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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2023
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 Incorporation or Organization) | | (I.R.S. Employer Identification No.) | |
| | | | |
| 200 Public Square, | Cleveland, | Ohio | | 44114-2315 | |
| (Address of Principal Executive Offices) | | (Zip Code) | |
Registrant’s telephone number, including area code: (216) 694-5700
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common shares, par value $0.125 per share | | CLF | | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 515,079,211 as of April 25, 2023.
TABLE OF CONTENTS
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| | | Page Number |
| | | | | |
DEFINITIONS | | | |
| | | |
PART I - FINANCIAL INFORMATION | | | |
| ITEM 1. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | | | |
| | STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL POSITION AS OF MARCH 31, 2023 AND DECEMBER 31, 2022 | | | |
| | STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 | | | |
| | STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 | | | |
| | STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 | | | |
| | STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CHANGES IN EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 | | | |
| | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | | | |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | | |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | | |
| ITEM 4. | CONTROLS AND PROCEDURES | | | |
| | | |
PART II - OTHER INFORMATION | | | |
| ITEM 1. | LEGAL PROCEEDINGS | | | |
| ITEM 1A. | RISK FACTORS | | | |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | | | |
| ITEM 4. | MINE SAFETY DISCLOSURES | | | |
| ITEM 5. | OTHER INFORMATION | | | |
| ITEM 6. | EXHIBITS | | | |
| | | | | |
SIGNATURES | | | |
| | | |
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our,” "Cleveland-Cliffs" and “Cliffs” are to Cleveland-Cliffs Inc. and subsidiaries, collectively. References to "$" is to United States currency.
| | | | | | | | |
Abbreviation or acronym | | Term |
| | |
| | |
| | |
6.750% 2030 Senior Notes | | 6.750% Senior Guaranteed Notes due 2030 issued by Cleveland-Cliffs Inc. on April 14, 2023 in an aggregate principal amount of $750 million |
ABL Facility | | Asset-Based Revolving Credit Agreement, dated as of March 13, 2020, among Cleveland-Cliffs Inc., the lenders party thereto from time to time and Bank of America, N.A., as administrative agent, as amended as of March 27, 2020, December 9, 2020 and December 17, 2021, and as may be further amended from time to time |
Adjusted EBITDA | | EBITDA, excluding certain items such as EBITDA of noncontrolling interests, extinguishment of debt, acquisition-related expenses and adjustments, asset impairment and other, net |
AOCI | | Accumulated Other Comprehensive Income (Loss) |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
| | |
BOF | | Basic oxygen furnace |
CERCLA | | Comprehensive Environmental Response, Compensation and Liability Act of 1980 |
CHIPS Act | | The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 |
COVID-19 | | A novel strain of coronavirus that the World Health Organization declared a global pandemic in March 2020 |
Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EAF | | Electric arc furnace |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
| | |
EPA | | U.S. Environmental Protection Agency |
EPS | | Earnings per share |
EV | | Electric vehicle |
Exchange Act | | Securities Exchange Act of 1934, as amended |
FASB | | Financial Accounting Standards Board |
| | |
FMSH Act | | Federal Mine Safety and Health Act of 1977, as amended |
GAAP | | Accounting principles generally accepted in the United States |
GHG | | Greenhouse gas |
GOES | | Grain oriented electrical steel |
HBI | | Hot briquetted iron |
| | |
HRC | | Hot-rolled coil steel |
Inflation Reduction Act | | Inflation Reduction Act of 2022 |
| | |
Metric ton (mt) | | 2,205 pounds |
MSHA | | U.S. Mine Safety and Health Administration |
Net ton (nt) | | 2,000 pounds |
NOES | | Non-oriented electrical steel |
| | |
NPDES | | National Pollutant Discharge Elimination System, authorized by the Clean Water Act |
OPEB | | Other postretirement benefits |
Platts 62% price | | Platts IODEX 62% Fe Fines CFR North China |
RCRA | | Resource Conservation and Recovery Act |
| | |
SEC | | U.S. Securities and Exchange Commission |
Section 232 | | Section 232 of the Trade Expansion Act of 1962, as amended |
Securities Act | | Securities Act of 1933, as amended |
SunCoke Middletown | | Middletown Coke Company, LLC, a subsidiary of SunCoke Energy, Inc. |
