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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______ .
Commission File Number:1-8944
CLEVELAND-CLIFFS INC
(Exact name of registrant as specified in its charter)
Ohio 34-1464672
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
1100 Superior Avenue, Cleveland, Ohio 44114-2589
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of May 3, 1996, there were 11,757,217 Common Shares (par value $1.00 per
share) outstanding.
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PART I - FINANCIAL INFORMATION
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED INCOME
(In Millions,
Except Per
Share Amounts)
Three Months
Ended March 31,
----------------------------------
1996 1995
---------------- ----------------
REVENUES:
Product sales and services $47.9 $51.3
Royalties and management fees 9.2 8.9
---------------- ----------------
Total operating revenues 57.1 60.2
Investment income (securities) 2.2 2.6
Other income 0.5 0.8
---------------- ----------------
TOTAL REVENUES 59.8 63.6
COSTS AND EXPENSES:
Cost of goods sold and operating expenses 46.7 49.8
Administrative, selling and general expenses 3.8 3.1
Interest expense 1.2 1.7
Other expenses 2.8 1.9
---------------- ----------------
TOTAL COSTS AND EXPENSES 54.5 56.5
---------------- ----------------
INCOME BEFORE INCOME TAXES 5.3 7.1
Income taxes
Currently payable 1.4 1.9
Deferred 0.3 0.2
---------------- ----------------
TOTAL INCOME TAXES 1.7 2.1
---------------- ----------------
NET INCOME $3.6 $5.0
================ ================
INCOME PER COMMON SHARE $0.30 $0.41
================ ================
See notes to financial statements
2
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
------------------------------------
ASSETS March 31, December 31,
------ 1996 1995
----------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 119.1 $ 139.9
Marketable securities 8.5 8.9
-------- --------
127.6 148.8
Accounts receivable - net 27.4 61.8
Inventories:
Finished products 80.0 38.0
Work in process 0.5 0.7
Supplies 16.0 17.0
-------- --------
96.5 55.7
Deferred income taxes 14.1 14.1
Other 9.3 12.3
-------- --------
TOTAL CURRENT ASSETS 274.9 292.7
PROPERTIES 262.4 260.0
Less allowances for depreciation and depletion (141.7) (140.0)
-------- --------
TOTAL PROPERTIES 120.7 120.0
INVESTMENTS IN ASSOCIATED COMPANIES 150.8 152.0
OTHER ASSETS
Long-term investments 15.7 16.3
Deferred income taxes 11.0 11.2
Other 54.5 52.4
-------- --------
TOTAL OTHER ASSETS 81.2 79.9
-------- --------
TOTAL ASSETS $ 627.6 $ 644.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $ 85.8 $ 103.5
LONG-TERM OBLIGATIONS 70.0 70.0
POST EMPLOYMENT BENEFITS 67.2 67.3
RESERVE FOR CAPACITY RATIONALIZATION 17.9 17.2
OTHER LIABILITIES 43.9 44.0
SHAREHOLDERS' EQUITY
Preferred Stock
Class A - No Par Value
Authorized - 500,000 shares; Issued - None -- --
Class B - No Par Value
Authorized - 4,000,000 shares; Issued - None -- --
Common Shares - Par Value $1 a share
Authorized - 28,000,000 shares 16.8 16.8
Issued - 16,827,941 shares
Capital in excess of par value of shares 67.9 65.2
Retained income 385.9 386.1
Foreign currency translation adjustments 0.5 0.3
Net unrealized (loss) on marketable securities (0.4) 0.1
Cost of 4,995,174 Common Shares in treasury
(1995 - 4,998,674) (123.8) (123.8)
Unearned Compensation (4.1) (2.1)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 342.8 342.6
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 627.6 $ 644.6
======== ========
See notes to financial statements
3
CLEVELAND-CLIFFS INC
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease)
in Cash and Cash
Equivalents for
Three Months Ended
March 31,
(In Millions)
---------------------------------
1996 1995
---------------- ---------------
OPERATING ACTIVITIES
Net income $3.6 $5.0
Depreciation and amortization:
Consolidated 1.7 1.4
Share of associated companies 2.6 2.7
Provision for deferred income taxes 0.3 0.3
Charges to capacity rationalization reserve 1.6 (1.1)
Other (0.6) (0.7)
---------------- ---------------
Total Before Changes in Operating Assets and Liabilities 9.2 7.6
Changes in operating assets and liabilities (22.3) (2.9)
