uploads/2016/01/part-5-cash-flows1.png

U.S. Steel to Burn Cash in 2016 if Markets Don’t Improve

By

Updated

Cash burn

Previously, we looked at U.S. Steel’s 4Q15 shipments and earnings. Along with these metrics, it’s important for investors to look at the free cash flows. Generating negative free cash flows would lead to cash burn. U.S. Steel (X) is already grappling with a huge debt pile. Negative free cash flows would only make things worse.

Article continues below advertisement

Negative free cash flows

  • U.S. Steel generated negative free cash flows of $180 million in fiscal 2015. The company burnt cash in each quarter last year as can be seen in the graph above.
  • Though U.S. Steel burnt cash last year, other steel companies managed to generate positive free cash flows. Steel Dynamics (STLD) and AK Steel (AKS) posted positive free cash flows in 2015 despite challenging market conditions.
  • Nucor (NUE) has also generated positive free cash flows in the first three quarters of fiscal 2015. It’s important to note that Nucor is the only US steel company to carry an investment-grade (BND) credit rating.

Outlook

U.S. Steel has slashed its 2016 capital expenditure budget to $350 million. Last year, the company’s capital expenditure was in excess of $500 million. Also, U.S. Steel estimates its cash requirements for interest payments, dividends, and pension obligations to total $350 million this year. These expenses will be a drag on U.S. Steel’s 2016 cash flows. However, U.S. Steel is looking at a working capital reduction of $500 million, which will 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 part, we’ll look at upside as well as downside risks to U.S. Steel’s 2016 guidance.

Advertisement

More From Market Realist