallourec since December 2000.
Positions held in 2005Positions and appointments held in French companies (all Vallourec Group companies)– Chairman of the Management Board of Vallourec– Chairman of V & M FRANCE, VALLOUREC & MANNESMANN TUBES and ValTubes (formerly Sopretac)– Director of Valtimet and VALLOUREC MANNESMANN OIL & GAS FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH– Chairman of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of V & M Holdings, Vallourec Inc. and Vallourec Industries Inc.– Director of Finalourec– Director of V & M do BRASIL SA and Vallourec Tubes Canada– Member of the Executive Committee of V & M STAR
Positions held in 2004Positions and appointments held in French companies (all Vallourec Group companies)– Chairman of the Management Board of Vallourec (since 10 June 2004, a member prior to that date)– Chairman of V & M FRANCE (since 10 June 2004, Member of the Board prior to that date),VALLOUREC & MANNESMANN TUBES (since
11 June 2004, Member of the Board prior to that date), Sopretac (now ValTubes) (since 29 June 2004, Member and Director prior tothat date), Valtubes (from 29 June 2004 until 16 December 2004, Member and Director prior to that date)
– Director of Valtimet and VALLOUREC MANNESMANN OIL & GAS FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH (since 25 June 2004, Member of the Board prior to that date)– Chairman of the Advisory Board of V & M do BRASIL SA (since 15 October 2004)– Chairman of the Board of Directors of V & M Holdings (since 10 June 2004, Director prior to that date), Vallourec Inc.
and Vallourec Industries Inc.– Director of Finalourec– Director of V & M do BRASIL SA and Vallourec Tubes Canada– Member of the Executive Committee of V & M STAR
Positions held in 2003Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Member and Director of Sopretac and Valtubes– Director of VALLOUREC & MANNESMANN TUBES,VALLOUREC MANNESMANN OIL & GAS FRANCE,Vallourec Composants Automobiles
Hautmont, Vallourec Composants Automobiles Vitry, Vallourec Précision Etirage, Vallourec Précision Soudage, Valti and Valinox Nucléaire(until 7 February 2003)
– Member of the Board of V & M FRANCE
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
199Vallourec 2005 Annual Report
200 Vallourec 2005 Annual Report
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Board of Directors of V & M do BRASIL SA– Director of Finalourec– Director of V & M Holdings, Vallourec Tubes Canada, VAM PC, Vallourec Industries Inc., Vallourec Inc.
and VALLOUREC MANNESMANN OIL & GAS UK– Member of the Supervisory Board of V & M DEUTSCHLAND GmbH– Member of the Executive Committee of V & M STAR
Positions held in 2002Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Member and Director of Sopretac and Valtubes– Director of VALLOUREC & MANNESMANN TUBES, Valinox Nucléaire, VALLOUREC MANNESMANN OIL & GAS FRANCE,
Vallourec Composants Automobiles Hautmont, Vallourec Composants Automobiles Vitry, Vallourec Précision Etirage,Vallourec Précision Soudage, Escofier and Valti
– Member of the Board of V & M FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Board of Directors of V & M do BRASIL SA – Director of Finalourec– Director of V & M Holdings, Vallourec Tubes Canada, VAM PC, Vallourec Industries Inc, Vallourec Inc.
and VALLOUREC MANNESMANN OIL & GAS UK– Member of the Supervisory Board of V & M DEUTSCHLAND GmbH– Member of the Executive Committee of V & M STAR (since 28 June 2002)
Positions held in 2001Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Member and Director of Sopretac (since 29 June 2001) and Valtubes (since 1 July 2001)– Director of VALLOUREC & MANNESMANN TUBES (since 5 June 2001), VALLOUREC MANNESMANN OIL & GAS FRANCE,
Vallourec Composants Automobiles Vitry (since 23 February 2001), Vallourec Composants Automobiles Hautmont,Vallourec Précision Etirage, Vallourec Précision Soudage, Escofier, Eurocamus, Jacot, Valti (since 16 February 2001)and Valinox Nucléaire (since 23 May 2001)
– Member of the Board of V & M FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Board of Directors of V & M do BRASIL SA– Director of Finalourec (since 18 June 2001)– Director of V & M Holdings, VAM PC, Vallourec Industries Inc. and VALLOUREC MANNESMANN OIL & GAS UK– Member of the Supervisory Board of V & M DEUTSCHLAND GmbH
Sect
ion
5
François FABREDate of first appointment: 12 December 2000Date on which appointment ceases: 31 December 2007 (General Meeting called to approve the financial statements for the financialyear 2007)Date of birth: 18 August 1941
Business address: Vallourec - 130, rue de Silly - 92100 Boulogne (France)
Expertise and managerial experience – 40 years in the Vallourec Group (IT, plant management and human resources)– Member of the Management Board since end-2000.
Positions held in 2005Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services and Interfit (until 9 September 2005)– Director and COO of ValTubes (formerly Sopretac)– Member of the Supervisory Board of V & M FRANCE – Director of VALLOUREC & MANNESMANN TUBES, Escofier, Interfit, Valti, Vallourec Composants Automobiles Hautmont,
Vallourec Composants Automobiles Vitry, Vallourec Précision Etirage, Vallourec Précision Soudage and VALLOUREC MANNESMANN OIL & GAS FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings, Vallourec Industries Inc., Vallourec Inc. and Finalourec– Member of the Executive Committee of V & M STAR (until 15 March 2005)
Positions held in 2004Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services and Interfit (since 28 May 2004)– Director and COO of Sopretac and Valtubes (until 16 December 2004)– Member of the Supervisory Board of V & M FRANCE (since 22 June 2004)– Director of VALLOUREC & MANNESMANN TUBES (since 11 June 2004), Escofier (since 28 May 2004), Valti (since 28 May 2004),
Vallourec Composants Automobiles Hautmont (since 28 May 2004), Vallourec Composants Automobiles Vitry (since 28 May 2004),Vallourec Précision Etirage (since 14 June 2004), Vallourec Précision Soudage (since 14 June 2004) and VALLOUREC MANNESMANN OIL & GAS FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH (since 25 June 2004, manager prior to that date)– Director of V & M do BRASIL SA, V & M Holdings, Vallourec Industries Inc. (since 10 June 2004), Vallourec Inc. (since 10 June 2004)
and Finalourec– Member of the Executive Committee of V & M STAR
Positions held in 2003Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services – Director and COO of Sopretac and Valtubes – Member of the Management Board of V & M FRANCE – Director of VALLOUREC MANNESMANN OIL & GAS FRANCE
Positions and appointments held in foreign companies (all Vallourec Group companies)– Manager of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings and Finalourec– Member of the Executive Committee of V & M STAR
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
201Vallourec 2005 Annual Report
202 Vallourec 2005 Annual Report
Positions held in 2002
Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services – Director and COO of Sopretac and Valtubes – Member of the Management Board of V & M FRANCE – Director of VALLOUREC MANNESMANN OIL & GAS FRANCE and Cerec (until 13 November 2002)
Positions and appointments held in foreign companies (all Vallourec Group companies)– Manager of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings and Finalourec– Member of the Executive Committee of V & M STAR (since 28 June 2002)
Positions held in 2001Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services – Director and COO of Sopretac and Valtubes – Member of the Management Board of V & M FRANCE – Director of VALLOUREC MANNESMANN OIL & GAS FRANCE and Cerec
Positions and appointments held in foreign companies (all Vallourec Group companies)– Manager of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings and Finalourec.
Sect
ion
5
In accordance with the requirements of Article L. 225-184 of the
French Code de Commerce, we inform you that no share purchase
or share subscription options were granted during the financial
year 2005.
We remind you that the Extraordinary General Meeting held on
15 June 2000 authorized the Management Board to grant share
subscription options (first resolution) and/or share purchase options
(second resolution), up to the respective limits of 4% and 10% of
Vallourec’s share capital, to managers and/or employees of Group
companies, for a period of five years that expired on 14 June 2005.
Under this authorization:
■ 178,500 share subscription options, each giving the right to
subscribe for one Vallourec share, were granted on 15 June 2000
to 144 beneficiaries at a price of € 38 per share, corresponding
to 95% of the average of the last 20 prices quoted before the date
the options were granted.
After a holding period of four years, these subscription options may
be exercised during a period of three years from 15 June 2004 to
14 June 2007 inclusive. After taking into account i) the options
exercised between 15 June 2004 and 31 December 2005, i.e.
163,794 options, of which 24,064 in 2005, ii) the options
cancelled (6,750) since the date they were granted (the holders
having left the Group) and iii) the adjustment resulting from the
capital increase in cash in July 2005, the number of subscription
options outstanding at 31 December 2005 amounted to 8,174,
i.e. 0.08% of the share capital at that date, and the adjusted
exercise price was then set at € 37.43 per share.
■ 193,000 share purchase options, each giving the right to purchase
one Vallourec share, were granted on 11 June 2003 to 148 bene-
ficiaries at a price of € 53.65 per share, corresponding to the
average of the last 20 prices quoted during the 20 trading
sessions preceding the date the options were granted, not
discounted.
These options, which cannot be exercised until after the end of a
holding period of four years, may be exercised during a period of
three years from 11 June 2007 to 10 June 2010 inclusive. After
taking into account i) the options cancelled (2,750) since the date
they were granted (the holders having left the Group) and ii) the
adjustment resulting from the capital increase in cash in July 2005,
the number of purchase options outstanding at 31 December 2005
amounted to 193,146, i.e. 1.82% of the share capital at that date,
and the adjusted exercise price was then set at € 52.85 per share.
The Extraordinary General Meeting to be held on 1 June 2006
(eleventh resolution) will be asked to approve a resolution
delegating to the Management Board the necessary authorization,
valid for a period of 38 months, to grant, where appropriate,
options to purchase Vallourec shares.
8.1.2 Special report of the Management Board on options - Financial year 2005
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
203Vallourec 2005 Annual Report
204 Vallourec 2005 Annual Report
8.2 Report of the Chairman of the Supervisory Boardon the conditions governing the preparation and organizationof the Supervisory Board’s work and the internal controlprocedures implemented by Vallourec
In accordance with the provisions of Article L. 225-68 of the French
Code de Commerce, introduced by law no. 2003-706 of 1 August
2003 on financial security, the Chairman of Vallourec’s Supervisory
Board presents this report to the shareholders, detailing the conditions
governing the preparation and organization of the Supervisory Board’s
work and the internal control procedures implemented by the Company.
