Cleveland-Cliffs Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results. Cleveland-Cliffs is a vertically integrated North American steel producer and iron ore pellet producer; results are reported primarily through its Steelmaking segment. Comparisons with 2020 are substantially affected by the 2020 acquisitions of AK Steel and ArcelorMittal USA and are not fully like-for-like.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6.004B | $1.646B | $15.098B | $3.098B |
| Operating income (loss) | $1.649B | $38M | $2.893B | $(249)M |
| Net income (loss) | $1.282B | $2M | $2.134B | $(155)M |
| Net income (loss) attributable to Cliffs shareholders | $1.274B | $(10)M | $2.095B | $(186)M |
| Diluted EPS | $2.33 | $(0.02) | $3.69 | $(0.51) |
| Adjusted EBITDA | $1.933B | $126M | $3.806B | $67M |
Q3 gross profit was approximately $1.775B, or 29.6% of revenue; operating margin was approximately 27.5%. These are calculated from reported revenue and cost of goods sold or operating income.
- Cash flow: Nine-month operating cash flow was $1.648B, versus cash used of $51M in 2020. Investing cash outflow was $414M, including $473M of cash capital expenditures. Financing cash outflow was $1.304B. Cash ended the period at $42M.
- Debt and liquidity: Total debt carrying value was $5.376B, compared with $5.424B at year-end 2020. Long-term debt on the balance sheet was $5.350B. ABL borrowings were $1.673B, with $1.591B available after letters of credit. Cash plus ABL availability provided approximately $1.6B in liquidity.
- Balance sheet: Total assets were $18.066B and total equity was $4.290B at September 30, 2021. Inventories were $4.505B and accounts receivable $2.348B.
Performance and material changes
- Revenue rose sharply, reflecting acquired steel operations, increased shipments, and much higher steel prices. Management reported Q3 Steelmaking shipments up 3.0 million net tons and average steel selling price up $334 per net ton year over year.
- The domestic hot-rolled coil index averaged $1,500 per net ton during the first nine months, 188% above the comparable 2020 period. Steelmaking Adjusted EBITDA was $1.969B in Q3 and $3.901B for nine months.
- Management attributed stronger operating cash generation to improved results, partly offset by working-capital investment: receivables increased with prices and inventory rose amid automotive chip shortages and higher input and production costs.
- During 2021, Cliffs issued $1.0B of senior notes due 2029 and 2031, issued 20 million common shares for $322M of proceeds, redeemed or repurchased multiple debt issues, and redeemed all Series B preferred shares for approximately $1.3B. The nine-month debt extinguishment loss was $88M.
Outlook, commentary, and risks
- Management expected ample liquidity for operations and debt service over the next 12 months, subject to customer demand and steel-price volatility. It anticipated using free cash flow to reduce debt and improve financial flexibility; no specific earnings or steel-price guidance was provided.
- Expected cash capital expenditures for the next 12 months were $750M–$850M. Management said it would continue evaluating debt repayments and opportunities to extend maturities and increase unsecured debt relative to secured debt.
- On October 8, 2021, after quarter-end, Cliffs agreed to acquire Ferrous Processing and Trading for $775M, cash-free and debt-free, subject to customary adjustments and regulatory and other closing conditions. Closing was expected in Q4 2021; the filing warns completion could be delayed or fail.
- Key risks include cyclical steel and iron ore prices, the automotive semiconductor shortage and supply-chain disruptions, raw-material and energy cost volatility, customer and supplier performance, substantial debt and liquidity needs, environmental obligations, and labor and integration risks.
- Environmental obligations were $161M; asset retirement obligations were $392M. The company disclosed ongoing regulatory and litigation matters, including Burns Harbor water-related claims, and stated their ultimate costs remain uncertain. A September 2021 arbitration award required $2M plus interest to Mesabi Trust and established a royalty pricing method for certain intercompany pellet sales.
- Unusual items included a $45M COVID-19 vaccination incentive expense, primarily paid in Q3, and $129M of inventory step-up amortization in the first nine months. The ABL springing fixed-charge coverage covenant was not applicable because liquidity requirements were met.
Important facts for investors to verify
- Whether the FPT acquisition closed, its final purchase price and financing, and whether expected scrap-supply and cost benefits materialized.
- Steel pricing, shipment volumes, product mix, and the degree to which 2021 earnings reflect unusually favorable market conditions versus sustainable margins.
- Working-capital trends, cash conversion, capital spending, ABL availability, and progress in reducing debt after the preferred-stock redemption.
- Developments and potential financial exposure in environmental matters, including Burns Harbor, and changes in pension, OPEB, and asset-retirement obligations.
- The effect of the company’s large 2025 debt maturities and planned adoption of the convertible-debt accounting standard, which the filing expected could add approximately 17 million diluted shares from 2022 unless anti-dilutive.