---------------- ---------------
NET CASH FROM (USED BY) OPERATING ACTIVITIES (13.1) 4.7
INVESTMENT ACTIVITIES
Capital expenditures:
Consolidated (2.4) (2.9)
Share of associated companies (1.7) (0.8)
Other 0.8
---------------- ---------------
NET CASH (USED BY) INVESTMENT ACTIVITIES (4.1) (2.9)
FINANCING ACTIVITIES
Dividends (3.8) (3.9)
Other (0.2)
---------------- ---------------
NET CASH (USED BY) FINANCING ACTIVITIES (3.8) (4.1)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.2 (0.5)
---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20.8) (2.8)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 139.9 140.6
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $119.1 $137.8
================ ===============
Income taxes paid $0.7 $2.5
Interest paid on debt obligations $ - $1.6
See notes to financial statements
4
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statement footnotes and other information in the Company's
1995 Annual Report on Form 10-K. In management's opinion, the quarterly
unaudited financial statements present fairly the Company's financial position
and results in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
References to the "Company" mean Cleveland-Cliffs Inc and consolidated
subsidiaries, unless otherwise indicated. Quarterly results are not necessarily
representative of annual results due to seasonal and other factors.
Certain prior year amounts have been reclassified to conform to current
year classifications.
NOTE B - MCLOUTH BANKRUPTCY
On September 29, 1995, McLouth Steel Products Corporation, Inc.
("McLouth"), a significant customer, petitioned for protection under Chapter 11
of the U.S. Bankruptcy Code. The Company had periodically extended credit to
McLouth. At the time of the bankruptcy filing, the Company had an unreserved
receivable from McLouth of $5.0 million, secured by first liens on certain
McLouth fixed assets. A $2.7 million reserve against the receivable was recorded
in September, 1995.
On March 15, 1996, McLouth announced that it had begun a shutdown of
its operations due to inadequate funds. The Company had supplied approximately
120,000 tons of pellets per month to McLouth in 1996 prior to shutdown. The
Company has reserved all financial exposure from the McLouth shutdown, except
the $2.3 million unreserved receivable which is secured by first liens on
property and equipment.
5
NOTE C - ENVIRONMENTAL RESERVES
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for known
environmental problems at active mining operations, idle and closed mining
operations and other sites have been recognized based on estimates of the cost
of required investigation and remediation at each site. If the cost can only be
estimated as a range of possible amounts with no specific amount being most
likely, the minimum of the range is accrued in accordance with generally
accepted accounting principles. Estimates may change as additional information
becomes available. Actual cost incurred may vary from the estimates due to the
inherent uncertainties involved. Any potential insurance recoveries have not
been reflected in the determination of the financial reserve.
During the first three months of 1996, the Company provided $.6 million
of additional environmental reserves and made payments of $.8 million. The
additional environmental provision reflects the Company's continuing review of
estimated restoration expense at all known sites.
At March 31, 1996, the Company has an environmental reserve of $22.7
million, of which $4.4 million is current. The reserve includes the Company's
obligations related to:
* Federal and State Superfund and Clean Water Act sites where the
Company is named as a potential responsible party, including
Cliffs-Dow and Kipling sites in Michigan, the Summitville mine
site in Colorado, and the Rio Tinto mine site in Nevada, all of
which sites are independent of the Company's iron mining
operations. The reserves are based on the Company's share of
engineering estimates of remediation investigations and
remediations prepared by outside consultants engaged by the
potential responsible parties. The Company continues to evaluate
the recommendations and other means for site clean-up.