A - CONDITIONS GOVERNINGTHE PREPARATION AND ORGANIZATIONOF THE SUPERVISORY BOARD’S WORK
The internal regulations of the Supervisory Board, the situation of the
Board members as regards the criteria of the Bouton report, the
composition and operation of the two Committees (Finance
Committee and Appointments and Remuneration Committee) set up
within the Supervisory Board and the remuneration principles are
detailed in section 6 of the Reference Document for the year ended
31 December 2005 dealing with Corporate Governance, of which this
report forms an integral part.
The number of meetings of the Board is normally set at four per year
but additional meetings may be organized where circumstances so
require. In 2005, the Board met eight times, in particular in connection
with the negotiations concerning the acquisition of the 45%
shareholding in V & M TUBES.The average length of Board meetings
is about three hours.
In order to ensure that Board members are able to attend meetings,
the timetable of regular meetings is prepared very far in advance.
For this reason, a meetings timetable for the following year is drawn
up in June and agreed at the Board meeting held in September. As
a result of the above procedures, the effective attendance rate of
Board members at meetings is very high: out of all the meetings held
in 2005, only five absences were noted. The absence rate of Board
members at exceptional meetings is a little higher, but still remains
low: as regards the four exceptional meetings in 2005, no more than
two or three members were absent at any meeting. Members who
were unable to attend were, however, represented at all meetings,
whether regular or exceptional. The members of the Management
Board attended all meetings.
The arrangements for the meetings are confirmed about a fortnight
in advance by means of a notice of the meeting to which is attached
the agenda and the draft minutes of the previous meeting. Board
members are invited to submit any comments they have in advance
of the Board meeting.
The Management Board endeavours to circulate documents of a
financial nature a few days in advance of Board meetings.At meetings,
a complete file incorporating all supporting documentation in
respect of the items on the agenda is given to each participant.
This file also contains the Management Board’s quarterly report to
the Supervisory Board on the Company’s performance, prepared in
accordance with the provisions of Article L. 225-68, section 4, of the
French Code de Commerce. Where necessary, the Board relies on
preliminary work carried out by the Finance Committee or the
Appointments and Remuneration Committee.
Meetings are conducted in French with a simultaneous translation
being provided for German members.
Meetings are chaired by the Supervisory Board Chairman who
ensures, in particular, that each member expresses his opinion on the
most important matters. In the unusual case of a Board member
having a personal interest in one of the matters under consideration
as specified in Article L. 225-86 of the French Code de Commerce,
he will be required to leave the meeting while the matter concerned
is being discussed.
In 2005, Vallourec’s Auditors attended those Supervisory Board
meetings at which the annual and half-year financial statements were
approved.
After the first assessment of the operation of the Board carried out
at the beginning of 2003, a further assessment was carried out in
March/April 2006 on the basis of an updated questionnaire. It
should be noted that, in order to comply with the request (made by
the majority of the Board members during the assessment of the
operation of the Board carried out at the beginning or 2003) for a
system of periodic site visits, a meeting was held in April 2005 at
Belo Horizonte (Brazil), which enabled the participants to visit all
V & M do BRASIL’s facilities (tube mill, steel mill, mine and forest).
Sect
ion
5
B - INTERNAL CONTROL PROCEDURES
1. Objectives of internal control
The aim of internal control is to provide reasonable assurance, by
means of a system of processes and procedures implemented by the
Vallourec Group’s staff, that the following three objectives may be
achieved:
– Optimization of operational efficiency,
– Accuracy of financial information,
– Compliance with the laws and regulations currently in force.
As is the case with any control system, the Group’s internal control
system cannot guarantee that all risk of error or fraud is fully
eliminated or controlled.
2. Description of internal controlprocedures
2.1 Internal control procedures adapted to thespecific characteristics of the Vallourec Group
The organization of the Vallourec Group has for many years been
based on the principle of decentralization.This approach is particularly
well suited to the Group’s international dimension, which was boosted
in 1997 by the formation of VALLOUREC & MANNESMANN TUBES.
Consequently, responsibility for the implementation of appropriate
internal control procedures governing risk management, financial
control and compliance with legislation is delegated to the managers
of each of the Group’s subsidiaries.
To ensure the consistency of Group procedures worldwide, senior
management relies on the functional departments to draw up the
procedures necessary for the proper operation of controls, issue
instructions regarding their implementation and ensure compliance
with the said instructions.
The key operations and the internal control procedures applicable to
them are as follows:
2.2 Internal control procedures in respectof financial and accounting information
2.2.1 Financial and accounting reporting
Financial and accounting information is prepared centrally on the
basis of the subsidiaries’ financial statements, adjusted to comply with
Group standards. The necessary data is collected and processed by
the new version of MAGNITUDE, which was installed in July 2004.
MAGNITUDE is a reporting and consolidation software application
that is used by all consolidated subsidiaries and is compatible with
the new IFRS accounting standards that Vallourec has adopted as
from 1 January 2005.
Reports are produced monthly, and prepared in the month following
the month to which they relate, whereas full accounting consolidations
are produced quarterly and prepared in the two months following
the end of the quarter to which they relate. The preparation of the
annual and half-yearly consolidations is the responsibility of senior
management under the control of the Finance Committee and the
Group’s Auditors.
The monitoring of off-balance-sheet commitments is an integral part
of the quarterly consolidation process.
2.2.2 External financial information
Financial communications to third parties consist, on a quarterly basis,
of the Group’s consolidated sales and, on a half-yearly basis, of the
financial statements prepared by the Management Board, submitted
to the Supervisory Board and reviewed by the Auditors.
2.2.3 Cash position and financing
Responsibility for cash management is delegated to the subsidiaries,
by means of well defined procedures and delegation.Any departure
from the general rules requires the prior authorization of the Group
Finance department.
The Group Finance department is also responsible for borrowings and
investments with a term of more than one year. Responsibility for
borrowings and investments with a term of less than one year is
delegated to the subsidiaries, which are required to comply with
specific Group procedures: quality of the banks involved, risk-free
investment and monitoring of financial guarantees given.
Transactions in foreign currencies and foreign exchange hedging are
also governed by rules issued by the Group Finance department.
Borrowings, investments and foreign exchange transactions are
monitored on a monthly basis by means of a report produced by the
Group treasurer and submitted to senior management.
2.2.4 Procedures and instructions
With the objective of producing high-quality financial and accounting
information, Vallourec has produced procedures and instructions
tailored to the French and foreign subsidiaries. These procedures are
grouped by topic and deal mainly with accounting, treasury and
reporting issues and, since 2004, with the IFRS framework.
Details of the procedures are available on an intranet site that can
be consulted by all of the Group’s finance staff.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
205Vallourec 2005 Annual Report
206 Vallourec 2005 Annual Report
A self-assessment procedure to review accounting and financial
procedures was introduced at the end of 2003, using a questionnaire
based on the report of the COSO (Committee Of Sponsoring
Organizations of the Treadway Commission), the accepted framework
in the field of internal control. The enquiry carried out by the Group’s
Internal Audit department focused on the fully-consolidated
companies. All of the accounting cycles were analyzed: purchases
– trade payables, sales – trade receivables, inventories, cash and bank
balances, pay and property, plant and equipment.
Self-assessment procedures to review accounting controls were
carried out separately in respect of each subsidiary. Each received a
summary of the points for improvement and prepared an action plan
for each weakness identified and for which the risk of occurrence is
considered to be significant. The managers of the companies
concerned have been kept informed of these assessments and the
action plans drawn up at entity level.
Although the action points, the implementation of which began as
early as 2004, vary from one entity to the other, the most frequent
relate to the organization of a fixed assets inventory, the setting of
additional parameters regarding access to computer files (SAP) and
the description of internal control procedures in respect of accounting
information.
2.2.5 Internal audit
The Internal Audit and Financial Control department is attached to
the Group Finance department. It audits the subsidiaries in
accordance with an audit plan, particularly in order to assess and
improve the accuracy and reliability of the accounting and financial
information.
Vallourec also has a team based at V & M do BRASIL SA.The team’s
audit plan is validated by the Internal Audit department. Its responsi-
bilities relate mainly to internal control procedures.
External experts may be consulted in the case of one-off assignments.
The Internal Audit department also coordinates relations with the
external Auditors, who are mainly affiliated to international audit firms.
2.3 Other key processes analyzed
2.3.1 Industrial investment
The Group’s Investments and Technology department reports to
senior management. It reports on investments to a committee set
up in 2005 and composed of the Chairman of the Management
Board and senior management. It examines the content of investment
projects proposed by the sites as part of the divisions’ industrial and
marketing plans. After validation, the decisions are taken and
authorizations to proceed with a project are granted by the Board
of the subsidiary concerned.
A posteriori controls of expenses and profitability of acquisitions are
performed annually. The results of such tests and the performance
measurement of acquisitions are brought to the attention of the
division Chairmen.
Group procedures define the methods applicable to the preparation
of capital expenditure proposals and the selection of projects, the
requests for authorization, and the controls necessary to ensure
compliance with the budget, timetable and objectives. In 2005,
these procedures were supplemented by aspects concerning
technology and purchasing.
2.3.2 Quality
Vallourec has a Group Quality department, which has developed
quality management systems, described in the manuals, which
comply with the ISO 9000 standard.These systems are implemented
at all the production sites.
Compliance with quality procedures is checked by the Group’s
Quality Audit unit and by independent external bodies. The findings
of these audits are analyzed and the appropriate corrective action
taken.
2.3.3 Environment
Within the context of sustainable development, an Environment
department was formed in 2002, with responsibility for coordinating
and directing environmental matters. The department relies on local
environment managers to ensure compliance with regulations.
The Environment department carries out audits and establishes key
indicators that enable the main parameters to be periodically
monitored.
A sustainable development charter was published in 2004 and an
internal report on the environment is prepared each year.
At the end of 2005, thirteen sites had received certification under
ISO 14001: four in Germany, three in Brazil, three in the United States,
two in France and one in the United Kingdom.
In order to improve environmental management, the Group’s policy
is to obtain certification under ISO 14001 for as many sites as possible
between now and the end of 2007, concentrating initially on France.
In 2005, a French site implemented a CO2 emissions monitoring plan
in connection with the first-time application of the national quota
Sect
ion
5
allocation plan. Such emissions are the subject of an annual return
verified by an approved organization and validated by the Inspection
body for the classified facilities.
