Cleveland-Cliffs Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The quarter includes AK Steel’s results only from its March 13 acquisition date, so comparisons with Q1 2019 are not like-for-like. Cleveland-Cliffs became a vertically integrated iron ore and steel producer, with Mining and Pelletizing and Steel and Manufacturing segments.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue, including deferred revenue recognized | $359.1 million | $157.0 million |
| GAAP revenues line | $324.5 million | $157.0 million |
| Operating loss | $78.8 million | $0.8 million |
| Net loss attributable to Cliffs shareholders | $52.1 million | $22.1 million |
| Diluted loss per share | $0.18 | $0.08 |
| Adjusted EBITDA | $22.7 million | $21.2 million |
| Cash used by operating activities | $160.5 million | $111.2 million |
| Cash and cash equivalents at quarter-end | $186.9 million | — |
The $34.6 million difference between reported GAAP revenues and total revenue reflects recognition of deferred revenue following termination of an AK Steel pellet sales agreement. Segment Adjusted EBITDA was $81.8 million for Mining and Pelletizing and negative $11.1 million for Steel and Manufacturing; corporate and eliminations were negative $48.0 million. Steel and Manufacturing cost of goods sold was 113% of segment revenue, affected by lower automotive volume and $23.2 million of inventory step-up amortization.
Investing cash outflow was $1,007.5 million, including $869.3 million net cash used for the AK Steel acquisition; capital expenditures were $138.1 million. Financing provided $1,005.1 million, primarily from $800 million of ABL borrowings and the $725 million secured-note issuance, offset by debt repurchases and issuance costs.
At March 31, long-term debt was $4,357.1 million carrying value, with $4,570.5 million of principal maturities. Cash plus stated ABL availability was $985.6 million; the ABL had $800 million drawn and $790 million of borrowing capacity available. The company reported compliance with ABL liquidity requirements, so its springing fixed-charge coverage covenant was not applicable. Total assets were $8,912.3 million and total liabilities $7,681.3 million.
Material changes and unusual items
- AK Steel acquisition: Completed March 13 for preliminary total consideration of $1.54 billion, including shares, replacement awards and assumed debt. Cliffs issued 126.8 million shares. Purchase-price allocation remains preliminary. Acquired operations contributed $217.5 million revenue from closing through quarter-end.
- Acquisition and integration costs: $42.5 million of acquisition-related costs included $23.2 million in third-party costs and $19.3 million in severance. Adjusted EBITDA excludes these costs and the $23.2 million inventory step-up amortization.
- Debt and financing: The company established a $2.0 billion ABL facility and issued $725 million of 6.75% secured notes due 2026. In April, it issued $400 million and an additional $555.2 million of 9.875% secured notes; proceeds from the additional issue funded repurchases of approximately $736.4 million principal, reducing principal debt by about $181.3 million.
- Shareholder returns: The board suspended future dividends after the April 15 payment to preserve cash. The Q1 2020 declared dividend was $0.06 per share.
Outlook, management commentary and risks
- Management said previously issued 2020 guidance should not be relied upon because of the uncertain effects of COVID-19. It expected substantial Q2 declines in automotive production and weaker demand across other served markets.
- COVID-19-related actions included idling Dearborn Works, Precision Partners facilities and about 65% of AK Tube production; halting Toledo HBI construction; and, after quarter-end, idling Northshore and Tilden mines, with restarts then expected in July and August. Mansfield was idled for an extended, uncertain period; AK Coal was indefinitely idled and held for sale. Dearborn hot strip mill, anneal and temper operations were being permanently idled.
- Management cited cost reductions, deferred or reduced capital spending, accelerated expected annual AK Steel synergies to $120 million run rate by October 2020, suspended dividends and an anticipated $150 million of CARES Act liquidity relief. It said stress tests and April financing supported its liquidity outlook for an extended downturn, while acknowledging demand and commodity-price uncertainty.
- The Toledo HBI project was temporarily on hold. Total expected project cost was approximately $1 billion excluding capitalized interest, with approximately $800 million spent by March 31 and about $150 million in contracts and purchase orders still in place.
- Key exposures include automotive concentration, steel and iron ore price volatility, customer and supplier credit risk, high leverage and refinancing needs, integration and synergy execution, idled-facility costs, environmental obligations, pension and OPEB liabilities, and possible asset impairment. Environmental obligations were $40.0 million at quarter-end, versus $2.0 million at year-end 2019, largely reflecting acquired obligations. Management said pending claims were not expected to have a material effect based on information then available, but outcomes remain uncertain.
Investor verification priorities
- Verify the final AK Steel purchase-price allocation, integration costs, and whether the projected $120 million annual synergy run rate is achieved.
- Track cash generation, ABL availability and borrowing-base eligibility, debt maturities, and the cost and use of April note proceeds.
- Monitor COVID-19 demand and facility restarts, especially automotive production, Northshore and Tilden, and the timing and cost of completing HBI.
- Assess the quality and sustainability of Mining and Pelletizing earnings, including the $34.6 million deferred-revenue recognition and sensitivity to steel and iron ore prices.
- Review environmental, pension/OPEB and other acquired liabilities, as well as the potential effect of prolonged downturn conditions on asset values and liquidity.