Cleveland-Cliffs Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Cleveland-Cliffs is a vertically integrated steel and iron ore producer, with Steelmaking as its sole reportable segment.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $6,337 | $5,045 | $12,292 | $9,094 |
| Operating income | $840 | $1,067 | $1,934 | $1,244 |
| Net income attributable to Cliffs shareholders | $596 | $780 | $1,397 | $821 |
| Diluted EPS | $1.13 | $1.33 | $2.64 | $1.42 |
| Adjusted EBITDA | $1,130 | $1,360 | $2,581 | $1,873 |
- Q2 Steelmaking shipments fell 13% to 3.641 million net tons, while average selling price rose 33% to $1,487 per net ton. Steelmaking gross margin declined 19% to $967 million, and gross margin percentage was 16%, versus 24%.
- For the first half, Steelmaking shipments declined 13% to 7.278 million net tons; average selling price increased 44% to $1,466 per net ton. Steelmaking gross margin rose 49% to $2,189 million, with margin percentage of 18%, versus 17%.
- First-half operating cash flow was $1,398 million, versus $132 million. Capital expenditures were $468 million, compared with $298 million; cash used in investing activities was $467 million.
- At June 30, cash was $47 million and long-term debt was $4,668 million ($4,731 million principal). ABL borrowings were $2,245 million, with $2,077 million available after letters of credit. Management reported approximately $2.1 billion of total liquidity and compliance with ABL requirements.
- Total assets were $20,039 million and total liabilities were $13,045 million. Inventories were $5,784 million, up from $5,188 million at year-end 2021.
Material changes versus comparable periods
- Revenue increased 26% in Q2 and 35% in the first half. The filing attributes the increases to higher steel selling prices and inclusion of FPT, acquired in November 2021; lower shipment volumes partially offset the gains.
- Despite higher Q2 revenue, operating income, shareholder net income, diluted EPS and Adjusted EBITDA all declined year over year. Management cited sharply higher raw-material, utility, maintenance, idle and labor costs, as well as lower shipments.
- First-half earnings and Adjusted EBITDA improved year over year, reflecting higher selling prices and FPT contributions, despite increased production costs and lower shipments.
- Debt principal declined by $638 million during the first half. The company redeemed its $607 million 9.875% 2025 secured notes, $294 million of convertible notes and $66 million of IRBs; it also repurchased $307 million principal amount of other senior notes. Debt actions contributed to an $80 million first-half extinguishment loss.
- The company repurchased 8.5 million shares for $176 million in the first half under a $1 billion authorization.
Outlook, management commentary, risks and unusual items
- Management expected $800–$900 million of cash capital expenditures over the next 12 months and stated that liquidity should be adequate for operations, debt obligations, capital spending and shareholder returns. The filing does not provide specific full-year revenue or earnings guidance.
- Management described steel-market conditions as volatile. Domestic hot-rolled coil prices had fallen from $1,492 per net ton in April to below $1,000 by the time of the filing, amid service-center destocking, higher interest rates, lower metallics prices and summer outages. Automotive demand remained constrained by semiconductor and other supply-chain shortages, though management cited pent-up demand and a positive longer-term outlook.
- Management emphasized the potential advantage of its internally sourced iron ore, HBI and scrap amid disruptions to Russian and Ukrainian pig iron supply. It also noted that approximately 45% of volumes are sold under fixed-price contracts.
- Indiana Harbor #4 blast furnace was indefinitely idled, reducing operating blast furnaces from eight to seven. Middletown coke operations were indefinitely idled; Mountain State Carbon was permanently closed, resulting in a $29 million impairment charge. Accelerated depreciation included $68 million for Indiana Harbor #4 and $23 million for Middletown Works.
- Environmental obligations were $140 million at June 30; $63 million was reclassified to asset retirement obligations, which totaled $532 million. A Burns Harbor consent decree became effective May 6, 2022, requiring wastewater-treatment enhancements and a $3 million civil penalty.
- Principal risks include steel and raw-material price volatility, automotive and broader economic weakness, supply-chain and energy disruptions, environmental obligations and regulation, liquidity and debt risks, and litigation or other contingencies. The company stated that it did not believe pending claims would materially affect its consolidated financial statements based on information then available.
Key facts investors should verify
- Whether steel prices and contract renewals can offset continued raw-material, energy, labor and maintenance cost pressure.
- Shipment trends, particularly the recovery of distributor demand and automotive production amid supply-chain constraints.
- Debt reduction, ABL borrowings and available liquidity, including the effect of variable interest rates.
- Progress and costs associated with the furnace and coke-facility idles, environmental obligations and the Burns Harbor consent decree.
- Actual capital spending versus the stated $800–$900 million next-12-month expectation, and the pace of share repurchases.