2.3.4 Research and Development
The Research and Development department has drawn up Group
procedures concerning the management of programmes for
developing new products and industrial processes.The processes thus
defined are applied in a consistent manner by the entities concerned.
These procedures include those aspects concerning industrial
property and their aim is the formalization of procedures in respect
of design and commercial production.
Each year, audits are carried out by the Group Quality department.
2.3.5 Purchasing
Since 2005, the Group Purchasing department’s role has been
extended to strengthen the department’s organization and improve
its performance. In conjunction with the Investments department, it
authorizes the more significant acquisitions and is usually involved
in negotiations concerning raw materials, energy and investments,
generally under the direct responsibility of the COO of each company.
The internal audit unit of the Group purchasing department performs
checks, circulates information about best practice and develops
procedures in this area.
2.3.6 Information systems
The Information Systems department is responsible for integrating
and ensuring the consistency of the software used.
In a significant number of subsidiaries, most data processing is
carried out by means of integrated software packages (SAP).
The information systems of all the French subsidiaries are managed
by means of a single entity: the Vallourec Information Technology
Centre (Centre des Techniques d’Information Vallourec - CTIV).
In 2005 CTIV continued the development of a contingency plan to
increase the security of information systems.
2.3.7 Human resources
The Group Human Resources department organizes career and
skills development for those positions requiring a high level of
responsibility or technical skills. It carries out comparative studies with
market practices in a certain number of sectors.
The department checks compliance with labour regulations and
the information relating to the workforce and to safety. It also
ensures that information for management reports is obtained and
circulated.
In each country, the human resources managers are responsible for
ensuring compliance with specific national regulations.
In Germany, most of the workforce is governed by the law on joint
management in the steel industry and mines of 21 May 1951.
2.3.8 Customer relations
With the aim of specifying and formalizing certain practices regarding
contractual relations with its customers, Vallourec has developed a
procedure for managing customer risk: limits in respect of credit and
delegation of authority, and credit insurance.
The Legal department has analyzed the legal provisions applicable
to sales contracts entered into between the subsidiaries and their
customers. These subsidiaries have standard documents defining the
conditions with which their sales contracts should comply in order
to reduce the level of risk. These standard documents are regularly
reviewed by the Legal department.
2.3.9 Insurance
Industrial risks are covered by two types of Group insurance: general
insurance (direct material damage to the Group’s property, subject
to specific exclusions, as well as any costs and consequential losses)
and third-party liability insurance (liability arising as a result of injury
or loss caused to third parties either resulting from the Group’s
operations or after delivery of goods or services).
3. Procedures to ensure continuousimprovement
Beginning with the last quarter of 2003, Vallourec decided to carry
out a self-assessment procedure to review internal control procedures
in respect of accounting and financial information, human resources,
the environment, purchasing, research and development, information
systems and the terms and conditions applicable to sales contracts
entered into between the subsidiaries and their customers.
These self-assessment procedures enabled action points to be
drawn up. Subsidiaries began to take action in respect of these points
in 2004, under the supervision of the functional departments.
This gradual process of improving internal control procedures was
continued in 2005 and will continue into 2006.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
207Vallourec 2005 Annual Report
208 Vallourec 2005 Annual Report
8.3 Statutory Auditors’ reports
8.3.1 Statutory Auditors’ general report on the annual statutory accounts
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience
of English speaking readers. The Statutory Auditors’ report includes information specifically required by French law in all audit reports,
whether qualified or not, and this is presented below the opinion on the financial statements. This information includes an explanatory
paragraph discussing the Auditors’ assessments of certain significant accounting and auditing matters. These assessments were
considered for the purpose of issuing an audit opinion on the financial statements taken as a whole and not to provide separate assurance
on individual account captions or on information taken outside of the financial statements.
This report, together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal
control, should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
To the shareholders of Vallourec,
In accordance with our appointment as statutory auditors by your Annual General Meetings, we hereby report to you for the year ended
31 December 2005 on the following:
■ the audit of the accompanying annual financial statements of Vallourec,
■ the justification of our assessments,
■ the specific procedures and disclosures required by law.
The annual financial statements have been approved by the Management Board. Our role is to express an opinion on these annual financial
statements based on our audit.
I. Opinion on the annual financial statementsWe conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the annual financial statements are free of material misstatement.An audit
includes examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements.An audit also includes
assessing the accounting policies used and significant estimates made by Management, as well as evaluating the overall financial
statements presentation. We believe that our audit provides a reasonable basis for the opinion expressed below.
In our opinion, the annual financial statements give a true and fair view of the Company’s financial position and its assets and liabilities
as of 31 December 2005 and of the results of its operations for the year then ended, in accordance with French accounting regulations.
Without qualifying the above opinion, we would draw your attention to the matter disclosed in note I to the annual financial statements
relating to the rules governing the measurement, recognition and presentation of the assets in accordance with regulations CRC 2002-10,
CRC 2003-07 and CRC 2004-06 applicable in France as from 1 January 2005.
II. Justification of our assessmentsIn accordance with the requirements of Article L. 823-9 of the French Company Law (Code de Commerce) relating to the justification of
our assessments, we draw to your attention the following matters:
The Management of Vallourec is required to make estimates and assumptions that affect the amounts in the annual financial statements
and accompanying notes. These assumptions are, by nature, subject to uncertainties, and actual results could differ from these estimates.
209Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Specific documents for the AGM on 1 June 2006
In the context of our audit of the annual financial statements for the year ended 31 December 2005, we considered that, of those items
that are subject to significant accounting estimates, a justification of our assessments was required in the case of participating interests
and provisions for liabilities and charges:
■ We have assessed the information and assumptions on which the estimates used by Management were based and have reviewed the
calculations made by your Company as they relate to the principles adopted in respect of the valuation and calculation of the
impairment of participating interests described in note II to the annual financial statements.
■ The principles adopted in respect of providing for liabilities and charges are described in note II of the notes to the annual financial statements.
We have assessed the bases on which such provisions were made and the information concerning any significant contingencies of which the
Company was aware at the year end, and reviewed the appropriateness of the information disclosed in note III to the annual financial statements.
On the basis of the above, we assessed whether these estimates were reasonable.
The assessments on these matters were performed in the context of our audit approach for the annual financial statements taken as a whole,
and therefore contributed to enable us to express an unqualified opinion in the first part of this report.
III. Specific procedures and disclosuresWe have also performed the other procedures required by law in accordance with professional standards applicable in France.
We have no matters to report regarding the fair presentation and the consistency with the annual financial statements of the information
given in the management report of the Management Board, and in the documents addressed to the shareholders with respect to the financial
position and the annual financial statements.
Pursuant to the law, we have verified that the management report contains the appropriate disclosures as to the acquisition of participating
and controlling interests and as to the identity of shareholders (percentage of voting rights).
Neuilly-sur-Seine, 26 April 2006
The Statutory Auditors
CALAN RAMOLINO ET ASSOCIES BARBIER FRINAULT & AUTRES
Ernst & Young
Bertrand de Florival Bernard Scheidecker Philippe Hontarrède Christine Staub
210 Vallourec 2005 Annual Report
8.3.2 Statutory Auditors’ special report on certain related party transactions
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience
of English speaking readers. This report should be read in conjunction and construed in accordance with French law and professional auditing
standards applicable in France and it should be understood that the agreements reported on are only those provided by the French Company
Law (Code de Commerce) and that the report does not apply to those related party transactions described in IAS 24 or other equivalent
accounting standards.
To the shareholders of Vallourec,
In accordance with our appointment as Statutory Auditors of your Company, we are required to report on certain related party transactions
which have been brought to our attention.
The terms of our engagement do not require us to identify such agreements, if any, but to communicate to you, on the basis of the information
provided to us, the principal terms and conditions of those agreements brought to our attention, without expressing an opinion on their
usefulness and appropriateness. It is your responsibility, pursuant to article 117 of the decree of 23 March 1967 to assess the interest involved
in respect of the conclusion of these agreements for the purpose of authorizing them.
Agreements authorized during the year
In accordance with Article L. 225-88 of the French Company Law (Code de Commerce), we have been informed of the following
agreements which received the prior authorization of your Supervisory Board.
With Salzgitter Mannesmann
Persons concerned: Messrs Wolfgang Eging, Kunibert Martin and Wolfgang Leese.
At its meetings on 20 January, 8 March, 18 April and 27 April 2005, your Supervisory Board monitored and approved the progress and
finalization of the negotiations Vallourec held with Mannesmannröhren-Werke GmbH (MRW) and Salzgitter AG, both of which are
shareholders of Vallourec, concerning the acquisition by Vallourec of the 45% interest held by the two companies in the common
subsidiary V & M TUBES.
The Supervisory Board gave its agreement, in particular, to the acquisition price of the investment, set at € 545 million, and ratified the
fact that the completion of this transaction would result in the termination of the joint venture agreement entered into by Vallourec and
MRW in 1997, and, in particular, the clauses of the contract relating to “reserved matters” and change of control.
At the same meeting on 27 April 2005, the Supervisory Board also gave its agreement to the parallel sale to Salzgitter Mannesmann of
10% of the shares in the HKM German steel mill held by V & M TUBES, the latter retaining a 20% holding in this steel mill as well as the
rights attached to the holding concerning the steel produced by the mill.
The main provisions of this sale were explained at the Annual General Meeting held on 7 June 2005 and are disclosed in the 2004 Reference
Document, in particular in section IV, paragraph 4.8 ("Agreement between Vallourec and Mannesmannröhren-Werke concerning the acquisition
of the 45% holding in V & M TUBES") and in the Management Board’s management report to the General Meeting.
In connection with the acquisition of the 45% holding in V & M TUBES, the Supervisory Board also gave its agreement, at its meeting on
27 April 2005, to the signing of contracts relating to the processing of a maximum annual volume of 132,000 tonnes of hollow tube rounds
for drawing by Salzgitter Mannesmann, comprising a contract for V & M TUBES to supply tube rounds to the Salzgitter Mannesmann group.
The contract to supply tube rounds, which expires on 31 December 2017, has a penalty clause under which V & M TUBES, in the event of its
failure to meet certain of its obligations, would be required to pay a maximum amount of € 60 million, this amount decreasing as from 2011.
