Cleveland-Cliffs Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Cleveland-Cliffs is a vertically integrated North American steel and iron-ore-pellet producer, with Steelmaking as its primary reportable segment.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $5,984 | $6,337 | $11,279 | $12,292 |
| Operating income | $483 | $840 | $452 | $1,934 |
| Net income attributable to Cliffs shareholders | $347 | $596 | $290 | $1,397 |
| Diluted EPS | $0.67 | $1.13 | $0.56 | $2.64 |
| Adjusted EBITDA (non-GAAP) | $775 | $1,131 | $1,018 | $2,583 |
- Steelmaking shipments rose 15% in Q2 to 4.202 million net tons and 14% for the first half to 8.287 million net tons. The average selling price per ton of steel products fell to $1,255 in Q2 from $1,487, and to $1,193 for the first half from $1,466.
- Steelmaking gross margin was 11% in Q2 versus 16%; first-half margin was 7% versus 18%. Management attributed the decline principally to lower selling prices, partly offset by higher volume and lower production costs.
- Cash from operations was $848 for the first half, down from $1,398. Capital spending was $319, producing free cash flow of $529, compared with $930 a year earlier. Cash and equivalents were $34 at June 30.
- Long-term debt carrying value was $3,963 at June 30, down from $4,249 at year-end 2022; principal outstanding was $4,025. Total liabilities were $10,259 and equity was $8,044.
Changes, liquidity and capital actions
- Revenue declined 6% in Q2 and 8% in the first half year over year. Lower steel prices outweighed increased shipment volumes; automotive revenue grew, while distributors/converters and steel-producer revenue fell.
- Q2 operating income fell to $483 from $840, and first-half operating income to $452 from $1,934. First-half results also compare against 2022, which included an $80 debt-extinguishment loss and a $29 asset impairment; these prior-year items were excluded from Adjusted EBITDA.
- At June 30, the amended ABL Facility provided $3,800 of borrowing capacity after $833 of borrowings and $117 of letters of credit. Including cash, reported liquidity was approximately $3.83 billion. The company said this was its highest liquidity level to date and sufficient for requirements over the next 12 months and foreseeable future.
- In April, the company issued $750 of 6.750% notes due 2030 and used the proceeds to repay ABL borrowings. In June, it amended the ABL Facility, increasing its size to $4.75 billion and extending maturity to June 2028. Management reported no debt maturities until 2026 and compliance with ABL covenants.
- The company repurchased 6.5 million shares for $94 in the first half; $666 remained under the $1 billion authorization at June 30.
Outlook, commentary and risks
- Management anticipated total cash capital expenditures of $675–$725 over the next 12 months and no major investments until at least 2026. It expected opportunities to reduce debt and return capital during the remainder of 2023, subject to cash generation and market conditions.
- Management described steel-market conditions as improving from the second half of 2022, citing stronger automotive production and low service-center inventories. It expected domestic demand to remain healthy if those conditions persisted. It estimated North American light-vehicle production would exceed 15 million units for 2023.
- Q2 domestic hot-rolled coil averaged $1,065 per net ton, 19% below Q2 2022 but above Q1 2023’s $875. Management cited easing input-cost inflation and lower maintenance costs as supportive, while noting that steel prices and demand remain cyclical.
- Key exposures include steel, iron ore, scrap, energy and raw-material price volatility; higher interest rates or recession; automotive demand and supply-chain disruption; customer or supplier distress; environmental regulation and remediation; and operational, labor, transport and cybersecurity disruptions. The filing also notes possible impairment risk at the Tooling and Stamping reporting unit if conditions worsen.
- Environmental obligations were $144 and asset-retirement obligations $525 at June 30. The company said pending claims were not expected to have a material adverse effect based on currently available information, but acknowledged estimates and outcomes are uncertain. The Burns Harbor water matter is subject to a consent decree requiring system enhancements and a $3 penalty, which was paid under the agreement.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether steel prices, contract renewals and shipment volumes sustain margins as lower spot prices affect realized selling prices.
- Whether operating cash flow and free cash flow support planned capital spending, debt reduction and share repurchases through market cycles.
- ABL availability, borrowing levels, covenant compliance, interest costs and the capacity to refinance or repay debt as maturities approach.
- Actual delivery of the stated demand outlook, including automotive production, service-center restocking and policy-supported steel demand.
- Developments in environmental proceedings, remediation estimates and other contingencies, as well as any impairment indicators for Tooling and Stamping.