Cleveland-Cliffs Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. Cleveland-Cliffs is a vertically integrated North American flat-rolled steel and iron ore pellet producer, with steelmaking, scrap processing, mining, and downstream businesses. Its largest end market is automotive. The company reported one reportable segment, Steelmaking.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $22.989 billion | $20.444 billion |
| Operating income | $1.939 billion | $4.012 billion |
| Net income | $1.376 billion | $3.033 billion |
| Net income attributable to Cliffs shareholders | $1.335 billion | $2.988 billion |
| Diluted EPS | $2.55 | $5.36 |
| Adjusted EBITDA | $3.169 billion | $5.277 billion |
| Cash from operating activities | $2.423 billion | $2.785 billion |
| Capital expenditures | $943 million | $705 million |
| Free cash flow, non-GAAP | $1.480 billion | $2.080 billion |
Revenue rose 12%, while net income, diluted EPS, Adjusted EBITDA, and free cash flow declined materially. Gross margin, calculated from revenue less cost of goods sold, was approximately 11.0%, compared with 22.2% in 2021; operating margin was approximately 8.4%, compared with 19.6%.
- Steel shipments fell 7% to 14.751 million net tons from 15.886 million. Average selling price for steel products increased to $1,360 per net ton from $1,187.
- Steelmaking revenue increased 12% to $22.383 billion, but segment Adjusted EBITDA declined to $3.089 billion from $5.280 billion. The company cited higher production costs, lower shipments, and weaker distributor demand; higher selling prices partly offset these pressures.
- Cash and cash equivalents were $26 million at year-end. Long-term debt principal was $4.306 billion, including $1.864 billion outstanding under the ABL Facility. ABL availability was $2.486 billion after borrowings and letters of credit; the company reported total liquidity of approximately $2.5 billion.
- Total debt principal decreased about $1.1 billion during 2022. The company repurchased $351 million of notes at an average of 92% of par and repurchased 12.5 million shares for $240 million. It also redeemed its remaining 9.875% 2025 secured notes, convertible notes, and IRBs. Debt-extinguishment loss was $75 million.
- Total liabilities were $10.713 billion, down from $13.201 billion, while shareholders’ equity increased to $7.791 billion from $5.490 billion. Pension and OPEB liabilities fell substantially, with management citing a $2.1 billion reduction in net pension and OPEB liabilities.
Material changes versus 2021
- Domestic hot-rolled coil prices averaged $1,011 per net ton, down 36% from 2021; prices fell below $700 in the fourth quarter. Despite that decline, Cliffs’ fixed-price contracts and lagging price mechanisms helped lift its reported average steel selling price.
- Steelmaking gross margin declined $2.053 billion. Management attributed approximately $3.6 billion of pressure to higher production costs, about $700 million to lower sales volumes, and approximately $2.5 billion of offset from higher selling prices.
- Operating cash flow decreased $362 million. Lower earnings were partly offset by a year-over-year improvement in working-capital cash flows.
- Production capacity was rationalized: Indiana Harbor No. 4 blast furnace was indefinitely idled, and Northshore mining operations were temporarily idled in mid-2022. Raw steel production was 16.8 million net tons, down from 18.3 million.
- Mountain State Carbon was permanently closed, resulting in a $29 million impairment charge. The Cleveland Works No. 5 blast furnace reline was completed in the third quarter.
Outlook, risks, and unusual items
- Management expected 2023 fixed-price contract values to be significantly higher than 2022 and anticipated lower costs as inflation eased, production improved, and maintenance spending normalized. These are expectations, not formal revenue or earnings guidance.
- Planned capital expenditures for the next 12 months were $700 million to $750 million, primarily sustaining investment; management expected no major investments until at least 2025. The company said it believed raw materials and energy supplies were adequate for 2023.
- Management pointed to potential demand support from automotive recovery and U.S. infrastructure, semiconductor, clean-energy, and EV-related legislation. Risks include recession and interest rates, automotive supply-chain constraints, steel-price volatility, imports and global capacity, elevated input and energy costs, and labor availability.
- Environmental and regulatory exposures include proposed particulate-matter and ozone rules and unresolved potential requirements for selenium, sulfate, and mercury controls. The timing and cost of several potential requirements were not estimable and could be material. Environmental obligations were $141 million and asset retirement obligations were $520 million at year-end.
- Significant litigation includes the JSW Steel antitrust case, which was dismissed with prejudice by the district court; JSW appealed, with oral argument held in February 2023. JSW sought more than $500 million in damages. Mesabi Metallics litigation also remained ongoing. Management stated it did not believe pending claims would materially affect consolidated results, based on information then available.
- The Burns Harbor water-discharge matter was resolved through a consent decree effective May 6, 2022, requiring wastewater-system enhancements and a $3 million civil penalty. The company also disclosed a $29 million impairment for the Mountain State Carbon closure and a $75 million debt-extinguishment loss.
- The ABL Facility matures in March 2025 and has variable-rate borrowings; a 100-basis-point rate change at year-end borrowing levels would change annual interest expense by approximately $19 million. The company reported compliance with facility covenants.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2022. The auditor identified mineral-reserve estimates and their effects on asset retirement obligations, impairment analysis, and depreciation as a critical audit matter.
Important facts for investors to verify
- Whether 2023 contract repricing and improved volumes offset continued spot-price weakness, cost inflation, and lower utilization.
- Debt and ABL borrowing trends, variable-rate interest expense, liquidity, and the March 2025 ABL maturity.
- Progress on the expected Northshore restart, capacity utilization, capital spending, and the anticipated cost normalization.
- Actual costs, timing, and operational implications of environmental rulemakings and mine water-treatment obligations.
- Developments in the JSW appeal and Mesabi Metallics litigation, and any resulting financial exposure.
- Changes in pension and OPEB assumptions, mineral-reserve estimates, and related asset retirement obligations, given their sensitivity to actuarial and operating assumptions.