Sect
ion
5
With Messrs Pierre Verluca and François Fabre, members of the Management Board
At its meeting on 14 September 2005, the Supervisory Board examined and approved, on the basis of the report from the Appointments
and Remuneration Committee, a draft “income guarantee scheme for the retired employees of Vallourec and Setval”, insured with
AXA France Vie.
Your Supervisory Board has noted that the profit from this defined benefit scheme financed by the Company and in respect of which the
vesting of rights is conditional on the employee finishing his career at Vallourec and/or Setval, enables the Group’s managerial staff, under
acceptable economic, financial and social conditions, to supplement their income following retirement. The Company undertakes to pay
to those concerned a lifetime annuity at a predetermined level, directly proportional to the salary and in accordance with the employee’s
seniority and career development. The annuity is capped at 20% of the average salary excluding bonus of the last three years and limited
to four times the annual social security ceiling.
The Board, noting that the members of Management Board of Vallourec are likely to benefit from rights if they work within the Group until
the end of their careers, ruled in accordance with the provisions of Article L. 225.86 of the French Company Law (Code du Commerce).
Agreements authorized in previous years having a continuing effect during the year
In addition, pursuant to the decree of 23 March 1967, we have been advised that the following related party transaction conducted and
authorized in previous years has had continuing effect during the year:
With Rothschild & Cie
Your Supervisory Board, at its meeting on 20 January 2005, authorized the extension of the assistance agreement initially entered into with
Rothschild & Cie by your Supervisory Board on 4 March 2003, until the finalization of the acquisition of the 45% interest in V & M TUBES,
in return for the payment of an additional flat-rate commission of € 1,500,000, excluding taxes, half of which related to services provided
during the second half of 2004. The fees borne by your Company in respect of the year ended 31 December 2005 thus totalled € 750,000,
excluding taxes.
We conducted our procedures in accordance with professional standards applicable in France; those standards require that we agree the
information provided to us with the relevant source documents.
Neuilly-sur-Seine, 26 April 2006
The Statutory Auditors
BARBIER FRINAULT & AUTRES CALAN RAMOLINO et ASSOCIES
Ernst & Young
Philippe HONTARREDE Christine STAUB Bertrand de FLORIVAL Bernard SCHEIDECKER
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
211Vallourec 2005 Annual Report
212 Vallourec 2005 Annual Report
8.3.3 Statutory Auditors’ report on the consolidated financial statements
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience
of English speaking readers. The Statutory Auditors’ report includes information specifically required by French law in all audit reports,
whether qualified or not, and this is presented below the opinion on the consolidated financial statements. This information includes an
explanatory paragraph discussing the Auditors’ assessments of certain significant accounting and auditing matters. These assessments
were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide
separate assurance on individual account captions or on information taken outside of the consolidated financial statements.
This report together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal
control, should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
To the shareholders of Vallourec,
In accordance with our appointment as statutory auditors by your Annual General Meetings, we have audited the accompanying
consolidated financial statements of Vallourec for the year ended 31 December 2005.
The consolidated financial statements have been approved by the Management Board. Our role is to express an opinion on these annual
financial statements based on our audit.These financial statements have been prepared for the first time in accordance with the IFRS framework
as adopted in the European Union. They comprise, by way of comparison, the data relating to the financial year 2004 restated in
accordance with the same rules with the exception of IAS 32 and IAS 39 which, in accordance with the option offered under IFRS 1, are
only applied by the Company as from 1 January 2005.
I. Opinion on the consolidated financial statementsWe conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall
financial statements’ presentation. We believe that our audit provides a reasonable basis for the opinion expressed below.
In our opinion, the consolidated financial statements give a true and fair view of the financial position and assets and liabilities of the Group
as of December 31, 2005 and the results of its operations for the year then ended in accordance with the IFRS framework as adopted in
the European Union.
II. Justification of our assessmentsIn accordance with the requirements of Article L. 823-9 of the French Company Law (Code de Commerce) relating to the justification of
our assessments, we draw to your attention the following matters:
As specified in paragraph A-2.2 of the notes to the consolidated financial statements, the Management of Vallourec is required to make
estimates and assumptions that affect the amounts in the consolidated financial statements and accompanying notes. These assumptions
are, by nature, subject to uncertainties, and actual results could differ from these estimates. In the context of our audit of the consolidated
financial statements for the year ended 31 December 2005, we considered that, of those items that are subject to significant accounting
estimates, a justification of our assessments was required in the case of long-lived tangible and intangible assets, goodwill, provisions for
liabilities and charges, retirement benefit obligations and financial instruments:
■ The methods adopted in respect of the valuation of long-lived tangible and intangible assets and goodwill are described in
paragraphs A-2.6 to A-2.10 of the notes to the consolidated financial statements. We have assessed the information and assumptions
on which the estimates used by Management were based and have reviewed the calculations made by your Company as explained in
notes 1 and 2 to the consolidated financial statements.
Sect
ion
5
■ The principles adopted in respect of providing for liabilities and charges are described in paragraph A-2.12 of the notes to the
consolidated financial statements. We have assessed the bases on which such provisions were made and the information concerning
any significant contingencies of which the Company was aware at the year end, and reviewed the appropriateness of the information
disclosed in note 15 to the consolidated financial statements.
■ The principles adopted in respect of provisions for retirement obligations are described in paragraph A-2.13 of the notes to the consolidated
financial statements. These obligations have been measured by independent actuaries. We have examined the information used, assessed
the assumptions adopted and reviewed the appropriateness of the information disclosed in note 16 to the consolidated financial statements.
■ The principles adopted in respect of the recognition and presentation of financial instruments are described in paragraph A-2.16 of the
notes to the consolidated financial statements. We have assessed the documentation prepared by your Company justifying, in particular,
the classification of financial instruments, the hedging relationships as well as their effectiveness, and reviewed the appropriateness of
the information disclosed in note 8 o the consolidated financial statements.
On the basis of the above, we assessed whether these estimates were reasonable.
The assessments on these matters were performed in the context of our audit approach for the consolidated financial statements taken
as a whole, and therefore contributed to enable us to express an unqualified opinion in the first part of this report.
III. Specific procedures and disclosuresIn accordance with professional standards applicable in France, we have also verified the information given in the Group management report.
We have no matters to report regarding its fair presentation and conformity with the consolidated financial statements.
Neuilly-sur-Seine, 26 April 2006
The Statutory Auditors
CALAN RAMOLINO ET ASSOCIES BARBIER FRINAULT & AUTRES
Ernst & Young
Bertrand de Florival Bernard Scheidecker Philippe Hontarrède Christine Staub
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
213Vallourec 2005 Annual Report
214 Vallourec 2005 Annual Report
8.3.4 Statutory Auditors’ report on the report of the Chairman of the Supervisory Boardon internal control procedures
STATUTORY AUDITORS’ REPORT, PREPARED IN ACCORDANCE WITH ARTICLE L.225-235 OF THE FRENCH COMPANY LAW
(CODE DE COMMERCE), ON THE REPORT PREPARED BY THE CHAIRMAN OF THE SUPERVISORY BOARD OF VALLOUREC, WITH
RESPECT TO THE INTERNAL CONTROL PROCEDURES RELATING TO THE PREPARATION AND TREATMENT OF THE FINANCIAL AND
ACCOUNTING INFORMATION.
This is a free translation into English of a report issued in the French language and is provided solely for the convenience of English speaking
readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing
standards applicable in France.
To the Vallourec shareholders,
In our capacity as Statutory Auditors of Vallourec and in accordance with Article L. 225-235 of the French Company Law (Code de Commerce),
we hereby report to you on the report prepared by the Chairman of your Company in accordance with Article L. 225-68 of the French Company
Law (Code de Commerce) for the year ended 31 December 2005.
It is the Chairman’s responsibility to report, in his report, notably on the conditions of preparation and organization of the Supervisory Board’s
work and on the internal control procedures implemented in the Company.
It is our responsibility to report to you our observations on the information included in the Chairman’s report with respect to the internal
control procedures relating to the preparation and treatment of the financial and accounting information.
We have performed our work in accordance with the professional guidelines applicable in France. These guidelines require that we plan
and perform our procedures with a view to assessing whether the disclosures in the Chairman’s report on the internal control procedures
relating to the preparation and treatment of the financial and accounting information are true and fair.
These procedures include:
■ obtaining an understanding of the objectives and general organization of internal control, as well as the internal control procedures relating
to the preparation and treatment of financial and accounting information, as set out in the Chairman’s report;
■ obtaining an understanding of the work underlying the information thus set out in the report.
On the basis of the procedures we have performed, we have nothing to report with regard to the information concerning the internal control
procedures of the Company relating to the preparation and treatment of the financial and accounting information, as included in the report
of the Chairman of the Supervisory Board, prepared in accordance with the last paragraph of Article L. 225-68 of the French Company Law
(Code de Commerce).
Neuilly-sur-Seine, 26 April 2006
The Statutory Auditors
CALAN RAMOLINO ET ASSOCIES BARBIER FRINAULT & AUTRES
Ernst & Young
Bertrand de Florival Bernard Scheidecker Philippe Hontarrède Christine Staub
Sect
ion
5
8.4 Supervisory Board report
Vallourec’s performance once again improved significantly in 2005:
consolidated sales rose by 42% to € 4,307 million, EBITDA rose by
133% to € 1,061 million and the EBITDA/Sales ratio reached a record
24.6%.
During 2005, the Group also achieved a major stage in its develop-
ment – the acquisition of full control of its subsidiary V & M TUBES.
Following this acquisition, Vallourec now has full control over the
company’s strategy.As already reported, this acquisition contributed
to the increase in net income, Group share, which more than tripled
to € 473 million, and would have reached € 577 million if the
additional 45% stake in V & M TUBES had been acquired on
1 January 2005.
The Supervisory Board congratulates the Management Board and,
via the Management Board, all Group employees for these truly
remarkable results, which illustrate the commitment and motivation
demonstrated throughout the Group.
The Supervisory Board has examined the Management Board’s
management report and the financial statements for the year ended
31 December 2005 as well as the various documents attached
thereto. The Supervisory Board considers that they accurately reflect
the position of the Company and of the Group and that no special
remarks are called for.
The Board has also reviewed the report of the Chairman of the
Supervisory Board on the conditions governing the preparation and
organization of the Supervisory Board’s work and the internal
control procedures implemented by the Company.
