Cleveland-Cliffs Inc. (filed as Cliffs Natural Resources Inc.) — Q1 2015 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Unless noted, amounts are in U.S. dollars.
Business context and reporting changes
Management was refocusing the company on U.S. Iron Ore. After Bloom Lake’s restructuring filing in Canada, Cliffs deconsolidated substantially all Canadian operations effective January 27, 2015. North American Coal was classified as held for sale as of March 31. Both businesses’ results are reported in discontinued operations; continuing operations comprise U.S. Iron Ore and Asia Pacific Iron Ore.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $446.0 million | $615.5 million |
| Sales margin | $80.8 million; 18.1% | $190.0 million; 30.9% |
| Operating income | $71.9 million | $139.2 million |
| Income from continuing operations | $166.8 million | $69.7 million |
| Net loss | $(761.7) million | $(70.7) million |
| Net loss attributable to common shareholders | $(772.6) million; $(5.04) basic EPS | $(83.1) million; $(0.55) basic EPS |
| Adjusted EBITDA | $94.4 million | $208.6 million |
| Cash from operating activities | $(228.2) million | $(82.0) million |
Continuing-operations diluted EPS was $0.94 versus $0.37. The 2015 continuing result included a $313.7 million gain on extinguishment of debt; it also included $175.1 million of income tax expense, primarily reflecting a valuation allowance on U.S. deferred tax assets. The net loss chiefly reflects $928.5 million of after-tax discontinued-operations losses, including Canadian exit charges and the coal-asset impairment.
- Revenue fell 27.5%, principally because lower iron-ore prices reduced revenue by $214.5 million; higher iron-ore sales volumes partly offset the decline.
- Consolidated sales margin fell $109.2 million. U.S. Iron Ore margin declined to $80.0 million from $95.0 million; Asia Pacific Iron Ore margin dropped to $0.8 million from $66.3 million.
- Platts 62% Fe fines averaged $62 per ton, down 48.2% year over year. Realized revenue per ton decreased 15.0% in U.S. Iron Ore and 55.5% in Asia Pacific Iron Ore.
- Cost reductions helped: consolidated cost of goods sold and operating expenses declined $60.3 million, while management cited $97.0 million of cost savings and operational efficiencies before higher-volume costs.
Liquidity, debt and cash flow
- Cash and cash equivalents were $355.7 million at March 31, versus $271.3 million at December 31, 2014. Current assets were $1.524 billion and current liabilities $846.5 million.
- Operating cash outflow was $228.2 million; investing cash outflow was $15.7 million, including $15.9 million of capital expenditures. Financing provided $310.0 million, including proceeds from the new first-lien notes.
- Long-term debt carrying value was $2.881 billion. Outstanding debt principal shown in scheduled maturities was $3.072 billion, including $1.720 billion due in 2020. No ABL loans were drawn.
- The March 30 ABL facility provides up to $550 million, subject to borrowing-base limits. Reported availability was $441.1 million before letters of credit and other commitments, and $299.4 million after them. Cash plus available borrowing capacity totaled approximately $655.1 million.
- Cliffs issued $540 million of 8.25% first-lien notes due 2020 and exchanged approximately $675 million of existing notes for $544.2 million of 7.75% second-lien notes due 2020. The exchange generated much of the debt-extinguishment gain; the new second-lien notes were initially recorded at a discount.
- Common dividends were eliminated beginning in Q1; preferred dividends continued at $12.8 million per quarter. Management said the common-dividend suspension was intended to preserve about $92 million annually for debt reduction.
Outlook, risks and unusual items
- 2015 guidance: U.S. Iron Ore sales and production of 20.5 million long tons; cash production cost of $55–$60 per ton and cash cost of goods sold of $60–$65. Asia Pacific Iron Ore sales and production of about 11 million metric tons; corresponding costs of $30–$35 and $35–$40 per ton. Asia Pacific guidance assumes no 2015 sale of that business.
- Management reduced the 2015 capital expenditure outlook to $100–$125 million, SG&A to $120 million, and expected consolidated depreciation, depletion and amortization to approximately $140 million. It expected 2015 cash requirements, including capital spending and preferred dividends, to exceed operating cash flows, but believed liquidity sufficient for at least 12 months.
- Management described weak steel demand, rising steel imports, Chinese demand uncertainty and continued downward pressure on seaborne iron-ore prices. It expected U.S. steel demand support from housing and autos to be partly offset by weakness in oil and gas and inventory destocking.
- Canadian deconsolidation and exit charges totaled $818.7 million pretax, including a $476.0 million investment impairment and $342.7 million of contingent liabilities. The company said additional claims could arise and that losses above the recorded accrual could not be reasonably estimated; future changes could be material.
- North American Coal incurred a $73.4 million impairment as assets were classified held for sale. Management planned to sell the coal assets during 2015. A Chromite asset sale to Noront closed after quarter-end for $27.5 million.
- Empire operations were expected to be temporarily reduced from around late June through October 2015, subject to demand. Management also noted a potential annual fuel-and-energy cost impact of approximately $9.6 million from a 10% change in natural-gas and diesel prices, absent additional hedging.
- Contingencies include the Essar dispute, with Cliffs seeking more than $90 million and Essar counterclaiming for more than $160 million, and Canadian-related guarantee exposure. The filing also describes securities class actions and a pipeline-related coal-mining lawsuit. The company stated the ultimate outcomes of pending litigation are uncertain.
Most important facts for investors to verify
- Whether operating cash flow and the reported $655.1 million of cash-plus-ABL liquidity can support operations, debt service and planned spending amid continued price pressure.
- How the Canadian CCAA process, guarantees and contingent claims resolve, and whether Cliffs’ recorded accruals adequately reflect ultimate exposure.
- Whether U.S. Iron Ore volumes, contract realizations and cost targets meet guidance, including the effect of planned mine curtailments and customer demand.
- Whether the coal and Asia Pacific Iron Ore divestiture plans proceed on acceptable terms and without additional material impairments or costs.
- The sustainability of earnings excluding the debt-extinguishment gain, discontinued-operations charges, tax valuation allowance and other unusual items.