| | |
| | |
| | |
U.S. | | United States of America |
| | |
| | |
| | |
VIE | | Variable interest entity |
PART I
| | |
|
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL POSITION
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
| | | | | | | | | | | |
(In millions, except share information) | March 31, 2023 | | December 31, 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 59 | | | $ | 26 | |
Accounts receivable, net | 2,216 | | | 1,960 | |
Inventories | 4,923 | | | 5,130 | |
Other current assets | 246 | | | 306 | |
Total current assets | 7,444 | | | 7,422 | |
Non-current assets: | | | |
Property, plant and equipment, net | 8,950 | | | 9,070 | |
Goodwill | 1,130 | | | 1,130 | |
Pension and OPEB, asset | 370 | | | 356 | |
Other non-current assets | 758 | | | 777 | |
TOTAL ASSETS | $ | 18,652 | | | $ | 18,755 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,173 | | | $ | 2,186 | |
Accrued employment costs | 388 | | | 429 | |
Accrued expenses | 271 | | | 383 | |
Other current liabilities | 628 | | | 551 | |
Total current liabilities | 3,460 | | | 3,549 | |
Non-current liabilities: | | | |
Long-term debt | 4,559 | | | 4,249 | |
Pension liability, non-current | 465 | | | 473 | |
OPEB liability, non-current | 572 | | | 585 | |
Deferred income taxes | 527 | | | 590 | |
Other non-current liabilities | 1,276 | | | 1,267 | |
TOTAL LIABILITIES | 10,859 | | | 10,713 | |
Commitments and contingencies (See Note 17) | | | |
Equity: | | | |
Common shares - par value $0.125 per share | | | |
Authorized - 1,200,000,000 shares (2022 - 1,200,000,000 shares); | | | |
Issued - 531,051,530 shares (2022 - 531,051,530 shares); | | | |
Outstanding - 515,052,745 shares (2022 - 513,340,779 shares) | 66 | | | 66 | |
Capital in excess of par value of shares | 4,832 | | | 4,871 | |
Retained earnings | 1,277 | | | 1,334 | |
Cost of 15,998,785 common shares in treasury (2022 - 17,710,751 shares) | (280) | | | (310) | |
Accumulated other comprehensive income | 1,651 | | | 1,830 | |
Total Cliffs shareholders' equity | 7,546 | | | 7,791 | |
Noncontrolling interest | 247 | | | 251 | |
TOTAL EQUITY | 7,793 | | | 8,042 | |
TOTAL LIABILITIES AND EQUITY | $ | 18,652 | | | $ | 18,755 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED OPERATIONS
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
| | | | | | | | | | | | |
| | Three Months Ended March 31, |
(In millions, except per share amounts) | | 2023 | | 2022 |
Revenues | | $ | 5,295 | | | $ | 5,955 | |
Operating costs: | | | | |
Cost of goods sold | | (5,196) | | | (4,706) | |
Selling, general and administrative expenses | | (127) | | | (122) | |
| | | | |
Miscellaneous – net | | (3) | | | (33) | |
Total operating costs | | (5,326) | | | (4,861) | |
Operating income (loss) | | (31) | | | 1,094 | |
Other income (expense): | | | | |
Interest expense, net | | (77) | | | (77) | |
Loss on extinguishment of debt | | — | | | (14) | |
Net periodic benefit credits other than service cost component | | 50 | | | 49 | |
Other non-operating income (expense) | | 2 | | | (2) | |
Total other expense | | (25) | | | (44) | |
Income (loss) from continuing operations before income taxes | | (56) | | | 1,050 | |
Income tax benefit (expense) | | 13 | | | (237) | |
Income (loss) from continuing operations | | (43) | | | 813 | |
Income from discontinued operations, net of tax | | 1 | | | 1 | |
Net income (loss) | | (42) | | | 814 | |
Income attributable to noncontrolling interest | | (15) | | | (13) | |
Net income (loss) attributable to Cliffs shareholders | | $ | (57) | | | $ | 801 | |
| | | | |
Earnings (loss) per common share attributable to Cliffs shareholders - basic | | | | |
Continuing operations | | $ | (0.11) | | | $ | 1.54 | |
Discontinued operations | | — | | | — | |
| | $ | (0.11) | | | $ | 1.54 | |
Earnings (loss) per common share attributable to Cliffs shareholders - diluted | | | | |
Continuing operations | | $ | (0.11) | | | $ | 1.50 | |
Discontinued operations | | — | | | — | |
| | $ | (0.11) | | | $ | 1.50 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2023 | | 2022 |
Net income (loss) | | | | | $ | (42) | | | $ | 814 | |
Other comprehensive income (loss): | | | | | | | |
Changes in pension and OPEB, net of tax | | | | | (27) | | | 1 | |
Changes in derivative financial instruments, net of tax | | | | | (152) | | | 96 | |
| | | | | | | |
Total other comprehensive income (loss) | | | | | (179) | | | 97 | |
Comprehensive income (loss) | | | | | (221) | | | 911 | |
Comprehensive income attributable to noncontrolling interests | | | | | (15) | | | (13) | |
