Cleveland-Cliffs Inc. — 2020 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter report. Cleveland-Cliffs transformed from an iron-ore pellet producer into North America’s largest flat-rolled steel producer by acquiring AK Steel on March 13, 2020 and ArcelorMittal USA on December 9, 2020. Results therefore include the acquired businesses only from their respective closing dates and are not directly comparable with 2019.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue, including deferred revenue realization | $5.354 billion | $1.990 billion |
| Net income (loss) | $(81) million | $293 million |
| Net income (loss) attributable to Cliffs shareholders | $(122) million | $293 million |
| Diluted EPS attributable to shareholders | $(0.32) | $1.03 |
| Adjusted EBITDA (non-GAAP) | $353 million | $525 million |
| Cash from operating activities | $(261) million | $563 million |
| Capital expenditures, including capitalized interest | $525 million | $656 million |
- Revenue rose primarily because the acquisitions contributed approximately $4.0 billion; lower iron-product revenue partially offset the increase. Revenue was concentrated in automotive (45%), steel producers (27%), infrastructure and manufacturing (15%), and distributors and converters (13%).
- Operating loss was $142 million, versus operating income of $429 million in 2019. The filing does not provide a single comparable consolidated operating-margin measure; acquisitions and pandemic-related idling materially affect comparison.
- COVID-19-related temporary idle costs were approximately $225 million in cost of goods sold; management separately cites approximately $214 million of temporary idle costs excluding idle depreciation, depletion and amortization.
- At year-end, cash and cash equivalents were $112 million. Debt principal was $5.595 billion; debt carrying value was $5.424 billion. ABL borrowings were $1.510 billion, with $1.743 billion available after letters of credit. Management reported approximately $1.9 billion of cash plus ABL availability entering 2021.
- Long-term pension and OPEB liabilities were $4.113 billion, with a further $151 million classified as current. Year-end total assets were $16.771 billion and total equity was $2.341 billion, including $738 million of redeemable preferred stock classified outside equity.
- Domestic HRC averaged $588 per net ton in 2020, fell to $438 in April, and reached $1,030 at year-end. The filing does not give a consolidated gross-margin percentage.
Material changes versus the prior comparable period
- The acquisitions substantially expanded the company’s scale, steelmaking capacity, product mix, debt, assets, workforce and pension/OPEB obligations. Raw steel production was 4 million net tons in 2020; reported annual capacity after the acquisitions was approximately 23 million net tons.
- Adjusted EBITDA declined to $353 million from $525 million, while operating cash flow swung from $563 million provided to $261 million used. Management attributed weaker performance to COVID-19 demand disruption, lower iron-product shipments and idle costs.
- Steel shipments from the acquired businesses supported new revenue streams, while iron-pellet sales to third parties fell as more production was consumed internally. Iron-product sales volume was 11.7 million long tons versus 18.6 million in 2019.
- Interest expense increased to $238 million from $101 million, largely reflecting acquisition-related and other incremental debt. A $130 million gain on debt extinguishment partly offset expenses.
- Cash and cash equivalents fell from $353 million to $112 million. Inventories rose to $3.828 billion from $317 million, and accounts receivable to $1.169 billion from $94 million, reflecting the enlarged business.
Outlook, management commentary, risks and unusual items
- Management expected a strong recovery in 2021, near-2019 North American vehicle production, higher steel prices and healthy free cash flow, while noting dependence on demand, pandemic conditions and steel-price volatility. It did not provide a clear numerical 2021 revenue or EBITDA forecast in the supplied filing text.
- Management expected Toledo HBI shipments to third parties to begin in the first quarter of 2021 and the 1.9-million-metric-ton annual-capacity plant to reach full production rate in the second quarter. Planned 2021 capital expenditures were $600–$650 million.
- Management’s initial debt-reduction target was total debt below three times annual Adjusted EBITDA. It cited approximately $310 million of expected synergies from the acquisitions overall; the strategy discussion separately identifies approximately $150 million of potential synergies associated with the ArcelorMittal USA transaction.
- In February 2021, the company issued $1.0 billion of unsecured notes due 2029 and 2031 and sold 20 million new common shares. It intended to use proceeds and cash to redeem or repay specified higher-cost debt and reduce ABL borrowings. These were post-year-end actions, not 2020 operating results.
- Notable 2020 items included $90 million of acquisition-related costs, $96 million of inventory step-up amortization, a $130 million debt-extinguishment gain and $35 million of deferred revenue recognized following termination of a pellet supply agreement.
- The Series B preferred stock issued to ArcelorMittal has a significant future dividend feature: from the second anniversary of issuance, cash dividends accrue initially at 10% annually, increasing by 2 percentage points every six months. The company stated it intended to redeem it before those dividends become payable, subject to financing restrictions.
- Principal risks include COVID-19 and automotive-market exposure, volatile steel and raw-material prices, leverage and refinancing needs, acquisition integration and realization of synergies, pension/OPEB and environmental liabilities, regulatory changes, labor negotiations, and operational, transportation and cybersecurity disruptions.
- Environmental and legal matters include selenium-treatment obligations, a roughly $100 million discounted liability included for Empire selenium-related work, a further estimated $20 million for Tilden infrastructure, Burns Harbor water-discharge proceedings, and pending Mesabi-related litigation and arbitration. Management said outcomes or impacts of several matters were uncertain or not reasonably estimable.
- The financial-statement and internal-control audit opinions were unqualified. Management and the auditor excluded acquired AK Steel and ArcelorMittal USA from the internal-control assessment; together, the acquired businesses represented 81% of year-end assets and 75% of 2020 revenue for their post-acquisition periods.
Important facts for investors to verify
- Reconcile reported revenue of $5.354 billion, including the $35 million deferred-revenue realization, with the income statement’s $5.319 billion revenue line.
- Review the final acquisition purchase-price allocations, including goodwill, inventory, pension/OPEB and environmental liabilities; the ArcelorMittal USA allocation was preliminary.
- Track integration progress and whether the stated synergy opportunities and 2021 recovery expectations are achieved.
- Confirm the completion and terms of the announced 2021 debt redemptions, ABL paydowns and preferred-stock redemption plan, and monitor leverage and liquidity.
- Assess cash conversion, working-capital needs—including the expected impact of the acquired factoring arrangement—and required pension/OPEB contributions.
- Monitor the outcome and potential costs of environmental proceedings, selenium compliance, the Mesabi arbitration and other contingencies, as well as control integration at the acquired businesses.