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Business Context and Reporting Period

Company: ArcelorMittal (Grand Duchy of Luxembourg)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Basis: International Financial Reporting Standards (IFRS)

ArcelorMittal is the world's largest and most global steel producer, operating in six segments across 20 countries. The 2009 reporting period was defined by the severe global economic crisis, which caused a sharp contraction in steel demand, a collapse in steel prices, and a significant reduction in production volumes. The Company responded with aggressive cost-cutting, production cuts of up to 45%, and a major deleveraging program.

Key Financial Metrics (2009 vs. 2008)

Note: Net Debt is calculated as Total Debt less Cash and Cash Equivalents. 2008 figures are adjusted retrospectively for purchase price allocations.

Material Changes and Operational Performance

• Revenue Collapse: Sales declined 48% primarily due to a 27% drop in average steel selling prices and a 30% reduction in steel shipments (71.1 million tonnes vs. 101.7 million tonnes in 2008). The decline was most acute in the first half of 2009.
• Operating Loss: The Company recorded an operating loss of $1.7 billion, a stark reversal from the $12.3 billion operating income in 2008. This was driven by lower volumes/prices and significant pre-tax charges of $2.4 billion in the first half of 2009, including $2.1 billion in inventory write-downs and $0.3 billion in workforce reduction provisions.
• Segment Performance:
  • Flat Carbon Americas & Europe: Both segments swung from profitability to operating losses ($0.8B and $0.5B respectively) due to the global downturn.
  • AACIS (Asia, Africa, CIS): Remained the only profitable segment with $0.3 billion operating income, though down significantly from 2008.
  • Stainless Steel: Recorded an operating loss of $0.2 billion, impacted by falling nickel prices and lower demand.
• Debt Reduction: Net debt was reduced by approximately $13.7 billion from September 2008 levels through a combination of debt, equity, and convertible bond offerings totaling $13.1 billion in 2009.

Outlook, Risks, and Management Commentary

• Market Recovery: Management notes a gradual recovery in the second half of 2009, driven by destocking cycles ending and improved business confidence. However, real demand remains below pre-crisis levels, and the extent of recovery is uncertain.
• Cost Reduction Plan: The Company is executing a five-year "management gains plan" targeting $5 billion in cost savings. $2.7 billion was achieved in 2009 through SG&A reductions and headcount rationalization.
• Capital Expenditures: Capex was sharply reduced to $2.8 billion in 2009 (down from $5.5 billion in 2008), with a focus on maintenance. Growth-oriented projects in emerging markets are expected to resume gradually in 2010.
• Key Risks:
  • High Indebtedness: Total debt remains at $25 billion. While the leverage ratio improved to 3.2x (from 1.1x in 2008), it remains subject to restrictive covenants.
  • Raw Material Volatility: The Company faces risks from mismatches between long-term raw material contracts and spot steel prices, though this margin squeeze eased in late 2009.
  • Asset Impairment: Significant goodwill ($14.8 billion) and intangible assets remain on the balance sheet. Management noted that reasonably possible changes in assumptions could trigger impairments in the AACIS and Stainless Steel segments.
  • Legal & Regulatory: Ongoing antitrust investigations in the US, Europe, and Brazil, as well as environmental compliance costs, pose potential liabilities.

Investor Verification Checklist

• Debt Maturity Profile: Verify the schedule of debt maturities, noting significant amounts due in 2010 ($4.1B) and 2011 ($4.3B), and the Company's ability to refinance in volatile credit markets.
• Inventory Valuation: Review the remaining inventory balances and the methodology for net realizable value assessments given the volatility in steel prices.
• Pension Obligations: Assess the funding status of defined benefit plans, particularly the significant deficits reported in the USA ($1.1B) and Europe ($1.9B).
• Goodwill Sensitivity: Examine the assumptions used in the goodwill impairment testing for the AACIS and Stainless Steel segments, which hold $1.5B and $1.8B of goodwill respectively.
• Antitrust Reserves: Confirm the adequacy of reserves for pending antitrust litigation, including the US class action and European investigations.