Cleveland-Cliffs Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; comparisons are with Q1 2021 unless noted. Cliffs is a vertically integrated North American steel and iron-ore producer, with Steelmaking as its sole reportable segment.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $5.955 billion | $4.049 billion |
| Operating income | $1.094 billion | $177 million |
| Net income attributable to Cliffs shareholders | $801 million | $41 million |
| Diluted EPS | $1.50 | $0.07 |
| Adjusted EBITDA (non-GAAP) | $1.451 billion | $513 million |
| Operating cash flow | $533 million | $(379) million |
| Capital expenditures paid | $236 million | $136 million |
Revenue increased 47%, primarily on higher steel prices, partly offset by lower shipments. Operating margin was approximately 18.4%, compared with 4.4% in Q1 2021; net income attributable to Cliffs shareholders was approximately 13.5% of revenue, versus 1.0%. Steelmaking shipments declined 12% to 3.637 million net tons, while average selling price rose 61% to $1,446 per net ton. Steelmaking Adjusted EBITDA increased to $1.423 billion from $502 million.
Cash and equivalents were $35 million at quarter-end, down from $48 million at year-end 2021. Long-term debt was $5.028 billion, versus $5.238 billion; total liabilities were $13.160 billion. The ABL Facility had $2.614 billion of available borrowing capacity after borrowings and letters of credit. Cash plus available ABL capacity provided approximately $2.6 billion of liquidity. The company reported compliance with ABL liquidity requirements; its springing fixed-charge covenant was not applicable. Operating cash flow less capital expenditures was approximately $297 million.
Material changes and notable items
- Steelmaking gross margin increased to $1.222 billion from $275 million. Management attributed the improvement mainly to approximately $2 billion of benefit from higher selling prices, partly offset by approximately $900 million of higher production costs and approximately $150 million from lower sales volumes.
- Q1 results included a $29 million impairment charge following the permanent closure of the Mountain State Carbon coke plant, and a $14 million loss on extinguishment of debt.
- In January, Cliffs redeemed $294 million of 1.500% convertible notes for cash and issued 24 million shares to settle the conversion premium. It also redeemed $66 million of industrial revenue bonds in March.
- After quarter-end, on April 20, Cliffs redeemed $607 million of 9.875% 2025 secured notes for a total payment of $677 million, using available liquidity. The company expects to record an $85 million extinguishment loss in Q2; the notes had approximately $60 million of annual cash interest.
- The board authorized up to $1 billion of share repurchases. During Q1, the company repurchased 1 million shares for $19 million under the program.
Outlook, management commentary and risks
- Management described demand and market fundamentals as healthy and expected HRC prices to remain substantially above historical averages, while noting that results remain sensitive to steel prices and customer demand. No specific full-year revenue or earnings guidance is provided in the filing.
- Cliffs expects no change to full-year 2022 steel shipment volumes from the indefinite idle of the Indiana Harbor #4 blast furnace, which reduced operating blast furnaces from eight to seven. It expects capital expenditures of $850–$900 million over the next 12 months and said liquidity should be adequate for at least that period.
- Management cited its internally sourced iron ore, HBI and scrap, and limited reliance on imported pig iron, as competitive advantages amid Russia-Ukraine-related supply disruption and higher input costs. It also said stronger fixed-price contract pricing should benefit 2022; approximately 45% of volumes are sold under fixed-price contracts.
- Key uncertainties include steel and commodity price volatility; automotive semiconductor and other supply-chain constraints; energy and raw-material availability and costs; economic and import conditions; and the effects of the Russia-Ukraine conflict. The company also identifies environmental obligations, regulatory and climate-related costs, operational interruptions, and liquidity and debt risks.
- Environmental obligations totaled $206 million at March 31. A proposed consent decree concerning the 2019 Burns Harbor water incident includes specified wastewater-system enhancements and a $3 million civil penalty; final court approval was being sought after quarter-end.
- JSW Steel’s antitrust and related claims seeking more than $500 million in damages were dismissed with prejudice in February; JSW appealed in March. Cliffs said it considers the claims without merit and intends to contest the appeal.
Important facts for investors to verify
- Whether steel prices, contract renewals and demand sustain the exceptional Q1 margins as shipment volumes and input costs evolve.
- Whether working-capital needs, capital spending and debt repayments affect cash generation and the approximately $2.6 billion of reported liquidity.
- The Q2 accounting and cash impact of the April note redemption, including the expected $85 million extinguishment loss and interest savings.
- Progress on automotive supply constraints, blast-furnace idle plans, and the expected shipment-volume outlook.
- Final court disposition of the Burns Harbor consent decree and appeal status of the JSW litigation, alongside environmental and other contingent liabilities.
- Execution and pace of the $1 billion share repurchase authorization, and the effect of the convertible-note settlement shares on per-share results.