Cleveland-Cliffs Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited. Amounts are in millions except per-share data and where noted.
Business context and reporting period
Cleveland-Cliffs is a vertically integrated North American steelmaker, with iron ore and other raw-material operations as well as steel, tubular, tooling and stamping businesses. The company reports one reportable segment, Steelmaking. Results reflect the full-period contribution of acquired operations; Q2 2020 included AK Steel only from its March 13, 2020 acquisition date, and ArcelorMittal USA was acquired in December 2020. Accordingly, year-over-year comparisons are not directly comparable and growth reflects both acquisitions and market conditions.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $5,045 | $1,093 | $9,094 | $1,452 |
| Operating income (loss) | $1,067 | $(208) | $1,244 | $(287) |
| Net income (loss) attributable to Cliffs shareholders | $780 | $(124) | $821 | $(176) |
| Diluted EPS | $1.33 | $(0.31) | $1.42 | $(0.51) |
| Adjusted EBITDA (non-GAAP) | $1,360 | $(82) | $1,873 | $(59) |
| Operating cash flow | Not presented quarterly | $132 | $(298) |
Q2 operating margin was approximately 21.1% (operating income divided by revenue), versus an operating loss in the prior-year quarter. Steelmaking Adjusted EBITDA was $1,395 in Q2 and $1,932 for the first half. The company reported an average net selling price of $1,118 per net ton for steel products in Q2, compared with $1,041 in Q2 2020.
For the first half, cash used for capital expenditures was $298; operating cash flow less that expenditure was approximately negative $166. Cash and equivalents were $73 at June 30. Long-term debt carrying value was $5,368, versus $5,390 at December 31, 2020. The ABL Facility had $1,595 of available borrowing capacity after borrowings and letters of credit; the company reported total liquidity of approximately $1.7 billion. Current assets were $6,574 and current liabilities $2,986.
Capital additions were $329 in the first half. The company forecast $700–$750 of cash capital expenditures over the following 12 months. Total equity was $3,541, including $738 of redeemable preferred stock presented separately from equity. Common shares outstanding were approximately 500 million at June 30.
Material changes versus the prior comparable period
- Revenue rose by $3,952 in Q2 and $7,642 in the first half. Management attributed the increase principally to acquired steel operations, higher shipments and higher steel prices—not solely to like-for-like growth.
- Management said the domestic HRC index averaged $1,374 per net ton in the first half, up 155% year over year and at a record level at the time. Strong demand and constrained supply supported pricing; higher steelmaking input costs also contributed.
- Operating cash flow improved from a $298 use to $132 provided in the first half, but higher receivables and inventories—associated in part with rising prices and the automotive semiconductor shortage—and pension funding consumed cash.
- The company issued $1.0 billion of 2029 and 2031 senior notes and completed multiple debt redemptions and repurchases. Q2 included a $22 loss on extinguishment of debt; first-half debt-extinguishment loss was $88.
- Common shares issued in a February offering generated $322 of proceeds, used with cash on hand to repurchase $322 principal amount of secured notes. Common shares outstanding rose from approximately 478 million at year-end to approximately 500 million at June 30.
Outlook, management commentary, risks and unusual items
- Management expected healthy free cash flow in the second half of 2021 and anticipated ample liquidity over the next 12 months, while noting that demand and domestic steel prices could change. It prioritized debt reduction and expected to use cash for ABL repayment and other opportunistic debt transactions. No specific earnings or revenue guidance was provided.
- Management cited strong steel demand and record HRC pricing, while noting automotive production disruptions from the global semiconductor shortage and other supply-chain constraints. It said Monessen was temporarily idled and expected to resume production in Q3 2021; Columbus Coatings restarted during Q2.
- On July 27, 2021, after quarter-end, the company redeemed all Series B Participating Redeemable Preferred Stock for approximately $1.2 billion in cash. This is a significant subsequent liquidity and capital-allocation event.
- Environmental obligations were $159 at June 30. The company discussed ongoing environmental matters, including a Burns Harbor water-discharge incident and related government and third-party proceedings; it could not reliably estimate potential penalties, injunctive relief or claims, which it said could exceed its reporting threshold in total.
- A June 2021 antitrust lawsuit by JSW Steel seeks treble damages exceeding $500 million and other relief. Cliffs said it considers the claims without merit and intends to defend them.
- Other material risks include steel and iron-ore price volatility, cyclical demand, customer and supplier disruptions, integration and synergy execution, substantial debt and pension/OPEB obligations, environmental compliance, and potential supply interruptions. The company reported compliance with ABL liquidity requirements; its springing fixed-charge coverage covenant was therefore not applicable.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects acquisitions, versus comparable shipment, price and cost performance.
- Whether strong steel prices and demand persist, and how automotive production constraints affect shipments and working capital.
- The cash and financing impact of the $1.2 billion preferred-stock redemption after quarter-end, including any resulting change in ABL borrowings and liquidity.
- Debt maturities and refinancing needs, as the filing lists $2,573 of principal maturities in 2025; also reconcile this schedule with reported debt carrying value of $5,368.
- Execution against the $700–$750 capital-expenditure outlook, expected cash generation and stated debt-reduction priorities.
- Developments and potential financial exposure in the JSW Steel litigation and Burns Harbor environmental proceedings; the filing does not provide a clear estimate of ultimate exposure.