Business context and reporting period
Companhia Siderúrgica Nacional (CSN), a Brazilian integrated steel, mining, logistics and cement company, filed this Form 20-F on May 28, 2010 for the fiscal year ended December 31, 2009. The filing reports annual results, not a standalone 2009 fourth quarter. Financial statements are presented in U.S. dollars under U.S. GAAP.
Key financial results
Amounts are in U.S. dollars unless otherwise stated.
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenues | $6.341 billion | $9.207 billion | Down 31.1% |
| Net operating revenues | $5.014 billion | $7.187 billion | Down 30.2% |
| Gross profit / margin | $1.764 billion / 35.2% | $3.585 billion / 49.9% | Down 50.8% in profit |
| Operating income / margin | $1.164 billion / 23.2% | $2.844 billion / 39.6% | Down 59.0% in income |
| Net income attributable to CSN | $1.281 billion | $2.654 billion | Down 51.8% |
| Operating cash flow | $40 million | $2.067 billion | Down $2.027 billion |
| Investing cash flow | -$829 million | -$1.292 billion | Cash use decreased |
| Financing cash flow | $872 million | $1.867 billion | Cash provided decreased |
Steel output fell: crude steel production declined 12% to 4.4 million tons, and finished steel production declined 9% to 4.1 million tons. Net steel revenues fell 30.1% to $4.099 billion. Mining revenues fell 50.1% to $690 million; reported mining results were affected by lower ore prices and the deconsolidation of Namisa.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $3.981 billion at year-end, up from $3.542 billion. Current assets were $6.841 billion and current liabilities $2.091 billion; the resulting current ratio was approximately 3.3.
- Total debt, as presented in management’s discussion, was $8.034 billion, versus $5.525 billion in 2008; debt equaled 192% of stockholders’ equity according to the filing. Long-term debt and debentures were $7.319 billion; short-term debt was $715 million. Cash less reported total debt was approximately $4.053 billion.
- About 59% of indebtedness was U.S.-dollar-denominated or linked. Long-term debt maturity profile included $2.104 billion due in 2012 and $1.250 billion in 2013; $750 million of perpetual securities was also outstanding.
- Total assets were $19.188 billion and stockholders’ equity $4.264 billion. The balance sheet included $4.281 billion due to related parties, substantially associated with Namisa prepayments and related arrangements.
- Capital expenditures were $930 million. Dividends and interest on shareholders’ equity paid during 2009 totaled $1.017 billion.
Changes versus the prior period and unusual items
- The global financial crisis reduced steel demand, selling prices and production, particularly in the first half of 2009. Domestic steel revenues declined 31.3%; export steel revenues declined 31.9%.
- Operating cash generation weakened sharply amid lower earnings and working-capital movements, including reduced trade payables. Receivables turnover rose to 36 days from 27, and inventory turnover to 140 days from 117.
- Net financial expense increased to $871 million from $380 million, including $450 million of interest expense related to Namisa prepayment agreements and a $417 million net loss on USD/CDI hedging swaps. The real’s appreciation contributed to a $422 million foreign-exchange gain, compared with a $1.265 billion loss in 2008.
- 2008 earnings included a $1.667 billion non-taxable gain from dilution of CSN’s interest in Namisa. In 2009, CSN recorded $809 million of equity income from affiliates, mainly reflecting Namisa’s results.
- CSN joined Brazil’s REFIS tax settlement program in 2009. Debt reductions generated a $255 million pretax benefit; $475 million of taxes payable in installments remained at year-end.
- Transnordestina became a consolidated subsidiary in December 2009. CSN acquired a 14.99% interest in Riversdale in 2009, later increased to approximately 16.3% in January 2010. The Cimpor tender offer expired without meeting its minimum acceptance condition, and no shares were acquired.
Outlook, risks and contingencies
- Management described improving global conditions from the second half of 2009 and a favorable outlook for Brazilian consumption, while noting continuing uncertainty in the global recovery. The filing does not provide formal earnings guidance.
- CSN planned up to $2.305 billion of 2010 capital expenditures and $1.325 billion of subsidiary investments. Its announced 2010–2016 investment plan totaled $18.8 billion across mining, steel, cement, logistics and maintenance. Funding was expected from operating cash flow and financing, including BNDES and export-credit sources.
- Mining plans targeted 89 million tons per year of iron ore sales by 2014, including 50 million tons from Casa de Pedra and 39 million tons from Namisa, with port capacity planned to expand to 84 million tons per year. These are plans, not achieved results.
- Key exposures include cyclical steel and iron ore markets, raw-material costs, exchange-rate and interest-rate movements, and reliance on China: China represented 46% of CSN mining sales to end customers in 2009. The filing also identifies project execution, energy supply, regulation and environmental compliance risks.
- Operational insurance for the Presidente Vargas steelworks had expired in February 2009 and replacement coverage was still being negotiated at the filing date. This leaves potential exposure to business interruption and property losses.
- Recorded provisions for contingencies and disputed taxes were $941 million, with $807 million in related restricted deposits. Separately, approximately $2.6 billion of other proceedings were assessed as possible losses and were not accrued. Environmental provisions were $66.8 million, up from $30.5 million.
- Off-balance-sheet contingent liabilities and commitments were reported at $2.747 billion, including $2.331 billion of take-or-pay obligations. The Namisa prepayment contracts require long-term ore supply and port services through 2038–2043.
Most important facts for investors to verify
- Reconcile the $8.034 billion reported debt measure, related-party balances and Namisa prepayment obligations; assess maturity, currency and interest-rate exposure.
- Assess the sustainability of $40 million of operating cash flow against planned capital spending, dividends and long-term investment commitments.
- Separate recurring operating performance from 2008’s Namisa dilution gain, 2009’s REFIS benefit, foreign-exchange effects and equity-method income.
- Monitor progress on the $18.8 billion investment plan, mining and port expansions, and the ability to fund and deliver those projects as scheduled.
- Review the status and potential outcomes of disputed tax matters, unaccrued possible claims, and insurance renewal for the Presidente Vargas steelworks.
- Confirm that the filing’s annual figures are appropriate for the requested period: it does not provide clear standalone fourth-quarter 2009 financial results.