Cleveland-Cliffs Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results include AK Steel only from its March 13, 2020 acquisition date, so comparisons with 2019 are not like-for-like.
Business context
The acquisition transformed Cleveland-Cliffs from a major iron ore pellet producer into a vertically integrated iron ore and steel producer. The company reports Steel and Manufacturing and Mining and Pelletizing segments. COVID-19 disrupted automotive and other customer demand, prompting temporary operating curtailments.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,092.7 million | $743.2 million | $1,417.2 million, plus $34.6 million deferred-revenue realization | $900.2 million |
| Operating income (loss) | $(208.4) million | $226.8 million | $(287.2) million | $226.0 million |
| Net income (loss) attributable to Cliffs shareholders | $(123.9) million | $160.8 million | $(176.0) million | $138.7 million |
| Diluted EPS attributable to Cliffs shareholders | $(0.31) | $0.57 | $(0.51) | $0.47 |
| Adjusted EBITDA (non-GAAP) | $(82.0) million | $248.4 million | $(59.3) million | $269.6 million |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $(299.2) million | $151.1 million |
The filing’s income statement presents six-month revenue of $1,417.2 million and deferred-revenue realization separately; segment and MD&A presentations include both, for total revenue of $1,451.8 million. Q2 Steel and Manufacturing Adjusted EBITDA was $(104.0) million, while Mining and Pelletizing generated $82.4 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $73.7 million; total assets were $8.49 billion and total liabilities were $7.37 billion.
- Long-term debt carrying value was $4.45 billion, up from $2.11 billion at year-end 2019. Principal maturities totaled $4.64 billion; most were due after 2024.
- The $2.0 billion ABL facility had $550.0 million drawn, $198.5 million of letters of credit, and $903.6 million of remaining borrowing capacity. Including cash and the facility availability, management reported $981.6 million of liquidity.
- The company reported compliance with ABL liquidity requirements; its springing minimum fixed-charge coverage covenant was therefore not applicable at quarter-end.
- Cash used in investing activities was $1.15 billion, including $869.3 million net cash outflow for the AK Steel acquisition. Financing activities provided $1.17 billion.
Material changes and unusual items
- AK Steel contributed $715.1 million of Q2 revenue and a $206.5 million loss included in net loss attributable to Cliffs shareholders. Acquisition accounting, including $36.2 million of Q2 inventory step-up amortization, and severance affected results.
- Q2 included a $129.4 million gain on debt extinguishment. The six-month gain was $132.6 million; it materially offset reported losses but is not recurring operating performance.
- COVID-related idle costs were approximately $119 million in Steel and Manufacturing and approximately $50 million in Mining and Pelletizing during Q2. Mining sales volume fell 23.6% and production fell 60.6% year over year for the quarter.
- Revenue and asset growth versus 2019 chiefly reflect the acquisition, while weaker demand, lower pellet premiums, and operating idles weighed on performance. Q2 Steel and Manufacturing sales were 619,000 net tons; Mining and Pelletizing sales were 4.759 million long tons.
Outlook, risks and contingencies
- Management said prior 2020 guidance should not be relied upon because of the uncertain duration and effects of COVID-19. It expected adequate liquidity for at least 12 months, subject to changing customer demand and steel and iron ore prices.
- Management expected approximately $450 million of capital expenditures over the next 12 months, including about $190 million to complete the Toledo HBI plant. The plant was expected to be completed in Q4 2020; construction restarted in June after a temporary pandemic pause.
- The company raised its AK Steel synergy target by $30 million to approximately $150 million. It also suspended future dividends, temporarily reduced compensation and overhead, and deferred certain pension and employer Social Security payments. Approximately $60 million of AMT refunds were collected in July 2020.
- Risks include continued pandemic impacts, customer and supplier disruptions, cyclicality and price volatility, integration and synergy execution, high debt and liquidity needs, HBI construction and ramp-up, and potential environmental or legal liabilities. Environmental obligations were $41.4 million at quarter-end. Management stated that pending claims were not expected to have a material effect based on information then available, while noting that ultimate environmental costs could exceed recorded accruals.
- Disclosure controls were assessed as effective; AK Steel processes and internal controls were still being integrated.
Investor verification priorities
- Reconcile the $1,417.2 million income-statement revenue figure with the $1,451.8 million presentation that includes deferred-revenue realization.
- Assess underlying operating performance apart from the debt-extinguishment gain, acquisition-related charges, inventory step-up amortization, and COVID-19 idle costs.
- Track liquidity, ABL availability, debt maturities and interest costs, including the impact of the new secured notes and acquisition debt.
- Verify recovery in automotive and other customer demand, restart status and utilization of idled facilities, and the timing, remaining cost and completion of the Toledo HBI project.
- Monitor delivery of the $150 million synergy target, environmental and permit proceedings, and any updates to pandemic-related outlook or risks.