The Management Board proposes that you approve the payment of
a dividend of € 11.20 per share, up significantly on the dividend of
€ 3.20 per share paid last year, which was itself double the dividend
paid the year before. After taking into account the interim dividend
of € 4 per share already paid in October 2005, the balance of € 7.20
per share will be paid on 5 July 2006.When the financial statements
for the first half of 2006 are reviewed, consideration will be given
to the possibility of paying, during the second half of the year, an
interim dividend in respect of the financial year 2006.
One of the resolutions on which you will vote at the Annual General
Meeting asks you to approve the transactions referred to in the
Statutory Auditors’ report on certain related party transactions
entered into during 2005 or entered into in prior years and which
continue to apply in 2005. These transactions mainly relate to the
acquisition of the 45% stake in V & M TUBES from Salzgitter
Mannesmann. Three representatives from Salzgitter Mannesmann
sit on Vallourec’s Supervisory Board.
On 14 December 2005, Mr Kunibert Martin resigned from the
Supervisory Board due to his retirement. The Supervisory Board
would like to express its sincere thanks to Mr Martin for his
commitment to Vallourec, which began even before his appointment
to the Board in 2001 with his involvement in the initial studies
relating to the setting up of V & M TUBES in 1997. The Board
would also like to thank him for his contribution to the work of that
company, particularly as a member of the Finance Committee since
2002. The Board has appointed Mr Heinz Jörg Fuhrmann to replace
Mr Martin. Mr Fuhrmann has spent his entire career in the steel
industry and is a member of the Executive Board and CFO of
Salzgitter.
The appointments of Messrs Patrick Boissier, Wolfgang Eging,
Heinz Jörg Fuhrmann, Denis Gautier-Sauvagnac and Jean-Paul Parayre
as members of the Supervisory Board expire at the close of this
General Meeting. The Board proposes that you renew these
appointments for a period of five years expiring at the close of the
General Meeting called to approve the financial statements for the
financial year 2010.
The appointments of your Statutory Auditors have also expired.
Following a selection process supervised by the Finance Committee
of the Supervisory Board, the latter has decided to propose that you
renew the appointment of Deloitte & Associés (until now represented
by the firm Calan, Ramolino et Associés) and appoint KPMG SA as
new Statutory Auditors.
Finally, you are asked to renew the annual share buy-back
authorization. The terms of the authorization are in line with those
normally governing such authorizations.
The other resolutions you are asked to approve do not call for
particular comment and we invite you to approve them.
The Supervisory Board has also reviewed the resolutions presented
to the Extraordinary General Meeting called at the close of this Annual
General Meeting as well as the content of the Management Board’s
report to that Meeting. Although the Supervisory Board is not
required to report on any of the matters covered by the resolutions,
we confirm that we have examined the resolutions extremely
carefully and we invite you to approve them.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
215Vallourec 2005 Annual Report
216 Vallourec 2005 Annual Report
8.5 Resolutions Ordinary General Meeting of 1 June 2006
FIRST RESOLUTION (Approval of the Statutory
Auditors’ special report on certain related party transactions)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, having heard the
special report of the Auditors in respect of the agreements subject
to Article L. 225-86 of the French Code de Commerce, approves the
operations stated in that report and records, where relevant, the
continuation of agreements authorized previously during the year
under review.
SECOND RESOLUTION (Approval of the Company
financial statements and the management report of the
Management Board)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, having heard the
reports of the Management Board, the report of the Chairman of the
Supervisory Board on internal control, the report of the Supervisory
Board and the general report of the Auditors for the financial year
ended 31 December 2005, hereby approves the management report
of the Management Board and the Company financial statements
for the financial year 2005 as presented, which show net income of
€ 14,144,934.26.
THIRD RESOLUTION (Approval of consolidated financial statements)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, having heard the
reports of the Management Board, the Supervisory Board and the
Auditors, approves the consolidated financial statements for the year
ended 31 December 2005 as presented to it, which show net
income of € 632,389 thousand.
FOURTH RESOLUTION (Allocation of net income)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, hereby approves
the allocation of net income recommended by the Management
Board.
In so doing, it resolves to appropriate from the net income for the
financial year an amount of € 1,460,752 to the legal reserve and to
appropriate the balance of € 12,684,182.26, increased by the amount
of € 106,039,536.14, € 101,916,198.73 of which was deducted from
retained earnings and € 4,123,337.41 of which was deducted from
general reserves, to give a total of € 118,723,718.40, to the distribution
of dividends.
Shareholders are reminded that, at its meeting on 14 September 2005,
the Management Board had already decided to distribute an interim
dividend of € 4 per share (giving a total payment of € 41,322,332).
This interim dividend was paid on 12 October 2005.
Accordingly, the balance of € 7.20 shall be paid to each of the
10,600,332 shares representing the share capital at 31 December 2005,
corresponding to a total dividend paid to each share in respect of the
financial year 2005 of € 11.20.
The Meeting stipulates that the Company shall not receive any
dividend in respect of any of its own shares that it may hold on the
ex-dividend date. The corresponding amount shall be appropriated
to retained earnings. Accordingly, the Meeting authorizes the
Management Board, if necessary, to amend the final amount of
dividends actually distributed and the final amount appropriated to
retained earnings.
The dividend will be paid on 5 July 2006.
In accordance with the provisions of Article 158.3 (2°) of the French
General Tax Code (Code Général des Impôts), this dividend is
eligible for the 40% deduction designed to compensate individuals
domiciled in France for tax purposes for the abolition of the tax credit.
Sect
ion
5
The General Meeting notes that the dividends granted for the preceding three financial years were as follows:
Financial year Number Net dividend Tax credit Total income of shares per share per share per share
(in €) (in €) (in €)
2002 9,730,226 2.10 1.05 (50%) 3.15
2003 9,730,226 1.60 0.80 (50%) 2.40
2004 9,869,956 3.20 None 3.20
FIFTH RESOLUTION (Ratification of the appointment
of Mr Heinz Jörg Fuhrmann as a member of the Supervisory Board,
to replace Mr Kunibert Martin, who has resigned)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, ratifies, in
accordance with Article L. 225-78 of the French Code de Commerce,
the provisional appointment as a member of the Supervisory Board
of Mr Heinz Jörg Fuhrmann at the Supervisory Board meeting on 14
December 2005, to replace Mr Kunibert Martin, who resigned, for
the remainder of Mr Martin’s term of office, that is until the close of
this Ordinary General Meeting.
SIXTH RESOLUTION (Renewal of the term of office
of a member of the Supervisory Board, said term of office
having expired)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, resolves to renew
the appointment as a member of the Supervisory Board of Mr
Patrick Boissier for a term of five (5) years expiring at the end of the
Ordinary General Meeting called to approve the financial statements
for the year ended 31 December 2010.
SEVENTH RESOLUTION (Renewal of the term
of office of a member of the Supervisory Board, said term
of office having expired)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, resolves to renew
the appointment as a member of the Supervisory Board of Mr
Wolfgang Eging for a term of five (5) years expiring at the end of the
Ordinary General Meeting called to approve the financial statements
for the year ended 31 December 2010.
EIGHTH RESOLUTION (Renewal of the term of office
of a member of the Supervisory Board, said term of office
having expired)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, resolves to renew
the appointment as a member of the Supervisory Board of Mr Heinz
Jörg Fuhrmann for a term of five (5) years expiring at the end of the
Ordinary General Meeting called to approve the financial statements
for the year ended 31 December 2010.
NINTH RESOLUTION (Renewal of the term of office
of a member of the Supervisory Board, said term of office
having expired)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, resolves to renew
the appointment as a member of the Supervisory Board of Mr Denis
Gautier-Sauvagnac for a term of five (5) years expiring at the end of
the Ordinary General Meeting called to approve the financial
statements for the year ended 31 December 2010.
TENTH RESOLUTION (Renewal of the term of office
of a member of the Supervisory Board, said term of office
having expired)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, resolves to renew
the appointment as a member of the Supervisory Board of Mr Jean-
Paul Parayre for a term of five (5) years expiring at the end of the
Ordinary General Meeting called to approve the financial statements
for the year ended 31 December 2010.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
217Vallourec 2005 Annual Report
218 Vallourec 2005 Annual Report
ELEVENTH RESOLUTION (Appointment of new
Statutory Auditors)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, notes the expiry of
the term of office as Statutory Auditors of the Company Barbier
Frinault & Autres and resolves not to renew its appointment.
The General Meeting, on the recommendation of the Supervisory
Board, resolves to appoint KPMG, domiciled at 1 Cours Valmy,
92923 Paris La Défense Cedex, as Statutory Auditors for a term of
six (6) financial years until the Ordinary General Meeting called to
approve the financial statements for the year ended 31 December
2011.
TWELFTH RESOLUTION (Appointment of new
Statutory Auditors)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, notes the expiry of
the term of office as Statutory Auditors of the Firm Calan, Ramolino
et Associés and resolves not to renew its appointment.
The General Meeting, on the recommendation of the Supervisory
Board, resolves to appoint Deloitte & Associés whose registered office
is at 185, avenue Charles de Gaulle, 92524 Neuilly Sur Seine, as
Statutory Auditors for a term of six (6) financial years until the
Ordinary General Meeting called to approve the financial statements
for the year ended 31 December 2011.
THIRTEENTH RESOLUTION (Appointment of new
Alternative Auditors)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, notes the expiry of
the term of office as Alternative Auditor of Mr Jean-Marc Besnier and
resolves not to renew his appointment.
The General Meeting, on the recommendation of the Supervisory
Board, resolves to appoint SCP Jean-Claude André & Autres, domiciled
at Les hauts de Villiers, 2 bis rue de Villiers, 92300 Levallois-Perret,
as Alternative Auditors to KPMG for a term of six (6) financial years
until the Ordinary General Meeting called to approve the financial
statements for the year ended 31 December 2011.
FOURTEENTH RESOLUTION (Renewal of the term
of office of Alternative Auditors)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, notes the expiry of
the term of office as Alternative Auditors of BEAS Sarl and resolves
to renew its appointment as Alternative Auditors to Deloitte & Associés
for a term of six (6) financial years until the Ordinary General
Meeting called to approve the financial statements for the year ended
31 December 2011.
FIFTEENTH RESOLUTION (Modification
of attendance fees)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, fixes at € 400,000
the total maximum annual amount of attendance fees that may be
granted to members of the Supervisory Board for the financial year
2006 and each subsequent financial year until decided otherwise.
