Cleveland-Cliffs Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; amounts below are in U.S. dollars unless noted.
Business context and results
Cliffs reported two continuing segments: U.S. Iron Ore, supplying pellets to North American steelmakers, and Asia Pacific Iron Ore, serving seaborne markets. Management committed on April 6, 2018 to a course of action expected to permanently close the Australian operation; the quarter’s results still include that business as continuing operations.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue, including freight reimbursements | $239.0 million | $461.6 million |
| Sales margin | $(3.6) million | $96.3 million |
| Operating income (loss) | $(40.0) million | $80.1 million |
| Net loss attributable to Cliffs shareholders | $(84.3) million | $(28.1) million |
| Diluted loss per share | $(0.29) | $(0.11) |
| Adjusted EBITDA | $11.6 million | $92.2 million |
| Cash used by operating activities | $142.9 million | $25.1 million |
Segments and material changes
- U.S. Iron Ore: Sales margin rose to $61.5 million from $49.0 million, despite sales volume declining to 1.611 million long tons from 3.118 million. The realized revenue rate increased 32.4% to $105.03 per long ton.
- Asia Pacific Iron Ore: Sales margin fell to $(65.1) million from $47.3 million. Sales volume declined to 1.656 million metric tons from 3.043 million; realized revenue per metric ton fell 42.8% to $31.10. The segment recorded inventory and long-lived-asset charges amid the planned closure.
- Consolidated revenue fell 48.2%. Management attributed the decline principally to lower sales volumes in both segments and weaker Asia Pacific realized prices; U.S. Iron Ore pricing improved, but did not offset the volume decline.
- Effective January 1, Cliffs adopted Topic 606 using the modified retrospective method. The adoption reduced Q1 reported revenue by $62.5 million and increased the reported net loss by $18.9 million versus results under the prior accounting method. Management expects the change to shift some U.S. Iron Ore revenue between quarters, with relatively lower Q1 and higher revenue in the remaining quarters; it does not expect a material ongoing annual net-income impact.
Financial position and liquidity
- At March 31, cash and cash equivalents were $786.6 million, down from $1,007.7 million at year-end. Current assets were $1,412.4 million and current liabilities $424.9 million.
- Long-term debt carrying value was $2,308.2 million; principal maturities totaled $2,439.4 million, including $211.3 million due in 2020 and $138.4 million in 2021. No ABL borrowings were outstanding.
- ABL borrowing-base availability was $314.1 million before $46.6 million of letters of credit and other commitments, leaving $267.5 million available. Cash plus remaining ABL capacity totaled $1,054.1 million. The company reported compliance with liquidity requirements; the facility’s springing minimum fixed-charge coverage covenant was not applicable.
- Investing cash outflow was $71.4 million, including $59.0 million of deposits for property, plant and equipment. Total deficit was $484.8 million.
Outlook, commentary and risks
- For 2018, management forecast U.S. Iron Ore sales of 20.5 million long tons and production of 20.0 million. Assuming iron ore, steel and pellet-premium prices for the rest of the year average their year-to-date levels, expected revenue was $102–$107 per long ton and cash cost was $58–$63 per long ton.
- Full-year expectations included $115 million of SG&A, approximately $130 million of interest expense and approximately $80 million of depreciation, depletion and amortization for U.S. Iron Ore and Corporate/Other.
- Capital-spending expectations were $225 million for the Toledo hot-briquetted iron (HBI) project, $85 million for sustaining capital and $50 million for Northshore upgrades. The filing also estimated $120–$140 million of future cash outflows related to closing Asia Pacific operations, within estimated total closure costs of $140–$170 million; most costs were expected in the first half of 2018 and most cash outflows within 18 months.
- Management cited stronger U.S. steel and pellet markets, higher pellet premiums and U.S. steel import tariffs as supportive factors. It also cautioned that iron ore and steel prices, Chinese demand, lower-grade ore discounts, exchange rates, fuel and energy costs, and production and closure execution could affect results.
- Other significant matters include a $54.3 million recorded contingent-claims liability related to Canadian CCAA proceedings and a proposed restructuring plan requiring creditor and court approval. Cliffs estimated a $13.0 million liability for Michigan electricity-related SSR surcharges. A separate Mesabi Metallics lawsuit seeks unspecified damages and injunctive relief; Cliffs says it intends to defend the claims.
Important facts for investors to verify
- Whether Asia Pacific closure timing, estimated costs and asset-sale proceeds develop as management expects.
- Actual U.S. Iron Ore sales volumes, realized pricing and costs compared with 2018 guidance, including the timing effects of Topic 606.
- Progress and total spending on the HBI project and Northshore upgrades, and the resulting effect on cash and liquidity.
- Final outcomes of the Canadian CCAA plan and related employee claims, Michigan SSR proceedings and Mesabi Metallics litigation.
- Debt maturities, borrowing-base availability and cash generation as closure spending and capital investment proceed.