Looking back to Push Forward: Decoding 4Q15 Steel Earnings in 2016
4Q15 free cash flows
Previously in this series, we looked at steel’s 4Q15 shipments and earnings. But along with these metrics, it’s important for investors to look at the free cash flows. You can define free cash flows as operating cash flows minus capital investments, and generating negative free cash flows can often lead to what’s referred to as “cash burn.” As most steel companies are already grappling with huge debt piles, negative free cash flow, or cash burn, only makes things worse.
Steel Dynamics
Steel Dynamics generated strong free cash flows of $302 million in 4Q15. Steel Dynamics is the only company among those we’re covering in this series that generated higher free cash flows in 4Q15 than in 4Q14 and in 3Q15. But Nucor Corporation (NUE) also managed to generate strong free cash flows, reaching $309 million in the quarter.
Both these companies generated healthy free cash flows in fiscal 2015 and ended the year with decent liquidity. Although steel companies face significant challenges in terms of operating environment, NUE and STLD have a relatively strong balance sheets compared to some of their integrated peers. Apparently, Nucor (NUE) is the only US steel company to carry an investment-grade credit rating (BND).
U.S. Steel
While AK Steel (AKS) generated negative free cash flows in 4Q15 yet managed to post positive free cash flows in fiscal 2015, U.S. Steel Corporation (X) generated negative free cash flows of $79 million in 4Q15 and negative free cash flows of $180 million in fiscal 2015, burning cash every quarter of that fiscal year.
U.S. Steel has thus slashed its 2016 capital expenditure budget to $350 million, and the company is looking at a working capital reduction of $500 million in 2016, which will likely enhance its cash position. Nonetheless, even after accounting for a working capital reduction, U.S. Steel expects a cash burn of $200 million this year, if market conditions don’t improve.
In the next and final part of this series, we’ll look at the industry outlook provided by different steel companies during their respective 4Q15 earnings conference calls.
Browse this series on Market Realist: