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Why Net Debt Rose for Nucor and AK Steel Last Year

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Net debt

In this part of our series, we’ll see how steel companies’ net debt progressed last year. You can define net debt as total debt minus cash and cash equivalents.

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Analysis

Steel Dynamics’ (STLD) net debt fell from $1.5 billion in 2016 to $1.3 billion in 2017. ArcelorMittal’s (MT) net debt also fell from $11 billion in 2016 to $10.1 billion in 2017. As we noted in the previous part of this series, the company has set itself a net debt target of $6 billion. U.S. Steel Corporation’s (X) net debt also fell, by $366 million to $1.1 billion in 2017. The reduction in net debt was led by free cash flows. Notably, all the steel companies that we’re covering in this series managed to post positive free cash flows in 2017. See Comparing Steel Companies’ 4Q17 Performance for a comparative analysis of steel companies’ free cash flows.

AK Steel

However, despite positive free cash flows, Nucor (NUE) and AK Steel (AKS) saw their net debt swell last year. Both these companies completed major acquisitions last year. While Nucor was able to partially finance the acquisition with its organic cash flows, AK Steel’s acquisition was almost entirely funded by debt.

Precision Partners, which AK Steel acquired last year, was initially funded by AK Steel’s revolving credit facility. However, it intends to finance the acquisition through a mix of debt and equity. The company’s net debt rose by $429 million last year to $2.0 billion after the acquisition.

Along with the absolute debt levels, we should also look at debt relative to earnings. In the next part of this series, we’ll do a comparative analysis of steel companies’ financial leverage.

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