Cleveland-Cliffs Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 20, 2020. This is an annual filing, with unaudited quarterly results that include the fourth quarter. Unless noted, results are for Cliffs on a standalone basis and exclude the proposed AK Steel acquisition.
Business context
Cliffs was primarily a U.S. iron-ore pellet producer, operating mines in Michigan and Minnesota and selling mainly to North American integrated steelmakers under long-term contracts. Its Toledo, Ohio, hot-briquetted iron (HBI) plant was under construction. The company agreed in December 2019 to acquire AK Steel, with closing expected in the first quarter of 2020, subject to conditions.
Financial and operating results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $1,989.9 million | $2,332.4 million |
| Sales margin | $575.7 million | $809.6 million |
| Operating income | $429.3 million | $673.2 million |
| Income from continuing operations | $294.5 million | $1,039.9 million |
| Diluted EPS from continuing operations | $1.04 | $3.42 |
| Adjusted EBITDA | $524.8 million | $766.3 million |
| Cash from operating activities | $562.5 million | $478.5 million |
| Cash capital expenditures, including deposits | $656.0 million | $296.1 million |
- Revenue declined about 15%; sales margin fell $233.9 million. Management attributed the decrease mainly to lower realized revenue rates and reduced third-party sales volumes. Realized product revenue was $99.50 per long ton, down from $105.64; sales tons were 19.371 million, down from 20.563 million.
- Net income from continuing operations was much lower than in 2018, primarily because 2018 included a $475.2 million income tax benefit, principally from releasing the U.S. deferred-tax valuation allowance. The 2019 tax provision was $17.6 million.
- Operating cash flow improved year over year, helped by collection of a $117.3 million income-tax receivable and the absence of certain prior-year discontinued-operation cash uses. Capital spending rose substantially, largely for the HBI project.
- Fourth-quarter 2019 revenue was $534.1 million, sales margin $126.9 million, and net income attributable to Cliffs shareholders $63.2 million.
Balance sheet, liquidity and capital allocation
- At year-end, cash and cash equivalents were $352.6 million, versus $823.2 million a year earlier. Principal long-term debt was $2.238 billion; balance-sheet long-term debt was $2.114 billion. No ABL loans were drawn; borrowing capacity after letters of credit and other commitments was $357.8 million, giving reported cash plus available ABL liquidity of $710.4 million.
- Cliffs issued $750 million of 5.875% notes due 2027 and used proceeds and cash to retire or repurchase $724 million of notes. Management reported no debt maturities until 2024.
- Investing cash outflow was $644.4 million and financing cash outflow was $394.1 million. The company repurchased 24.4 million shares for $252.9 million and paid $72.1 million in dividends.
- The HBI plant was expected to produce 1.9 million metric tons annually. Estimated project cost was about $830 million plus contingency of up to 20%, excluding capitalized interest; about $700 million had been paid by year-end.
Outlook, commentary and risks
For 2020, standalone guidance assumed average iron-ore pricing of $90 per metric ton, steel pricing of $650 per short ton and pellet premiums of $50 per metric ton. On those assumptions, management forecast net income of $300–$325 million and Adjusted EBITDA of $550–$575 million; interest expense of $125 million, non-cash tax expense of $25 million, and depreciation, depletion and amortization of $100 million were expected. Capital spending was projected at $350–$400 million, including HBI completion. These are forecasts, not results, and do not include AK Steel.
- Commodity and steel prices, customer demand, and concentration are significant exposures: three customers represented 97% of Mining and Pelletizing product sales revenue.
- The proposed AK Steel transaction carried execution, integration, financing, dilution, synergy and litigation risks. Cliffs expected combined debt of about $4.3 billion if existing debt were not retired or refinanced.
- Environmental and permitting uncertainties include selenium and sulfate water standards, mercury emissions, regional haze and potential climate regulation. The filing states that some potential impacts cannot be estimated clearly.
- Mesabi Trust had initiated arbitration over Northshore royalty calculations and DR-grade pellet sales. Merger-related shareholder lawsuits and other legal proceedings were also disclosed; management said it intended to defend the claims.
- The audited financial statements received an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Actual 2020 iron-ore, steel and pellet-premium prices versus the assumptions underlying guidance.
- HBI construction completion, commissioning, costs, production ramp and customer commitments.
- AK Steel closing status, financing terms, realized synergies, share issuance and resulting debt and liquidity.
- Customer concentration, contract volumes and realized pricing, including the effect of lower pellet premiums and steel prices.
- Outcomes and potential costs of Mesabi Trust arbitration, merger litigation and material environmental or permitting matters.