SIXTEENTH RESOLUTION (Authorization of share
buy-back programme)
The General Meeting, ruling under the conditions of quorum and
majority required for Ordinary General Meetings, having heard the
reports of the Management Board and Supervisory Board, authorizes
the Management Board, in accordance with Articles L. 225-209 et
seq. of the French Code de Commerce and the conditions laid down
in Articles 241-1 to 241-8 of the general regulation of the Autorité
des Marchés Financiers and European Regulation no. 2273/2003
of 22 December 2003 implementing EC Directive 2003/6/EC of
28 January 2003, to purchase the Company’s shares with a view to:
■ their attribution or sale (i) in accordance with the provisions of
Articles L. 225-179 et seq. of the French Code de Commerce, or
(ii) within the context of a share ownership plan or company
savings plan, or (iii) in accordance with the provisions of Articles
L. 225-197-1 et seq. of the French Code de Commerce, or
■ an investment services provider stimulating the market for or
liquidity of the shares by means of a liquidity contract in accordance
with the code of business ethics recognized by the Autorité des
Marchés Financiers, or
Sect
ion
5
■ their subsequent use by way of exchange, payment or other use
in connection with any acquisition transaction, or
■ their use in connection with the exercise of rights attached to
transferable securities giving the right via the redemption,
conversion, exchange, presentation of a warrant or in any other
way to the attribution of shares in the Company, or
■ their cancellation, subject to a further authorization being given
by an Extraordinary General Meeting called and held subsequent
to this day,
■ implementing any market practice authorized by the Autorité
des Marchés Financiers, and more generally carrying out any
other transaction allowed by the prevailing legislation.
Purchases of Company shares may apply to a number of shares such
that the number of shares held by the Company subsequent to such
purchases does not exceed 10% of the Company’s share capital. Such
percentage shall apply to the share capital as adjusted for any
transactions that may affect the share capital subsequent to this
General Meeting.
The purchase, disposal, exchange or transfer of shares may be
carried out by the Management Board on one or more occasions, at
the times the Board considers appropriate, by any means on the stock
exchange or over-the-counter and notably through any intervention
on or off the market, public purchase or exchange offer, or the
purchase of blocks of shares, including through the use of financial
derivatives. The full amount of the repurchase programme may be
acquired, ceded, exchanged or transferred by means of blocks of
shares. Purchase, disposal, exchange or transfer transactions may take
place during the period of a public offering subject to the limits
authorized by the prevailing legal and regulatory requirements and
subject to the provisions of Article 631-6 of the general regulation
of the Autorité des Marchés Financiers relating to “black-out periods”.
The maximum purchase price of each share is set at the value of the
share at the close of the last stock exchange trading session
preceding this General Meeting, increased by 50%.
The General Meeting invests all power in the Management Board
to adjust the aforementioned purchase price in order to take account
of the impact of any financial transactions on the value of the
shares. In particular, in the event of any transactions in the Company’s
share capital, notably in the event of a stock split or reverse stock
split, a capital increase by means of the capitalization of reserves and
the attribution of bonus shares, the aforementioned prices shall be
multiplied by a coefficient equal to the ratio between the number of
shares comprising the share capital before the transaction and the
number after the transaction.
The General Meeting also resolves that, in the event of a public offer
for the Company’s shares to be settled entirely in cash, the Company
may continue to implement its share buy-back programme.
The maximum amount of funds earmarked for the share buy-back
programme is € 750 million.
The General Meeting invests all power in the Management Board
to carry out these operations and to decide on and implement this
authorization and, in particular, to place any stock exchange orders,
conclude any agreements, notably concerning the keeping of registers
of purchases and sales of shares, make any declarations to the
Autorité des Marchés Financiers or any other body and effect the
adjustment provided for under the prevailing regulations in the
event of the purchase of shares at a price higher than the stock
exchange price.
The Management Board is expressly authorized to delegate to its
Chairman, with the latter having the option to sub-delegate to a
person of his choice, the execution of decisions taken by the
Management Board in connection with this authorization.
This authorization is granted for a period of eighteen months from
today.
It cancels and replaces the authorization given by the Ordinary and
Extraordinary General Meeting held on 7 June 2005.
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
219Vallourec 2005 Annual Report
220 Vallourec 2005 Annual Report
8.6
Subs
idia
ries
and
parti
cipat
ing
inte
rest
s as
at 3
1 De
cem
ber 2
005
in €
thou
sand
Com
pani
esCa
pita
lO
ther
Shar
eCa
rryi
ng a
mou
ntLo
ans
and
Tota
lSa
les
Inco
me
Div
iden
dssh
are-
ofof
sec
urit
ies
held
adva
nces
secu
rity
excl
udin
g(lo
ss)
rece
ived
by
hold
ers’
capi
tal
gran
ted
and
taxe
s fo
rfo
rVa
llour
eceq
uity
bef
ore
held
gros
sne
tby
Val
lour
ecgu
aran
tees
the
last
the
last
duri
ng t
heal
loca
tion
of
and
not
yet
give
n by
fina
ncia
lfi
nanc
ial
fina
ncia
lin
com
e (lo
ss)
(%)
repa
idVa
llour
ecye
arye
arye
ar
A)Su
bsid
iarie
s an
d pa
rtic
ipat
ing
inte
rest
s w
ith
a ca
rryi
ng a
mou
nt in
exc
ess
of 1
% o
f Val
lour
ec’s
ca
pita
l (i.e
.€2,
120
thou
sand
)Su
bsid
iarie
s (a
t lea
st 5
0%-o
wne
d) F
renc
h co
mpa
nies
Setv
al6,
000
1,70
810
06,
098
6,09
8-
-45
,009
1,09
1-
130,
rue
de S
illy
9210
0 Bo
ulog
ne-B
illan
cour
t
322
593
104
RCS
Nan
terr
e
ValT
ubes
100,
323
76,4
5510
021
6,32
321
6,32
3-
-27
42,1
983,
010
130,
rue
de S
illy
9210
0 Bo
ulog
ne-B
illan
cour
t
682
001
771
RCS
Nan
terr
e
VALL
OU
REC
& M
ANN
ESM
ANN
TU
BES
473,
991
422,
908
100
833,
982
833,
982
21,1
92-
-20
1,75
7-
130,
rue
de S
illy
9210
0 Bo
ulog
ne-B
illan
cour
t
411
373
525
RCS
Nan
terr
e
B)O
vera
ll in
form
atio
n on
oth
er s
ubsi
diar
ies
and
part
icip
atin
g in
tere
sts
I.Su
bsid
iarie
s (a
t lea
st 5
0%-o
wne
d)a)
Fre
nch
com
pani
es54
4019
8
b) F
orei
gn c
ompa
nies
1,33
894
144
0
II.Pa
rtic
ipat
ing
inte
rest
s (1
0% to
50%
-ow
ned)
a) F
renc
h co
mpa
nies
--
-b)
For
eign
com
pani
es-
-13
221Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Specific documents for the AGM on 1 June 2006
8.7 Companies controlled directly or indirectly as at 31 December 2005 (Law L. 233-3 of the Code de Commerce)
I - Direct controlling interest:
Name % held Name % held
■ ASSURVAL 99.00■ SETVAL 100.00 ■ FINALOUREC (Luxembourg) 99.99■ VALSEPT 100.00 ■ VALLOUREC Inc. (USA) 100.00■ VALLOUREC & MANNESMANN TUBES 100.00 ■ VALLOUREC TUBES CANADA (Canada) 100.00■ ValTubes 100.00
II - Indirect controlling interest, through:
Name % held Name % held
ValTubes VALLOUREC & MANNESMANN TUBES■ CEREC 100.00 ■ OMSCO (USA) (via VALLOUREC & MANNESMANN HOLDING Inc.) 100.00■ ESCOFIER TECHNOLOGIE 100.00 ■ PEISA (Mexico) 100.00■ INTERFIT 100.00 ■ PRINVER (Mexico) 100.00■ METALS PROCESS SYSTEMS 99.70 ■ VALLOUREC INDUSTRIES Inc. (USA)■ SIDRO ROHRBOGEN GmbH (Germany) 100.00 (via VALLOUREC & MANNESMANN HOLDING Inc.) 100.00■ SOPRENEUF 100.00 ■ VALLOUREC ITALIANA Srl 50.00■ SPECITUBES 100.00 (other subsidiaries hold the remainder)■ VALINOX NUCLEAIRE 100.00 ■ VALLOUREC MANNESMANN OIL & GAS FRANCE 99.36■ VALLOUREC BENELUX (Belgium) 99.96 ■ VALLOUREC MANNESMANN OIL & GAS GERMANY GmbH■ VALLOUREC GmbH (Germany) 100.00 (Germany) (via V & M DEUTSCHLAND GmbH) 100.00■ VALLOUREC NORDEN (Sweden) 100.00 ■ VALLOUREC MANNESMANN OIL & GAS UK Ltd (GB) 99.37■ VALLOUREC COMPOSANTS ■ VALLOUREC & MANNESMANN HOLDING Inc. (USA) 100.00AUTOMOBILES HAUTMONT 100.00 ■ VALLOUREC & MANNESMANN TUBES CORP. (USA)
■ VALLOUREC COMPOSANTS (via VALLOUREC & MANNESMANN HOLDING Inc.) 100.00AUTOMOBILES VITRY 100.00 ■ V & M CHANGZHOU Co. Ltd (China) 100.00
■ VALLOUREC PRECISION ETIRAGE 100.00 ■ V & M do BRASIL SA (Brazil) 99.41■ VALLOUREC PRECISION SOUDAGE 100.00 ■ V & M FRANCE (other subsidiaries hold the remainder) 99.00■ VALLOUREC UK Ltd (GB) 100.00 ■ V & M DEUTSCHLAND GmbH (Germany) 100.00■ VALTI 100.00 ■ V & M SERVICES 100.00■ VALTIMET 51.30 ■ V & M ONE Sarl (via V & M SERVICES) 100.00
