Cleveland-Cliffs Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results. Cleveland-Cliffs is a vertically integrated North American steel producer, with iron ore, HBI and scrap operations supporting steelmaking and downstream businesses.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5.653 billion | $6.004 billion | $17.945 billion | $15.098 billion |
| Operating income | $187 million | $1.649 billion | $2.121 billion | $2.893 billion |
| Net income attributable to Cliffs shareholders | $152 million | $1.274 billion | $1.549 billion | $2.095 billion |
| Diluted EPS | $0.29 | $2.33 | $2.95 | $3.69 |
| Adjusted EBITDA (non-GAAP) | $452 million | $1.933 billion | $3.033 billion | $3.806 billion |
| Operating cash flow | Not separately provided for the quarter | $1.934 billion | $1.648 billion |
Q3 operating and net margins were approximately 3.3% and 2.7%, respectively, versus 27.5% and 21.3% a year earlier. For the first nine months, the respective margins were approximately 11.8% and 8.6%, compared with 19.2% and 13.9% in 2021. Steelmaking gross margin was 6% in Q3 and 14% for the nine-month period, versus 30% and 22% in the prior-year periods.
Balance sheet, liquidity and capital allocation
- At September 30, cash was $56 million; current assets were $8.325 billion and current liabilities were $3.580 billion.
- Long-term debt was $4.475 billion, down from $5.238 billion at year-end 2021; principal debt outstanding was $4.535 billion. Cash less long-term debt implies net debt of approximately $4.419 billion.
- ABL borrowings were $2.090 billion, with $2.244 billion of remaining borrowing capacity after $166 million of letters of credit. The company reported approximately $2.3 billion of total liquidity and compliance with facility requirements; the springing fixed-charge covenant was not applicable.
- Operating cash flow of $1.934 billion was partly offset by $716 million of capital expenditure and $1.199 billion of net financing cash outflow. Cash increased by $8 million during the nine months.
- The company repaid or repurchased debt, reducing principal by $834 million during the first nine months, and repurchased 10.5 million shares for $210 million. The authorized share-repurchase program was up to $1 billion.
Material changes and management commentary
- Q3 revenue declined 6% year over year, while nine-month revenue grew 19%. Q3 Steelmaking shipments fell 12% to 3.635 million net tons; the nine-month decline was 13% to 10.913 million tons.
- Q3 average steel selling price increased 2% to $1,360 per net ton, but this did not offset lower shipments and sharply higher production costs. Steelmaking Adjusted EBITDA fell 77% in Q3 and 22% for the nine-month period.
- Management attributed the margin contraction to weaker distributor and converter demand, lower shipment volumes, and higher raw-material, energy, maintenance, idle and labor costs. Favorable contract pricing partly offset those pressures.
- Management described steel markets as volatile, citing falling HRC prices, service-center destocking, recession concerns, high energy costs, and automotive supply-chain constraints. It expected demand to normalize as inventories restock and supply-chain issues ease, while warning that higher interest rates and a potential recession could hurt end markets. Management expected infrastructure, CHIPS Act and Inflation Reduction Act spending to support demand beginning in 2023.
- Expected capital expenditures for the next 12 months were $700–$800 million. Management said liquidity should be adequate for at least 12 months and expected lower retiree healthcare costs and paused VEBA funding to reduce 2023 cash use by more than $100 million versus 2022.
- Q3 included $23 million of accelerated depreciation related to the indefinitely idled Middletown coke facility and $68 million related to the indefinitely idled Indiana Harbor No. 4 blast furnace, recognized in the nine-month period. A $29 million impairment charge related to the permanent closure of Mountain State Carbon was also recorded during the nine months.
- A new labor agreement for approximately 2,000 mine employees was ratified September 30. A separate agreement covering about 12,000 employees was announced October 12, after quarter-end. Subsequent remeasurement of affected benefit plans improved OPEB funded status by $1.522 billion but decreased pension funded status by $94 million; management then expected a $125 million full-year 2022 net periodic benefit credit.
Risks, contingencies and unusual items
- Key exposures include steel and raw-material price volatility, energy costs, cyclical demand, automotive production constraints, inflation, interest rates, supply-chain and transportation disruptions, and the possibility of recession.
- The ABL balance bears variable interest; management estimated that a 100-basis-point rate increase at the September 30 borrowing level would increase annual interest expense by $21 million. Certain operations also rely on single sources of electricity and natural gas.
- Environmental, legal, pension and OPEB obligations remain relevant. Environmental obligations were $143 million; asset retirement obligations were $522 million. The Burns Harbor water-discharge matter was resolved under a consent decree requiring a $3 million civil penalty and wastewater-system enhancements.
- The filing states that pending claims were not expected, based on information then available, to have a material adverse effect, while noting that adverse rulings and final environmental remediation costs remain uncertain.
- Debt extinguishment produced a $76 million loss for the nine months, principally associated with redemption of the 9.875% 2025 secured notes and 1.500% 2025 convertible notes, partly offset by gains on other debt repurchases.
Investor verification priorities
- Track HRC prices, shipment volumes and contract repricing against the sharp Q3 decline in Steelmaking margins and Adjusted EBITDA.
- Verify whether the expected $700–$800 million of capital spending and planned debt reduction are funded by operating cash flow without materially increasing ABL borrowings.
- Monitor ABL availability, variable-rate interest costs, and the $2.090 billion of debt shown as maturing in 2025.
- Assess the realized cost and cash-flow effects of the labor agreements, pension and OPEB remeasurements, and planned healthcare savings.
- Follow demand recovery, automotive supply constraints, raw-material and energy costs, idle-facility decisions, and the adequacy of recorded environmental and closure liabilities.