Comprehensive income (loss) attributable to Cliffs shareholders | | | | | $ | (236) | | | $ | 898 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CASH FLOWS
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
OPERATING ACTIVITIES | | | |
Net income (loss) | $ | (42) | | | $ | 814 | |
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | | | |
Depreciation, depletion and amortization | 242 | | | 301 | |
Impairment of long-lived assets | — | | | 29 | |
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Deferred income taxes | (4) | | | 57 | |
Pension and OPEB credits | (40) | | | (27) | |
Loss on extinguishment of debt | — | | | 14 | |
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Other | 39 | | | 25 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | (257) | | | (512) | |
Inventories | 207 | | | (372) | |
Income taxes | 15 | | | 180 | |
Pension and OPEB payments and contributions | (30) | | | (60) | |
Payables, accrued employment and accrued expenses | (90) | | | 109 | |
Other, net | (79) | | | (25) | |
Net cash provided (used) by operating activities | (39) | | | 533 | |
INVESTING ACTIVITIES | | | |
Purchase of property, plant and equipment | (188) | | | (236) | |
| | | |
Other investing activities | 3 | | | 1 | |
Net cash used by investing activities | (185) | | | (235) | |
FINANCING ACTIVITIES | | | |
| | | |
| | | |
Repurchase of common shares | — | | | (19) | |
| | | |
| | | |
Repayments of debt | — | | | (360) | |
Borrowings under credit facilities | 1,646 | | | 1,715 | |
Repayments under credit facilities | (1,339) | | | (1,609) | |
| | | |
Other financing activities | (50) | | | (38) | |
Net cash provided (used) by financing activities | 257 | | | (311) | |
Net increase (decrease) in cash and cash equivalents | 33 | | | (13) | |
Cash and cash equivalents at beginning of period | 26 | | | 48 | |
Cash and cash equivalents at end of period | $ | 59 | | | $ | 35 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CHANGES IN EQUITY
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Number of Common Shares Outstanding | | Par Value of Common Shares Issued | | Capital in Excess of Par Value of Shares | | Retained Earnings | | Common Shares in Treasury | | AOCI | | Non-controlling Interests | | Total |
December 31, 2022 | 513 | | | $ | 66 | | | $ | 4,871 | | | $ | 1,334 | | | $ | (310) | | | $ | 1,830 | | | $ | 251 | | | $ | 8,042 | |
Comprehensive income (loss) | — | | | — | | | — | | | (57) | | | — | | | (179) | | | 15 | | | (221) | |
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Stock and other incentive plans | 2 | | | — | | | (39) | | | — | | | 30 | | | — | | | — | | | (9) | |
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Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (19) | | | (19) | |
March 31, 2023 | 515 | | | $ | 66 | | | $ | 4,832 | | | $ | 1,277 | | | $ | (280) | | | $ | 1,651 | | | $ | 247 | | | $ | 7,793 | |
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(In millions) | Number of Common Shares Outstanding | | Par Value of Common Shares Issued | | Capital in Excess of Par Value of Shares | | Retained Earnings (Deficit) | | Common Shares in Treasury | | AOCI | | Non-controlling Interests | | Total |
December 31, 2021 | 500 | | | $ | 63 | | | $ | 4,892 | | | $ | (1) | | | $ | (82) | | | $ | 618 | | | $ | 284 | | | $ | 5,774 | |
Comprehensive income | — | | | — | | | — | | | 801 | | | — | | | 97 | | | 13 | | | 911 | |
Redemption of convertible debt | 24 | | | 3 | | | (28) | | | — | | | — | | | — | | | — | | | (25) | |
Stock and other incentive plans | 2 | | | — | | | (16) | | | — | | | 11 | | | — | | | — | | | (5) | |
Common stock repurchases | (1) | | | — | | | — | | | — | | | (19) | | | — | | | — | | | (19) | |
Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (28) | | | (28) | |
March 31, 2022 | 525 | | | $ | 66 | | | $ | 4,848 | | | $ | 800 | | | $ | (90) | | | $ | 715 | | | $ | 269 | | | $ | 6,608 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, CONSOLIDATION AND PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income, cash flows and changes in equity for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
NATURE OF BUSINESS
We are the largest flat-rolled steel producer in North America. Founded in 1847 as a mine operator, we are also the largest manufacturer of iron ore pellets in North America. We are vertically integrated from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We are the largest supplier of steel to the automotive industry in North America and serve a diverse range of markets due to our comprehensive offering of flat-rolled steel products. Headquartered in Cleveland, Ohio, we employ approximately 27,000 people across our operations in the United States and Canada.