■ V & M STAR (via V & M ONE) 80.53■ VAM FAR EAST Pte Ltd (Singapore) 51.00■ VAM PREMIUM CONNECTIONS Inc. (Canada) 100.00■ VAM PTS (USA) (via Vallourec Industries Inc.) 51.00
VALINOX NUCLEAIRE■ VALINOX NUCLEAR (USA) 100.00
VALTIMET V & M do BRASIL SA■ VALINOX ASIA (via VALTIMET) 65.83 ■ V & M FLORESTAL Ltda 100.00■ VALTIMET Inc. (USA) (via VALTIMET) 100.00 ■ V & M MINERAÇÃO Ltda 100.00
VALINOX ASIA■ CHANGZHOU VALINOX GREAT WALL (China) 100.00
VALTI■ VALTI GmbH (Germany) 100.00
NONE OF THE ABOVE COMPANIES DIRECTLY HELD ANY OF ITS OWN SHARES AT 31 DECEMBER 2005
222 Vallourec 2005 Annual Report
8.8 Evaluation of securities portfolio as at 31 December 2005
Name of company Number of securities and nominal value Carrying amount in € thousand
I - SHARES AND UNITS
a) French participating interests
Setval 399,998 units of € 15 6,098
ValTubes 6,688,181 shares of € 15 216,323
Valsept 2,500 shares of € 15 32
VALLOUREC & MANNESMANN TUBES 31,599,402 shares of € 15 833,982
b) Foreign participating interests
Finalourec 47,995 shares of € 4.58 39
Vallourec Tubes Canada 100,000 shares of no par value 604
Vallourec Inc. 1,000 shares of USD 50 298
c) Other participating interests
Assurval 495 units of € 20 8
Alberto Roca Deu SL 40 shares of € 6.01 -
II - BONDS AND SIMILAR SECURITIES none
Total 1,057,384
223Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Specific documents for the AGM on 1 June 2006
8.9 Five-year financial summary in euros
2001 2002 2003 2004 2005
CAPITAL
Share capital 194,604,520 194,604,520 194,604,520 197,399,120 212,006,640
Number of ordinary shares in issue 9,730,226 9,730,226 9,730,226 9,869,956 10,600,332
Number of preference dividend shares (without voting rights) in issue
Maximum number of new shares to be issued:
- by conversion of bonds
- by exercise of subscription rights 178,500 172,250 171,750 32,020 8,174
- by redemption of bonds
OPERATIONS AND RESULTS FOR THE YEAR
Sales excluding tax - - - - -
Income (loss) before tax, employee profit sharing,amortization, depreciation and provisions 29,404,736 25,555,607 71,129,582 -58,687,367 -11,515,957
Income tax -2,026,370 -12,983,543 -3,192,803 -5,827,453 -10,031,246
Employee profit sharing in respect of the year
Income (loss) after tax, employee profit sharing,amortization, depreciation and provisions 39,457,204 19,058,711 56,780,396 30,064,061 14,144,934
Dividends distributed 20,433,473 20,433,475 15,568,362 31,583,859 118,723,718
PER SHARE DATA
Income (loss) after tax and employee profit sharing,but before amortization, depreciation and provisions 3.23 3.96 7.64 -5.36 -0.14
Income (loss) after tax, employee profit sharing,amortization, depreciation and provisions 4.06 1.96 5.84 3.05 1.33
Dividend allotted to each share 2.10 2.10 1.60 3.20 11.20
EMPLOYEES
Average number of employees during the financial year 4 6 5 5 5
Payroll for the financial year 452,178 422,011 530,257 594,460 573,987
Payroll-related costs (social security, employee benefits, etc.) 149,523 155,074 217,987 188,462 214,024
224 Vallourec 2005 Annual Report
ANNUAL INFORMATION DOCUMENTArticle 221-1-1 of the general regulations of the French financial markets authority (Autorité des Marchés Financiers - AMF)
This document contains or refers to all the information published or made public by the issuer during the last 12 months
in order to comply with the legal and regulatory obligations in force during the period 1 January 2005 to 26 April 2006.
Year ended 31 December 2005
Publications in the BALO2006 Q1 consolidated sales http://balo.journal-officiel.gouv.fr 28/04/2006 Bulletin 51 Item 4925
Notice of Extraordinary General Meeting of 1 June 2006 http://balo.journal-officiel.gouv.fr 21/04/2006 Bulletin 48 Item 604324
Notice of Annual General Meeting of 1 June 2006 http://balo.journal-officiel.gouv.fr 21/04/2006 Bulletin 48 Item 604325
2005 Q4 consolidated sales (FY 2005) http://balo.journal-officiel.gouv.fr 03/02/2006 Bulletin 15 Item 298
Voting rights http://balo.journal-officiel.gouv.fr 25/01/2006 Bulletin 11 Item 8665
Voting rights http://balo.journal-officiel.gouv.fr 30/11/2005 Bulletin 143 Item 6349
2005 Q3 consolidated sales http://balo.journal-officiel.gouv.fr 28/10/2005 Bulletin 129 Item 99216
2005 first half financial statements http://balo.journal-officiel.gouv.fr 12/10/2005 Bulletin 122 Item 98340
Approval of 2004 financial statements of the subsidiary V & M TUBES http://balo.journal-officiel.gouv.fr 12/09/2005 Bulletin 109 Item 96992
Approval of 2004 financial statements of the subsidiary ValTubes http://balo.journal-officiel.gouv.fr 12/09/2005 Bulletin 109 Item 96992
2005 Q2 consolidated sales http://balo.journal-officiel.gouv.fr 01/08/2005 Bulletin 91 Item 94561
Voting rights http://balo.journal-officiel.gouv.fr 20/07/2005 Bulletin 86 Item 93664
Voting rights http://balo.journal-officiel.gouv.fr 13/07/2005 Bulletin 83 Item 93265
Approval of 2004 financial statements of the subsidiary Setval http://balo.journal-officiel.gouv.fr 20/06/2005 Bulletin 73 Item 91502
Approval of the 2004 financial statements and Statutory Auditors’ report http://balo.journal-officiel.gouv.fr 20/06/2005 Bulletin 73 Item 91435
Notice to shareholders – Capital increase (notice) http://balo.journal-officiel.gouv.fr 17/06/2005 Bulletin 72 Item 91385
Notice of Annual and Extraordinary General Meeting of 7 June 2005 http://balo.journal-officiel.gouv.fr 04/05/2005 Bulletin 53 Item 87328
2004 Company and consolidated financial statements http://balo.journal-officiel.gouv.fr 29/04/2005 Bulletin 51 Item 86076
2005 Q1 consolidated sales http://balo.journal-officiel.gouv.fr 29/04/2005 Bulletin 51 Item 87006
Invitation to Extraordinary General Meeting of 25 February 2005 http://balo.journal-officiel.gouv.fr 09/02/2005 Bulletin 17 Item 81949
2004 Q4 consolidated sales (FY 2004) http://balo.journal-officiel.gouv.fr 02/02/2005 Bulletin 14 Item 81594
Notice of Extraordinary General Meeting of 25 February 2005 http://balo.journal-officiel.gouv.fr 26/01/2005 Bulletin 11 Item 81274
Voting rights http://balo.journal-officiel.gouv.fr 12/01/2005 Bulletin 5 Item 80654
Publications in the Registry of the commercial court of NanterreDeeds in respect of the amendment of the share capital and By-laws(31/12/2005) http://www.infogreffe.fr 16/02/2006 File no. 5250
Deeds in respect of the change in the members of the Supervisory Board(14/12/2005) http://www.infogreffe.fr 16/02/2006 File no. 5249
Filing of 2004 Company and consolidated financial statements http://www.infogreffe.fr 11/07/2005 File no. 11983/11981
Deeds in respect of the amendment of the share capital and By-laws(13/07/2005) http://www.infogreffe.fr 02/11/2005 File no. 30164
Deeds in respect of the amendment of the share capital and By-laws(15/06/2005) http://www.infogreffe.fr 08/07/2005 File no. 18996
Deeds in respect of the change in the members of the Supervisory Board(08/03/2005) http://www.infogreffe.fr 26/05/2005 File no. 14152
Deeds in respect of the amendment of the share capital and By-laws(31/12/2004) http://www.infogreffe.fr 07/02/2005 File no. 3942
225Vallourec 2005 Annual Report
Sect
ion
5Se
ctio
n 1
Sect
ion
2Se
ctio
n 3
Sect
ion
4Se
ctio
n 6
Sect
ion
7Se
ctio
n 1
Sect
ion
2Se
ctio
n 4
Sect
ion
3Se
ctio
n 5
Sect
ion
6Se
ctio
n 7
Sect
ion
8Se
ctio
n 8
Specific documents for the AGM on 1 June 2006
Publications in the journals of legal noticesCapital increase of 31/12/2005 – appointment of a Director Affiches Parisiennes / La Vie Judiciaire 18/01/2006 No. 7 No. 8320
Capital increase of 13 July 2005 Affiches Parisiennes / La Vie Judiciaire 18/10/2005 No. 114 No. 2087
Approval of 2004 financial statements of the subsidiary V & M TUBES Affiches Parisiennes / La Vie Judiciaire 07/09/2005 No. 8283
Approval of 2004 financial statements of the subsidiary ValTubes Affiches Parisiennes / La Vie Judiciaire 07/09/2005 No. 8282
Notice of allocation of new shares subscribed in excess of shares allocatedin accordance with preferential subscription rights Petites Affiches/La Loi 13/07/2005 No. 138 No. 029140
Capital increase of 15/06/2005 Affiches Parisiennes / La Vie Judiciaire 28/06/2005 No. 72 No. 35987
Approval of 2004 financial statements of the subsidiary Setval Affiches Parisiennes / La Vie Judiciaire 15/06/2005 No. 3114
Invitation to Ordinary and Extraordinary General Meeting of 7 June 2005 Affiches Parisiennes / La Vie Judiciaire 23/05/2005 No. 1710
Invitation to Extraordinary General Meeting of 25 February 2005 Affiches Parisiennes / La Vie Judiciaire 09/02/2005 No. 4133
Capital increase of 31/12/2004 Affiches Parisiennes / La Vie Judiciaire 12/01/2005 No. 2317
Reference Document, financial transactions, AMF releasesCrossing of threshold 02/02/2006 http://www.amf-france.org 08/02/2006 No. 206C0256
Crossing of threshold 12/01/2006 http://www.amf-france.org 20/01/2006 No. 206C0126
Crossing of threshold 04/01/2006 and 06/01/2006 http://www.amf-france.org 12/01/2006 No. 206C0075
