Cleveland-Cliffs Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Cleveland-Cliffs is a vertically integrated North American flat-rolled steel and iron ore pellet producer, with automotive as a major end market. This unaudited filing covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $5,605 | $5,653 | $16,884 | $17,945 |
| Operating income | $325 | $187 | $777 | $2,121 |
| Net income attributable to Cliffs shareholders | $264 | $152 | $554 | $1,549 |
| Diluted EPS | $0.52 | $0.29 | $1.08 | $2.95 |
| Adjusted EBITDA | $614 | $463 | $1,632 | $3,046 |
| Operating cash flow | Not presented separately for quarter | $1,615 | $1,934 | |
| Free cash flow | Not presented separately for quarter | $1,134 | $1,218 |
Margins and operating drivers. Steelmaking gross margin was 9% in Q3 versus 6% a year earlier, but 7% for the first nine months versus 14%. Steelmaking Adjusted EBITDA was $603 million in Q3 (up from $447 million) and $1,608 million year to date (down from $2,980 million). Q3 steel shipments rose 13% to 4.106 million net tons; nine-month shipments rose 14% to 12.393 million net tons. Average steel product selling price declined $157 per net ton in Q3 and $235 year to date versus 2022.
Cash, debt and liquidity. At September 30, cash was $31 million; current assets were $6,941 million and current liabilities $3,294 million. Long-term debt was $3,458 million, compared with $4,249 million at year-end 2022; principal debt outstanding was $3,517 million. The company reported $4.36 billion of liquidity, including cash and ABL availability; $4.331 billion of ABL borrowing capacity remained after borrowings and letters of credit. The ABL maturity was extended to June 2028 and commitments increased to $4.75 billion. The company issued $750 million of 6.75% senior notes due 2030 and used the proceeds to repay ABL borrowings. It reported compliance with ABL covenants; the springing fixed-charge coverage covenant was not applicable at quarter-end.
Material changes and management commentary
- Q3 revenue was down 1%, while net income attributable to shareholders and Adjusted EBITDA increased. Lower input, utility and maintenance costs and higher shipment volumes helped offset weaker selling prices.
- Nine-month revenue fell 6%, and net income attributable to shareholders and Adjusted EBITDA declined substantially. Lower steel selling prices were the primary pressure, partly offset by higher shipments and lower production costs.
- Automotive steel revenue increased 13% in Q3 and 17% year to date, supported by higher shipments and favorable annual fixed-price contract renewals. Distributors/converters and steel-producer revenues fell, reflecting lower prices and related indices. About 45% of volumes are sold under fixed-price contracts.
- Operating cash flow and free cash flow were lower year over year. Working-capital cash flow improved, particularly from inventory reduction; cash capital expenditures were $481 million versus $716 million.
- The company repurchased 10.4 million shares for $152 million during the first nine months; $608 million remained under the repurchase authorization at quarter-end. Management said it expected opportunities to reduce debt and return capital during the rest of 2023.
Outlook, risks and unusual items
- Management expected domestic steel demand to remain healthy, citing automotive recovery, low service-center inventories, and anticipated support from U.S. infrastructure, semiconductor and clean-energy legislation. It estimated 2023 North American light-vehicle production above 15 million units and 2024 production above 16 million.
- The UAW strike, announced in September 2023, had not yet materially affected the company, but an expanded or prolonged strike could reduce automotive production or steel demand. Steel pricing and demand remain cyclical and volatile.
- Management expected lower input and maintenance costs to continue into the rest of 2023 and 2024. It estimated cash capital expenditures of $675–$725 million over the next 12 months and said no major investments were expected until at least 2026.
- Key risks include steel, iron ore, scrap and energy price volatility; customer and supplier disruptions; labor relations; environmental compliance and remediation; and the availability and cost of raw materials and energy. The filing reports $141 million of environmental obligations and $522 million of asset retirement obligations. Management said pending claims were not expected to have a material adverse effect based on information available, while noting uncertainty in ultimate environmental costs.
- Commodity hedges expose reported fair value to market movements: the filing estimates a hypothetical negative fair-value effect of $61 million for a 10% natural-gas price change and $13 million for a 10% electricity price change; related commodity-cost effects would partly offset these changes.
- On October 6, 2023, the company agreed to sell entities owning, among other assets, closed Pennsylvania coal mines and anticipated recording an approximately $60 million gain in Q4 2023. This was a subsequent event, not part of Q3 results.
- The company reported a 32% reduction in absolute Scope 1 and Scope 2 emissions from 2017 to 2022, exceeding its stated 25% reduction target ahead of 2030. A hydrogen injection trial at Middletown Works was completed in May 2023; future emissions initiatives depend on execution and technology availability.
Important facts for investors to verify
- Whether steel prices, shipment volumes and lower production costs sustain Q3 margin improvement, especially given the much weaker nine-month comparison.
- The duration and operational or demand impact of the UAW strike, and whether projected automotive production supports the company’s outlook.
- Debt-reduction and share-repurchase pace, liquidity availability, and the cost of variable-rate ABL borrowings.
- Execution and funding of the stated capital-spending and decarbonization plans, alongside environmental and asset-retirement obligations.
- Completion and accounting for the Pennsylvania closed-coal-mine sale and the anticipated Q4 gain.