BUSINESS OPERATIONS
We are organized into four operating segments based on differentiated products, Steelmaking, Tubular, Tooling and Stamping, and European Operations. We primarily operate through one reportable segment – the Steelmaking segment.
BASIS OF CONSOLIDATION
The unaudited condensed consolidated financial statements consolidate our accounts and the accounts of our wholly owned subsidiaries, all subsidiaries in which we have a controlling interest and VIEs for which we are the primary beneficiary. All intercompany transactions and balances are eliminated upon consolidation.
INVESTMENTS IN AFFILIATES
We have investments in several businesses accounted for using the equity method of accounting. These investments are included within our Steelmaking segment. We review an investment for impairment when circumstances indicate that a loss in value below its carrying amount is other than temporary.
Our investment in affiliates of $134 million and $133 million as of March 31, 2023 and December 31, 2022, respectively, was classified in Other non-current assets.
SIGNIFICANT ACCOUNTING POLICIES
A detailed description of our significant accounting policies can be found in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.
RECENT ACCOUNTING PRONOUNCEMENTS
ISSUED AND ADOPTED
In September 2022, the FASB issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This guidance requires annual and interim disclosure of the key terms of outstanding supplier finance programs and a roll-forward of the related obligations. The new standard does not affect the recognition, measurement or financial statement presentation of the supplier finance program obligations. We have adopted this standard, except for the amendment on roll-forward information, which is effective for fiscal years beginning after December 15, 2023. Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for further information.
NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
ALLOWANCE FOR CREDIT LOSSES
The following is a roll-forward of our allowance for credit losses associated with Accounts receivable, net:
| | | | | | | | | | | |
(In millions) | 2023 | | 2022 |
Allowance for credit losses as of January 1 | $ | (4) | | | $ | (4) | |
Increase in allowance | (1) | | | — | |
Allowance for credit losses as of March 31 | $ | (5) | | | $ | (4) | |
INVENTORIES
The following table presents the detail of our Inventories on the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | |
(In millions) | March 31, 2023 | | December 31, 2022 |
Product inventories | | | |
Finished and semi-finished goods | $ | 2,919 | | | $ | 2,971 | |
Raw materials | 1,626 | | | 1,794 | |
Total product inventories | 4,545 | | | 4,765 | |
Manufacturing supplies and critical spares | 378 | | | 365 | |
Inventories | $ | 4,923 | | | $ | 5,130 | |
SUPPLY CHAIN FINANCE PROGRAMS
We negotiate payment terms directly with our suppliers for the purchase of goods and services. We currently offer voluntary supply chain finance programs that enable our suppliers to sell their Cliffs receivables to financial intermediaries, at the sole discretion of both the suppliers and financial intermediaries. No guarantees are provided by us or our subsidiaries under the supply chain finance programs. The supply chain finance programs allow our suppliers to be paid by the financial intermediaries earlier than the due date on the applicable invoice. Supply chain finance programs that extend terms or provide us an economic benefit are classified as short-term financings. As of March 31, 2023 and December 31, 2022, we had $27 million and $19 million, respectively, deemed as short-term financings that are classified in Other current liabilities. Additionally, as of March 31, 2023 and December 31, 2022, we had $87 million and $112 million, respectively, classified as Accounts payable.
CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures is as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Capital additions | $ | 128 | | | $ | 181 | |
Less: | | | |
Non-cash accruals | (76) | | | (55) | |
Right-of-use assets - finance leases | 16 | | | — | |
| | | |
Cash paid for capital expenditures including deposits | $ | 188 | | | $ | 236 | |
Cash payments (receipts) for income taxes and interest are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Taxes paid on income | $ | 1 | | | $ | 1 | |
Income tax refunds | (26) | | | (1) | |
Interest paid on debt obligations net of capitalized interest1 | 79 | | | 65 | |
| | | |
1 Capitalized interest was $3 million and $2 million for the three months ended March 31, 2023 and 2022, respectively. |
NOTE 3 - REVENUES
We generate our revenue through product sales, in which shipping terms indicate when we have fulfilled our performance obligations and transferred control of products to our customer. Our revenue transactions consist of a single performance obligation to transfer promised goods. Our contracts with customers define the mechanism for determining the sales price, which is generally fixed upon transfer of control, but the contracts generally do not impose a specific quantity on either party. Quantities to be delivered to the customer are determined at a point near the date of delivery through purchase orders or other written instructions we receive from the customer. Spot market sales are made through purchase orders or other written instructions. We consider our performance obligation to be complete and recognize revenue when control transfers in accordance with shipping terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring product. We reduce the amount of revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. Payment terms are consistent with terms standard to the markets we serve. Sales taxes collected from customers are excluded from revenues.
