ArcelorMittal 2014 Annual Report (Form 20-F) Summary
Business Context and Reporting Period
Company: ArcelorMittal (Grand Duchy of Luxembourg)
Reporting Period: Fiscal year ended December 31, 2014
Accounting Standard: International Financial Reporting Standards (IFRS)
Business Overview: ArcelorMittal is the world's largest integrated steel and mining company, operating in 19 countries across four continents. The company reports operations through five segments: NAFTA, Brazil, Europe, ACIS (Africa and Commonwealth of Independent States), and Mining. In 2014, the company focused on cost control, asset optimization, and deleveraging amidst a challenging global economic environment characterized by weak demand in Europe and slowing growth in emerging markets.
Key Financial Metrics (2014)
| Metric | 2014 Value | 2013 Value |
|---|---|---|
| Sales | $79,282 million | $79,440 million |
| Operating Income | $3,034 million | $1,197 million |
| Operating Margin | 3.83% | 1.51% |
| Net Loss (Continuing Ops) | $(974) million | $(2,575) million |
| Net Loss (Attributable to Parent) | $(1,086) million | $(2,545) million |
| Diluted EPS (Continuing Ops) | $(0.61) | $(1.46) |
| Net Cash from Operating Activities | $3,870 million | $4,296 million |
| Total Debt | $19.9 billion | $22.3 billion |
| Cash and Cash Equivalents | $4.0 billion | $6.2 billion |
| Net Assets (Equity) | $45.2 billion | $53.2 billion |
Note: Sales remained flat year-over-year despite a 3% increase in steel shipments (85.1 million tonnes in 2014 vs. 82.6 million tonnes in 2013), reflecting lower average selling prices.
Material Changes vs. Prior Period
- Profitability Improvement: Operating income improved significantly by 153% to $3.0 billion, driven by cost reduction programs ("Management Gains") and improved operational efficiency, despite a net loss due to high financing costs ($3.4 billion) and losses from associates.
- Debt Reduction: Total debt decreased by approximately $2.4 billion to $19.9 billion. The company redeemed $1.25 billion in notes in October 2014 and continued to prioritize deleveraging.
- Production Volume: Crude steel production increased to 93.1 million tonnes (up from 91.2 million tonnes in 2013), and steel shipments rose to 85.1 million tonnes.
- Segment Performance:
- Europe: Turned profitable with operating income of $737 million (vs. a loss of $985 million in 2013) due to cost cuts and asset optimization.
- Brazil: Operating income increased to $1.4 billion (from $1.2 billion).
- NAFTA: Operating income declined to $386 million (from $630 million) due to lower steel prices and higher raw material costs.
- Mining: Operating income dropped to $565 million (from $1.2 billion) as iron ore prices fell to historical lows in late 2014.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management highlighted a strategy focused on cost discipline, asset optimization, and maintaining a strong balance sheet. The company targets a medium-term net debt level of $15 billion. Capital expenditure for 2015 is expected to be approximately $3.4 billion, primarily for maintenance and select growth projects in mining.
Key Risks and Contingencies:
- Market Conditions: Continued weakness in the Eurozone economy and structural overcapacity in the global steel industry, particularly from China, weigh on steel prices and margins.
- Raw Material Volatility: Iron ore prices dropped significantly in late 2014 (reaching $66-69/tonne), impacting the Mining segment's profitability and creating a "price-cost squeeze" risk if steel prices do not adjust downward commensurately.
- Debt and Liquidity: The company carries substantial indebtedness ($19.9 billion). A further deterioration in market conditions could increase gearing and make refinancing difficult. Credit rating downgrades (S&P downgraded the company in February 2015) increase borrowing costs.
- Geopolitical and Operational Risks:
- Ukraine: Ongoing conflict and currency devaluation (UAH devalued >50% in Feb 2015) pose significant risks to operations and asset values.
- Liberia: The Ebola outbreak caused a force majeure declaration, delaying the Phase 2 expansion of the iron ore mine.
- Antitrust: The company is subject to ongoing investigations and litigation regarding antitrust matters globally, including a $90 million settlement in the U.S. in 2014.
- Pension Liabilities: Significant underfunding exists in defined benefit pension plans, particularly in Europe ($2.1 billion deficit) and the U.S. ($0.9 billion deficit), totaling a consolidated deficit of $5.7 billion for post-employment benefits.
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of debt maturities, noting substantial amounts due in 2015 ($2.6 billion) and 2016 ($2.6 billion), and assess refinancing risks given recent credit rating downgrades.
- Iron Ore Price Sensitivity: Monitor the correlation between falling iron ore prices and the company's ability to pass cost savings to customers via lower steel prices to maintain margins.
- European Asset Optimization: Review the execution of cost-cutting measures and plant closures in Europe to ensure the sustainability of the segment's return to profitability.
- Ukraine Exposure: Assess the impact of the ongoing conflict and currency devaluation on the valuation of assets and cash flows from the ACIS segment.
- Pension Funding Requirements: Evaluate future cash flow needs to fund the significant underfunded pension liabilities, particularly in light of low interest rates increasing the present value of obligations.
- Antitrust Liabilities: Track the status of pending antitrust investigations in Brazil, Romania, South Africa, and other jurisdictions for potential future fines or damages.