Significant site clean-up activities have taken place at
Cliffs-Dow since late 1993.
* Wholly-owned active and idle operations, including Northshore
mine and Silver Bay power plant in Minnesota, which was acquired
on September 30, 1994. The Northshore/Silver Bay reserve is based
on an environmental investigation conducted by the Company and an
outside consultant in connection with the purchase.
* Other sites, including current and former operations, for which
reserves are based on the Company's estimated cost of
investigation and remediation of sites where expenditures may be
incurred.
Estimated environmental expenditures under current laws and regulations are not
expected to materially impact the Company's consolidated financial statements.
6
NOTE D - SHAREHOLDERS' EQUITY
The 1987 Incentive Equity Plan authorizes the Company to make grants
and awards of stock options, stock appreciation rights and restricted or
deferred stock awards to officers and key employees, for up to 839,045 Common
Shares. The 1992 Incentive Equity Plan authorizes the Company to issue up to
595,000 Common Shares upon the exercise of Option Rights, as Restricted Shares,
in payment of Performance Shares or Performance Units that have been earned, as
Deferred Shares, or in payment of dividend equivalents paid with respect to
awards made under the Plan. Such shares may be shares of original issuance or
treasury shares or a combination of both. Transactions since December 31, 1995
are summarized as follows:
Stock Options: 1987 PLAN 1992 PLAN
--------- ---------
Options outstanding as of 12/31/95 56,275 16,500
Granted -0- 103,500
Exercised (1,500) -0-
Cancelled -0- -0-
------ -------
Options outstanding as of 3/31/96 54,775 120,000
Options exercisable as of 3/31/96 54,775 16,500
Restricted Awards:
Awarded and restricted as of 12/31/95 2,253 8,601
Awarded 2,000 -0-
Vested -0- (72)
Cancelled -0- -0-
------ -------
Awarded and Restricted as of 3/31/96 4,253 8,529
Performance Shares:
Allocated as of 12/31/95 -0- 88,767
Allocated -0- 53,400
Forfeited -0- -0-
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Performance Shares as of 3/31/96 -0- 142,167
Reserved for future grants or awards
as of 3/31/96 2,501 308,056
7
NOTE E - ACCOUNTING AND DISCLOSURE CHANGES
In March, 1995, the Financial Accounting Standards Board issued
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which requires the review for impairment
of long-lived assets and certain identifiable intangibles whenever significant
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Although Statement 121 is effective for years beginning
after December 15, 1995, the Company elected to adopt the provisions of this
standard for the year ended December 31, 1995. The Company has determined that
no event or change in circumstance occurred to indicate that a review for asset
impairment was required.
In October, 1995, the Financial Accounting Standards Board issued
Statement 123, entitled, "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The standard is effective for years that begin
after December 15, 1995. Management is evaluating the accounting and disclosure
alternatives; however, no significant financial statement effect is expected.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF FIRST QUARTER - 1996 AND 1995
- -------------------------------------------
Net income for the first quarter of 1996 was $3.6 million, or $.30 per
share. Comparable earnings in the first quarter of 1995 were $5.0 million, or
$.41 per share. First quarter results are traditionally not representative of
annual results due to seasonal effects.
The $1.4 million decrease in first quarter net income was mainly due to
higher operating costs (principally the effect of unusually severe winter
weather) and lower North American sales volume, partially offset by higher
Australian earnings.
Australian pre-tax earnings were $3.5 million and $1.0 million in the
first quarter 1996 and 1995, respectively. The Australian operation is projected
to cease operations in the first quarter of 1997.
* * *
The Company's managed mines in North America produced 9.0 million tons
of iron ore pellets in the first quarter, unchanged from 1995. Production
shortfalls due to the adverse weather effects in the first quarter of 1996 were
offset by the mid-1995 expansion of Northshore Mining Company capacity and
additional production at certain mines.