Declaration of intent following crossing of threshold 20/12/2005 http://www.amf-france.org 06/01/2006 No. 206C0038
Crossing of threshold 20/12/2005 http://www.amf-france.org 04/01/2006 No. 206C0016
Crossing of threshold 22/11/2005 http://www.amf-france.org 29/11/2005 No. 205C2021
Crossing of threshold 29/09/2005 http://www.amf-france.org 07/10/2005 No. 205C1682
Crossing of threshold 03/08/2005 and 05/08/2005 http://www.amf-france.org 11/08/2005 No. 205C1401
Issue and admission: Capital increase June 2005 (information notice) http://www.amf-france.org 15/06/2005 AMF authorizationno. 05-0556
Les Echos 20/06/2005 Page 44
Share buy-back programme http://www.amf-france.org 16/05/2005 AMF authorizationhttp://www.vallourec.com no. 05-0396http//www.euronext.comLes Echos 23/05/2005 Pages 47 & 48
Reference Document for the year ended 31 December 2004 http://www.amf-france.org 20/04/2005 No. D05-0497http://www.vallourec.com
Management reports, Statutory Auditors’ reports, report of the Chairman http://www.amf-france.org 20/04/2005 No. D05-0497on procedures etc. (see Reference Document) http://www.vallourec.com
Financial communications 2006 Q1 sales http://www.amf-france.org 26/04/2006
http://www.vallourec.comhttp//www.euronext.com
Notice of Extraordinary General Meeting of 1 June 2006 http://www.amf-france.org 14/04/2006http://www.vallourec.comhttp//www.euronext.com
Notice of Ordinary General Meeting of 1 June 2006 http://www.amf-france.org 14/04/2006http://www.vallourec.comhttp//www.euronext.com
Declarations of securities transactions by the management 17/03/2006 http://www.amf-france.org 04/04/2006
Declarations of securities transactions by the management 16/06/2006 http://www.amf-france.org 04/04/2006
Statutory Auditors’ remuneration for the 2005 financial year http://www.amf-france.org 24/03/2006http://www.vallourec.com
Declarations of securities transactions by the management 08/02/2006 http://www.amf-france.org 15/03/2006
2005 annual results http://www.amf-france.org 08/03/2006http://www.vallourec.comhttp//www.euronext.com
226 Vallourec 2005 Annual Report
Financial communications (continued)
Declarations of securities transactions by the management 02/02/2006 http://www.amf-france.org 08/02/2006
2005 Q4 sales (FY 2005) http://www.amf-france.org 01/02/2006http://www.vallourec.comhttp//www.euronext.com
Declarations of securities transactions by the management 20/12/2005 http://www.amf-france.org 09/01/2006
Declarations of securities transactions by the management 20/12/2005 http://www.amf-france.org 23/12/2005
2005 Q3 sales http://www.amf-france.org 27/10/2005http://www.vallourec.com
Declarations of securities transactions by the management 15/09/2005 http://www.amf-france.org 19/09/2005
2005 first half results http://www.amf-france.org 15/09/2005http://www.vallourec.com
2005 Q2 sales http://www.amf-france.org 27/07/2005http://www.vallourec.com
Declarations of securities transactions by the management 01/07/2005 http://www.amf-france.org 19/07/2005
Declarations of securities transactions by the management 20/06/2005 and 01/07/2005 http://www.amf-france.org 13/07/2005
Capital increase http://www.amf-france.org 16/06/2005http://www.vallourec.com
Invitation to Ordinary and Extraordinary General Meeting of 7 June 2005 http://www.amf-france.org 20/05/2005http://www.vallourec.com
Notice of Ordinary and Extraordinary General Meeting of 7 June 2005 http://www.amf-france.org 03/05/2005http://www.vallourec.comhttp//www.euronext.com
2005 Q1 sales http://www.amf-france.org 29/04/2005http://www.vallourec.com
2004 annual results http://www.amf-france.org 09/03/2005http://www.vallourec.com
Invitation to Ordinary and Extraordinary General Meeting http://www.amf-france.org 09/02/2005of 25 February 2005 http://www.vallourec.com
2004 Q4 sales (FY 2004) http://www.amf-france.org 02/02/2005http://www.vallourec.comhttp//www.euronext.com
Notice of Ordinary and Extraordinary General Meeting of 25 February 2005 http://www.amf-france.org 25/01/2005http://www.vallourec.comhttp//www.euronext.com
Securities transactions by the management second half 2004 http://www.amf-france.org 20/01/2005
Securities transactions by the management first half 2004 http://www.amf-france.org 20/01/2005
Other publicationsAcquisition of CST in India http://www.amf-france.org 07/04/2006
http://www.vallourec.com
Vallourec sells Spécitubes http://www.amf-france.org 03/04/2006http://www.vallourec.com
Completion of SMFI acquisition http://www.amf-france.org 22/03/2006http://www.vallourec.com
Slide presentation: 2005 results http://www.vallourec.com 08/03/2006
Financial notice: 2005 results Les Echos 08/03/2006- in German Rheinische Post (Germany) 09/03/2006
Le Revenu Hebdo 10/03/2006Investir Hebdo 11/03/2006
Acquisition of SMFI http://www.amf-france.org 30/01/2006http://www.vallourec.com
Sect
ion
5
Other publications (continued)
2006 Financial calendar http//www.euronext.comhttp://www.vallourec.com
Completion of acquisition of OMSCO http://www.amf-france.org 30/09/2005http://www.vallourec.com
Slide presentation: 2005 first half results http://www.vallourec.com 15/09/2005
Financial notice: 2005 first half results Les Echos 15/09/2005La Vie Financière 16/09/2005Investir Hebdo 17/09/2005
Acquisition of OMSCO’s assets (press release) http://www.amf-france.org 30/08/2005- press release and slide presentation http://www.vallourec.com
Success of € 125 million rights offering http://www.amf-france.org 13/07/2005http://www.vallourec.com
Completion of acquisition of full control of V & M TUBES http://www.amf-france.org 23/06/2005http://www.vallourec.com
General Meeting of 7 June 2005: forecast 2005 margin,plant in China (press release) http://www.amf-france.org 07/06/2005- press release and slide presentation http://www.vallourec.com
2004 dividend http://www.amf-france.org 19/04/2005http://www.vallourec.com
Slide presentation: 2004 results http://www.vallourec.com 09/03/2005
Financial notice: 2004 results Les Echos 09/03/2005La Vie Financière 11/03/2005
- in German Rheinische Post (Germany) 11/03/2005Investir Hebdo 12/03/2005
Vallourec signs Memorandum of Understanding with Salzgitterto acquire full control of V & M TUBES (press release) http://www.amf-france.org 21/01/2005- press release http//www.euronext.com- press release and slide presentation http://www.vallourec.com
Financial notice: Acquisition of full control of V & M TUBES Les Echos 24/01/2005La Vie Financière 28/01/2005Investir Hebdo 29/01/2005
2005 financial calendar http//www.euronext.com
Specific documents for the AGM on 1 June 2006
Sect
ion
1Se
ctio
n 2
Sect
ion
3Se
ctio
n 4
Sect
ion
6Se
ctio
n 7
Sect
ion
1Se
ctio
n 2
Sect
ion
4Se
ctio
n 3
Sect
ion
5Se
ctio
n 6
Sect
ion
7Se
ctio
n 8
Sect
ion
8
227Vallourec 2005 Annual Report
228 Vallourec 2005 Annual Report
CROSS REFERENCES BETWEEN THE VALLOUREC REFERENCE DOCUMENTAND APPENDIX 1 OF THE EUROPEAN PROSPECTUS REGULATIONS
Appendix I of the European Prospectus Regulations Vallourec Reference Document
1. PERSONS RESPONSIBLE
1.1 Persons responsible for the information 1.1
1.2 Declaration by those responsible 1.2
2. STATUTORY AUDITORS 1.3
3. SELECTED FINANCIAL INFORMATION Sections 4, 5 and 8.1
4. RISK FACTORS 4.7
5. INFORMATION ABOUT THE ISSUER
5.1 History and development of the issuer 3.1 and 4.1.0
5.2 Investments 4.4.1
6. BUSINESS OVERVIEW 4.1.1 to 4.1.6
7. ORGANIZATIONAL STRUCTURE 3.3.4 and 4.1
8. PROPERTY, PLANTS AND EQUIPMENT 4.1.1
9. OPERATING AND FINANCIAL REVIEW 8.1
10. CAPITAL RESOURCES Section 5
11. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES 4.4.0 and 8.1.1
12. TREND INFORMATION Section 7
13. PROFIT FORECASTS OR ESTIMATES Section 7
14. ADMINISTRATIVE, MANAGEMENT AND SUPERVISORY BODIES AND SENIOR MANAGEMENT 6.1 and 6.2
15. REMUNERATION AND BENEFITS 6.2 and 8.1.1
16. BOARD PRACTICES 6.1 and 8.2
17. EMPLOYEES 4.3, 6.3 and 8.1
18. MAJOR SHAREHOLDERS 3.3 and 8.1.1
19. RELATED PARTY TRANSACTIONS Section 5 (note 18)
20. FINANCIAL INFORMATION CONCERNING THE ISSUER’S ASSETS AND LIABILITIES, Section 5FINANCIAL POSITION AND PROFITS AND LOSSES
21. ADDITIONAL INFORMATION 3.2
22. MATERIAL CONTRACTS N/A
23. THIRD PARTY INFORMATION AND STATEMENT BY EXPERTS AND DECLARATIONS OF ANY INTEREST N/A
24. DOCUMENTS ON DISPLAY 3.1.6
25. INFORMATION ON HOLDINGS 8.6, 8.7 and 8.8
An
nu
al R
epo
rt20
05
Annual Report
2005
Société Anonyme à Directoire
et à Conseil de Surveillance
Capital: 212 006 640 €
Registered Office: 130, rue de Silly
92100 Boulogne-Billancourt (France)
552 142 200 RCS Nanterre
Tel.: +33 (0)1 49 09 38 24
Fax: +33 (0)1 49 09 36 94
Internet: www.vallourec.com Dire
ctio
n an
d w
ritin
g:Va
llour
ec -
Gav
in A
nder
son
& Co
mpa
ny -
Desig
n an
d pr
oduc
tion:
Phén
ix C
omm
unica
tion
- Pho
tos:
Stud
io P
ons
(Phi
lippe
Stro
ppa)
,Get
ty Im
ages
(M.M
cQue
en,T
.Vin
e,T.
Mar
esch
al,A
.Hol
t),J.P
.Bol
le,V
allo
urec
,X.