Business context and reporting period
Cleveland-Cliffs Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The company’s March 2020 acquisition of AK Steel created two reportable segments: Steel and Manufacturing, and Mining and Pelletizing. Comparisons with 2019 are not like-for-like because AK Steel’s results are included only from March 13, 2020.
Key financial results
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue reported in operations statement | $1,646.0 | $555.6 | $3,063.2 | $1,455.8 |
| Operating income (loss) | $38.0 | $121.6 | $(249.2) | $347.6 |
| Net income (loss) attributable to Cliffs shareholders | $(10.0) | $90.9 | $(186.0) | $229.6 |
| Diluted EPS attributable to Cliffs shareholders | $(0.02) | $0.33 | $(0.51) | $0.80 |
| Adjusted EBITDA | $126.3 | $144.1 | $67.0 | $413.7 |
Segment revenue reporting includes $34.6 million of deferred revenue realization for the nine-month period, giving total segment revenue of $3,097.8 million; the operations statement presents $3,063.2 million plus a separate $34.6 million realization line. Q3 operating margin was approximately 2.3%; nine-month operating margin was approximately negative 8.1% using reported revenue.
Cash flow, debt and liquidity
- Nine-month operating cash flow was negative $53.2 million, versus positive $388.1 million in 2019. Investing cash use was $1,240.2 million, including $869.3 million for the AK Steel acquisition; cash capital expenditures were $378.9 million.
- Cash and equivalents were $56.0 million at September 30. Management’s liquidity presentation included $60.0 million of total cash (including discontinued-operation cash and excluding VIE cash) and $1,123.0 million of available ABL borrowing capacity, or $1,183.0 million combined liquidity.
- Long-term debt carrying value was $4,309.8 million; principal maturities totaled $4,490.7 million. ABL borrowings were $400.0 million, with $1,123.0 million borrowing capacity available. The company reported compliance with facility liquidity requirements; its springing fixed-charge covenant was not then applicable.
- Current assets were $2,628.8 million and current liabilities $1,214.1 million. Inventories were $1,795.1 million.
Material changes versus the prior comparable period
- Q3 revenue rose substantially following the AK Steel acquisition, but Q3 Adjusted EBITDA declined to $126.3 million from $144.1 million. Nine-month Adjusted EBITDA fell to $67.0 million from $413.7 million, reflecting pandemic-related disruption, lower Mining and Pelletizing sales and pricing, acquisition costs, and higher interest expense.
- Steel and Manufacturing generated Q3 Adjusted EBITDA of $33.3 million, following a weak first half; nine-month segment Adjusted EBITDA was negative $81.8 million. Mining and Pelletizing Adjusted EBITDA was $145.3 million in Q3 and $309.5 million year to date, down from $182.7 million and $510.7 million, respectively.
- Debt increased materially from year-end 2019, in part due to AK Steel and pandemic-era financing. The company also issued shares for the AK Steel acquisition; outstanding shares were approximately 399.2 million at September 30, versus 270.1 million at year-end 2019.
Outlook, commentary, risks and unusual items
- Management said automotive production recovered sharply in Q3 and expected a healthy pace, supported by consumer demand. Other steel markets improved less strongly; iron ore demand and U.S. steel production remained affected by the pandemic. Management cautioned that previously issued 2020 guidance should not be relied upon.
- The Toledo HBI project resumed construction in June; completion and production were expected in Q4 2020. Estimated total project spending was approximately $1 billion, excluding capitalized interest; $940.2 million had been paid by September 30. Management anticipated approximately $440 million in capital expenditures over the next 12 months.
- The pending ArcelorMittal USA transaction, announced September 28, had an approximately $1.4 billion purchase price: $505 million cash, 78,186,671 Cliffs common shares and 583,273 preferred shares. Closing was expected in Q4, subject to regulatory approvals and other conditions. Management cited approximately $150 million of identified synergies. It also identified approximately $150 million of synergies from the AK Steel combination.
- Management stated it expected ample liquidity over the next 12 months, including to fund the $505 million cash consideration for the pending transaction. COVID-19 effects remained uncertain; further demand, operating or supply-chain disruptions were possible. The company cited substantial indebtedness, commodity and steel-price volatility, acquisition integration and synergy execution, pension/OPEB obligations, and environmental and regulatory matters as risks.
- COVID-19 led to temporary idling, approximately $149 million of Steel and Manufacturing idle-related costs and $63 million of Mining and Pelletizing idle-related costs for the first nine months, reduced capital spending, and suspension of future dividends. A $132.6 million nine-month gain on debt extinguishment and $74.0 million inventory step-up amortization were notable items. The company received approximately $60 million of accelerated AMT refunds and deferred approximately $90 million of pension contributions and employer Social Security payments.
- Environmental obligations were $40.9 million at September 30. The company said pending claims and proceedings were not expected to have a material effect based on information then available, while noting that outcomes and remediation costs could be uncertain.
Important facts for investors to verify
- Whether automotive demand, steel prices and Mining and Pelletizing volumes continued to recover after quarter-end.
- Actual cash generation, capital spending and progress toward HBI completion and production.
- Debt maturities, borrowing-base availability and liquidity needs, especially after the pending ArcelorMittal USA transaction.
- Regulatory approval, closing terms, share dilution, assumed liabilities and realization of synergies for the proposed transaction.
- The scale and timing of integration costs, environmental and pension/OPEB cash requirements, and any changes in COVID-19 impacts.