The Company's North American iron ore pellet sales in the first quarter
of 1996 were 1.0 million tons versus 1.2 million tons in 1995. This decline
reflected seasonal variations and the shutdown of McLouth.
LIQUIDITY
- ---------
At March 31, 1996, the Company had cash and marketable securities of
$127.6 million, including $8.4 million dedicated to fund Australian mine
obligations.
Since December 31, 1995, cash and marketable securities have decreased
$21.2 million due to increased working capital, $22.7 million, capital
expenditures, $4.1 million, and dividends, $3.8 million, partially offset by
cash flow from operating activities, $9.2 million. These changes since year-end
1995 reflect the normal seasonal pattern.
Capital additions and replacements, at the six Company-managed mines in
North America, are projected to total approximately $70 million in 1996. The
Company's share of such 1996 expenditures is expected to approximate $19
million.
On April 15, 1996, the Company announced an international joint venture
to produce and market premium quality reduced iron briquettes to the steel
industry. All definitive project documents were subsequently signed on May 8,
1996. The venture's participants, through subsidiaries, will be Cleveland-Cliffs
Inc, 46.5 percent; The LTV Corporation, 46.5 percent; and Lurgi AG of Germany, 7
percent. The Company will manage the $150 million project, to be located in
Trinidad and Tobago, and will be responsible for sales by the venture company,
Cliffs and Associates Limited. The Company's share of capital expenditures is
estimated to be $70 million, of which $17 million is expected to be spent in
1996. No project financing is envisioned.
9
The Company has $70.0 million of senior unsecured notes outstanding
with a group of private investors. The notes which have a fixed interest rate of
7.0 percent are due in December, 2005. In addition, the Company has a $100
million revolving credit agreement. No borrowings are outstanding under this
agreement which expires on March 1, 2000. The Company was in compliance with all
financial covenants and restrictions of the agreements.
In January, 1995, the Company commenced a program to repurchase up to
600,000 shares of its common shares in the open market or in negotiated
transactions. Under the continuing program the Company has repurchased 389,200
shares through May 8, 1996.
The Company initially established a reserve in 1983 for expected costs
of reorienting its mining joint ventures and facilities to adjust to changed
market conditions. The reserve balance is principally for the planned shutdown
of Savage River Mines in Tasmania, Australia, in the first quarter of 1997, and
the permanent shutdown of the Republic Mine, which was announced on January 30,
1996. The Republic Mine has been idle since 1981. The Savage River Mines
shutdown provision has been funded. Expenditures in 1996, for both Savage River
Mines and Republic Mine, are expected to approximate $10.5 million.
Pursuant to the Coal Industry Retiree Health Benefit Act of 1992
("Benefit Act"), the Trustees of the UMWA Combined Benefit Fund have assigned
responsibility to the Company for premium payments with respect to retirees,
dependents, and "orphans" (unassigned beneficiaries), representing less than
one-half of one percent of all "assigned beneficiaries" under the Benefit Act.
The Company is making premium payments under protest and is contesting the
assignments that it believes were incorrect. Premium payments by the Company
were $.2 million in the first quarter of 1996 and 1995. Additionally, in
December, 1993, a complaint was filed by the Trustees of the United Mine Workers
of America 1992 Benefit Plan against the Company demanding the payment of
premiums on additional beneficiaries related to two formerly operated joint
venture coal mines. The Company is actively contesting the complaint. Monthly
premiums are being paid into an escrow account (80% by a former joint venture
participant and 20% by the Company) by joint agreement with the Trustee, pending
outcome of the litigation. At March 31, 1996, the Company's coal retiree reserve
was $10.1 million, of which $1.5 million is expected to be paid in 1996. The
reserve is reflected at present value, using a discount rate of 7.25%.
Constitutional and other legal challenges to various provisions of the Benefit
Act by other former coal producers are pending in the Federal Courts.
10
CAPITALIZATION
- --------------
Long-term obligations effectively serviced by the Company at March 31,
1996, including the current portion, totalled $76.6 million. The following table
sets forth information concerning long-term obligations guaranteed and
effectively serviced by the Company.
