ArcelorMittal — FY2017 Form 20-F summary
Reporting period: Fiscal year ended December 31, 2017. This is an audited annual report, not a standalone fourth-quarter filing; the supplied text does not provide a clear, complete set of Q4-only financial results. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars.
Business context and key financial metrics
ArcelorMittal is a global integrated steel and mining company, reporting five segments: NAFTA, Brazil, Europe, ACIS and Mining. It reported 197,108 employees at year-end and steel shipments of 85.2 million tonnes.
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Sales | $68.679 billion | $56.791 billion | Up 20.9%; higher steel prices and shipments and higher iron ore prices contributed. |
| Operating income | $5.434 billion | $4.161 billion | Up 30.6%; 2017 included $206 million of South Africa impairments. |
| Net income attributable to parent shareholders | $4.568 billion | $1.779 billion | Basic EPS was $4.48 versus $1.87; per-share data were recast after the May 2017 reverse split. |
| Gross margin | $7.803 billion; approximately 11.4% of sales | $6.363 billion; approximately 11.2% | Calculated from reported gross margin and sales. |
| Operating margin | Approximately 7.9% | Approximately 7.3% | Calculated from reported operating income and sales. |
| Net cash from operating activities | $4.563 billion | $2.708 billion | Increase included improved operating income; working capital absorbed $1.88 billion. |
| Capital expenditures | $2.819 billion | $2.444 billion | Investing cash outflow was $2.830 billion. |
| Cash and cash equivalents, including restricted cash | $2.786 billion | $2.615 billion | Includes $212 million restricted cash in 2017. |
| Total debt / net debt | $12.928 billion / $10.142 billion | $13.674 billion / $11.059 billion | Net debt declined; gearing fell to 24.8% from 34.2%. |
Steel shipments increased 1.6% to 85.2 million tonnes; average steel selling prices increased 20.4%. Crude steel production was 93.1 million tonnes. Own-mine production was 57.4 million tonnes of iron ore and 6.3 million tonnes of coal. The company sourced approximately 50% of iron ore requirements and 13% of PCI and coal requirements from its own mines.
Segment operating income was $2.359 billion in Europe, $1.185 billion in NAFTA, $991 million in Mining, $697 million in Brazil and $508 million in ACIS. NAFTA income declined from $2.002 billion, partly because FY2016 included an $832 million U.S. employee-benefit gain. Europe and Mining improved substantially, supported by steel prices, price-cost effects and higher mining reference prices.
Material changes versus the prior comparable period
- Revenue rose 20.9%, while cost of sales increased to $60.876 billion from $50.428 billion, reflecting higher input prices and greater volumes. SG&A was $2.369 billion, or 3.4% of sales, compared with $2.202 billion, or 3.9%.
- Financing costs fell to $875 million from $2.056 billion. Net interest expense declined to about $0.8 billion from $1.1 billion; foreign-exchange gains were $546 million, compared with a $3 million loss in 2016.
- Operating cash flow improved, but inventories increased and working capital was a significant cash use. Net cash used in investing activities rose to $2.830 billion from $1.143 billion.
- Net debt declined by about $0.9 billion, principally as operating cash flow exceeded capital expenditure; foreign-exchange impacts on euro-denominated debt partly offset the reduction.
- Impairment charges were $206 million in 2017 and $205 million in 2016, versus $4.764 billion in 2015. The 2017 charge related to South African steel assets.
Outlook, management commentary and material risks
Management described market conditions as favorable and expected global apparent steel consumption to grow 1.5%–2.5% in 2018, with growth outside China estimated at 3%–4%. The outlook assumes continuing economic growth and healthy steel spreads; Chinese demand was expected to be broadly flat, within a range of -0.5% to +0.5%.
Management forecast 2018 business cash needs of approximately $5.6 billion, excluding operating working capital, including capital expenditure of about $3.8 billion, net interest of $0.6 billion and other cash needs of $1.2 billion. Capital expenditure was expected to increase from $2.8 billion, reflecting the Mexico hot-strip-mill project, anticipated Ilva spending and other strategic projects. These are forward-looking estimates, not guaranteed results.
- Balance sheet and shareholder returns: Further deleveraging remained a priority. A proposed $0.10-per-share dividend for 2018, paid from FY2017 results, was subject to shareholder approval. The company stated it would return a portion of annual operating cash flow less capital expenditure after net debt reached $6 billion.
- Ilva acquisition: The proposed purchase of Ilva for €1.8 billion remained subject to antitrust approval and a European Commission Phase II review. The agreement also entails substantial industrial and environmental investment and remediation commitments. Completion, remedies, costs and expected synergies remain uncertain.
- Other transactions: The Votorantim Brazilian long-steel combination was pending closing and regulatory conditions at the filing date; approval was reported in February 2018. ArcelorMittal also submitted an offer for Essar Steel India in February 2018.
- Industry and market risks: Steel and mining are cyclical and exposed to global overcapacity, import competition, trade policy, Chinese demand, price volatility and inventory cycles. Volatile raw-material, energy and freight costs can squeeze margins when selling prices adjust with a lag.
- Operational, environmental and legal risks: The filing highlights mining and plant hazards, environmental and emissions compliance costs, labor disruption, emerging-market and currency risks, cyber threats, and antitrust, tax and other litigation. It reported 23 workplace fatalities in 2017 despite an improved lost-time injury frequency rate.
- Contingencies and commitments: Environmental provisions were $815 million, excluding $427 million of asset-retirement obligations. Total provisions were $2.022 billion. Reported commitments included $24.734 billion of purchase obligations, $5.021 billion of guarantees, pledges and other collateral, and $878 million of capital expenditure commitments. The company cautioned that additional environmental liabilities may arise.
- Other notable items: The company recorded $7.055 billion of deferred tax assets, whose recovery depends on future taxable income; at least $31.3 billion of future taxable income was estimated as necessary to recover the recognized balance. The FY2017 tax expense was $432 million. The U.S. Tax Cuts and Jobs Act was enacted late in 2017, and its implications were not yet fully assessed.
Most important facts for investors to verify
- Review the audited financial statements and notes for cash flow, working-capital movements, debt maturities, financing costs and the composition of cash and restricted cash.
- Check the assumptions behind 2018 steel-demand, price-spread, cash-needs and capital-expenditure forecasts, and compare subsequent results with those estimates.
- Track Ilva’s antitrust outcome, required divestitures, acquisition closing, lease and purchase terms, environmental obligations and delivery of targeted synergies.
- Assess the sustainability and recoverability of deferred tax assets, especially in Luxembourg, and review any effects from U.S. tax reform.
- Review environmental, antitrust, tax and other legal proceedings, guarantees to joint ventures and associates, and pension and post-retirement funding obligations for developments that could affect cash flows.
- Confirm shareholder approval and implementation of the proposed $0.10 dividend and the stated net-debt threshold for future capital returns.