Business Context and Reporting Period
Company: ArcelorMittal (formerly Mittal Steel Company N.V.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Accounting Basis: International Financial Reporting Standards (IFRS)
Overview: ArcelorMittal is the world's largest and most global steel producer, formed by the 2006 merger of Mittal Steel and Arcelor. The company operates in 20 countries across four continents with 65 steel-making facilities and approximately 311,000 employees. The 2007 results reflect the full-year impact of the Arcelor acquisition and continued aggressive growth through M&A, including the acquisition of Sicartsa in Mexico.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 Value | 2006 Value |
|---|---|---|
| Sales | $105,216 million | $58,870 million |
| Operating Income | $14,830 million | $7,532 million |
| Operating Margin | 14.1% | 12.8% |
| Net Income (Parent Equity) | $10,368 million | $5,247 million |
| Diluted EPS | $7.40 | $5.30 |
| Crude Steel Production | 116.4 million tonnes | 85.6 million tonnes |
| Steel Shipments | 109.7 million tonnes | 78.9 million tonnes |
| Operating Cash Flow | $16,532 million | $7,122 million |
| Total Debt | $30.6 billion | $26.6 billion |
| Cash & Equivalents | $8.1 billion | $6.1 billion |
| Capital Expenditures | $5.4 billion | $2.9 billion |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 78.7% year-over-year, driven primarily by the inclusion of Arcelor's full-year results and higher average steel selling prices (up 20.2%).
- Profitability: Operating income nearly doubled (97% increase) to $14.8 billion. On a pro forma basis (adjusting for the Arcelor acquisition as if it occurred Jan 1, 2006), operating income grew 25.1% due to higher selling prices and strong demand.
- Cost Pressures: The company faced significant increases in raw material costs, including a 65% increase in iron ore prices for 2008 and sharp rises in nickel, zinc, and scrap prices during 2007. However, the company successfully passed most of these costs to customers.
- Acquisitions: Completed $12.3 billion in acquisitions and investments in 2007, including Sicartsa (Mexico), Vallourec tube businesses (France), and various minority stake buyouts.
- Divestitures: Sold Sparrows Point (USA) to satisfy DOJ consent decree requirements (sale to E2 terminated, process ongoing) and divested several European assets (TPP, Huta Bankowa, SWT) to satisfy EU Commission commitments.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2008 Guidance: Management expects Q1 2008 operating income of approximately $3.7 billion. Total 2008 capital expenditures are projected at $7.0 billion. The effective tax rate is expected to be between 20% and 25%.
- Dividend Policy: The Board increased the base dividend to $1.50 per share (from $1.30) and announced a $1.0 billion share buy-back program for 2008, aiming to return 30% of net income to shareholders.
- Market Outlook: Global steel demand is expected to grow around 6% in 2008. The company anticipates price increases in Europe and North America to offset rising input costs.
Key Risks and Contingencies
- Debt and Liquidity: Total debt stands at $30.6 billion. While credit ratings were upgraded (S&P to BBB+, Moody's to Baa2), the company faces refinancing risks and exposure to variable interest rates.
- Raw Material Volatility: Significant exposure to iron ore, coking coal, and energy prices. A 65% iron ore price hike for 2008 was agreed with Vale.
- Geopolitical and Regulatory: Operations in Kazakhstan face risks regarding operating licenses and tax claims ($2.5 billion) following mine accidents. EU state aid rules in Central/Eastern Europe require strict compliance with restructuring plans.
- Pension Liabilities: Significant underfunded pension obligations exist, particularly in Europe ($1.86 billion deficit) and the US ($451 million deficit).
- Environmental: Substantial liabilities for environmental remediation ($889 million reserve) and compliance with EU Emissions Trading Scheme.
Investor Verification Checklist
- Pro Forma Comparability: Verify that year-over-year comparisons are adjusted for the Arcelor acquisition (pro forma basis) to understand organic growth trends versus M&A impact.
- Raw Material Hedging: Assess the extent of hedging for iron ore and energy, given the 65% price increase in iron ore for 2008 and the company's ability to pass these costs through.
- Kazakhstan Exposure: Review the status of the $2.5 billion tax claim and operating license threat at ArcelorMittal Temirtau following the Abaiskaya mine accident.
- Pension Funding: Monitor cash flow requirements for funding the significant pension deficits in Europe and North America.
- Debt Covenants: Confirm compliance with financial covenants (gearing ratio, interest coverage) given the high debt load and variable interest rate exposure.
- Divestiture Progress: Track the status of the Sparrows Point divestiture required by the US DOJ.