(MILLIONS)
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MARCH 31, 1996 DECEMBER 31, 1995
----------------------- ------------------------------
Total Total
Long-Term Long-Term
Obligations Obligations Obligations Obligations
Effectively and Effectively and
Serviced Guarantees Serviced Guarantees
-------- ---------- -------- ----------
Consolidated $ 70.0 $ 70.0 $ 70.0 $ 70.0
Share of Unconsolidated
Affiliates 6.6 13.2* 6.3 12.9*
------ ------- ------- -------
Total $ 76.6 $ 83.2 $ 76.3 $ 82.9
====== ======= ======= =======
Ratio to Shareholders'
Equity .2:1 .2:1 .2:1 .2:1
* Includes $6.6 million of Empire Mine debt obligations which are
serviced by LTV and Wheeling and mature in December, 1996.
At March 31, 1996, the Company was in compliance with all financial
covenants and restrictions related to its medium-term, unsecured senior note
agreement.
The fair value of the Company's long-term debt (which had a carrying
value of $70.0 million) at March 31, 1996, was estimated at $67.9 million based
on a discounted cash flow analysis and estimates of current borrowing rates.
Following is a summary of common shares outstanding:
1996 1995 1994
---------- ---------- ----------
March 31 11,832,767 12,031,392 12,079,885
June 30 11,892,092 12,080,560
September 30 11,898,467 12,091,310
December 31 11,829,267 12,099,860
OUTLOOK
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North American steel producers continue to operate at high levels and
analysts' forecasts of 1996 shipments approximate the 112 million tons shipped
in 1995.
The North American iron ore industry is scheduled to produce 86 million
tons of pellets in 1996, which is slightly more than 1995 and the highest output
since 1981. Production at capacity levels in 1995 and 1996 has resulted from
U.S. and Canadian integrated steel producers increasing pellet consumption to
maximize blast furnace production. Pellet exports from eastern Canadian mines to
Europe have also increased, creating a tighter interior North American market.
11
The six North American mines managed by the Company are operating at
nearly full capacity and are scheduled to produce 40.6 million tons of iron ore
up slightly from 39.6 million tons produced in 1995. The Company's share of
scheduled production is 10.3 million tons in 1996 compared with 9.8 million tons
in 1995.
The Company's North American iron ore pellet sales for the year 1996
are now estimated to be 10.6 million tons, up slightly from the 10.4 million
tons sold in 1995. Average pellet price realization is expected to increase over
1995 due to the market strength and contractual increases.
BUSINESS RISK
- -------------
The North American steel industry has experienced high operating rates
in recent years. The Company's steel company partners and customers (with the
exception of McLouth) have generally improved their financial condition as a
result of higher earnings and increased equity capital.
The improvement in most steel companies' financial positions has
reduced the major near-term business risk faced by the Company, i.e., the
potential financial failure and shutdown of one or more of its significant
customers or partners, with the resulting loss of ore sales or royalty and
management fee income. However, if any such shutdown were to occur without
mitigation through replacement sales or cost reduction, it would represent a
significant adverse financial development to the Company. The iron mining
business has high operating leverage because "fixed" costs are a large portion
of the cost structure. Therefore, loss of sales or other income due to failure
of a customer or partner would have an adverse income effect proportionately
greater than the revenue effect.
12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) List of Exhibits - Refer to Exhibit Index on page 14.
(b) There were no reports on Form 8-K filed during the three months
ended March 31, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLEVELAND-CLIFFS INC
Date May 13, 1996 By /s/ J.S. Brinzo
----------------------- ----------------------------------
J. S. Brinzo
Executive Vice President-Finance and
Principal Financial Officer
13
EXHIBIT INDEX
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Exhibit
Number Exhibit
- ------- --------------------------------------------------- ---------
11 Statement re computation of earnings per share Filed
Herewith
27 Consolidated Financial Data Schedule submitted for
Securities and Exchange Commission information only
14