The following table represents our Revenues by market:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(In millions) | 2023 | | 2022 | | | | |
Steelmaking: | | | | | | | |
Automotive | $ | 1,870 | | | $ | 1,607 | | | | | |
Infrastructure and manufacturing | 1,297 | | | 1,542 | | | | | |
Distributors and converters | 1,258 | | | 1,829 | | | | | |
Steel producers | 701 | | | 816 | | | | | |
Total Steelmaking | 5,126 | | | 5,794 | | | | | |
Other Businesses: | | | | | | | |
Automotive | 139 | | | 122 | | | | | |
Infrastructure and manufacturing | 10 | | | 15 | | | | | |
Distributors and converters | 20 | | | 24 | | | | | |
Total Other Businesses | 169 | | | 161 | | | | | |
Total revenues | $ | 5,295 | | | $ | 5,955 | | | | | |
The following tables represent our Revenues by product line:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2023 | | 2022 |
Steelmaking: | | | | | | | |
Hot-rolled steel | | | | | $ | 1,121 | | | $ | 1,194 | |
Cold-rolled steel | | | | | 639 | | | 984 | |
Coated steel | | | | | 1,617 | | | 1,775 | |
Stainless and electrical steel | | | | | 574 | | | 551 | |
Plate | | | | | 331 | | | 421 | |
Slab and other steel products | | | | | 327 | | | 334 | |
Other | | | | | 517 | | | 535 | |
Total Steelmaking | | | | | 5,126 | | | 5,794 | |
Other Businesses: | | | | | | | |
Other | | | | | 169 | | | 161 | |
Total revenues | | | | | $ | 5,295 | | | $ | 5,955 | |
NOTE 4 - SEGMENT REPORTING
We are vertically integrated from mined raw materials and direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We are organized into four operating segments based on our differentiated products – Steelmaking, Tubular, Tooling and Stamping, and European Operations. We have one reportable segment – Steelmaking. The operating segment results of our Tubular, Tooling and Stamping, and European Operations that do not constitute reportable segments are combined and disclosed in the Other Businesses category. Our Steelmaking segment operates as the largest flat-rolled steel producer supported by being the largest iron ore pellet producer as well as a leading prime scrap processor in North America, primarily serving the automotive, distributors and converters, and infrastructure and manufacturing markets. Our Other Businesses primarily include the operating segments that provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. All intersegment transactions were eliminated in consolidation.
We evaluate performance on an operating segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel industry. In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.
Our results by segment are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Revenues: | | | |
Steelmaking | $ | 5,126 | | | $ | 5,794 | |
Other Businesses | 169 | | | 161 | |
Total revenues | $ | 5,295 | | | $ | 5,955 | |
| | | |
Adjusted EBITDA: | | | |
Steelmaking | $ | 240 | | | $ | 1,424 | |
Other Businesses | 8 | | | 29 | |
Eliminations | (5) | | | (1) | |
Total Adjusted EBITDA | $ | 243 | | | $ | 1,452 | |
The following table provides a reconciliation of our consolidated Net income (loss) to total Adjusted EBITDA:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Net income (loss) | $ | (42) | | | $ | 814 | |
Less: | | | |
Interest expense, net | (77) | | | (77) | |
Income tax benefit (expense) | 13 | | | (237) | |
Depreciation, depletion and amortization | (242) | | | (301) | |
| 264 | | | 1,429 | |
Less: | | | |
EBITDA of noncontrolling interests1 | 23 | | | 22 | |
Loss on extinguishment of debt | — | | | (14) | |
Asset impairment | — | | | (29) | |
| | | |
Other, net | (2) | | | (2) | |
Total Adjusted EBITDA | $ | 243 | | | $ | 1,452 | |
| | | |
1 EBITDA of noncontrolling interests includes the following: |
Net income attributable to noncontrolling interests | $ | 15 | | | $ | 13 | |
Depreciation, depletion and amortization | 8 | | | 9 | |
EBITDA of noncontrolling interests | $ | 23 | | | $ | 22 | |
The following summarizes our assets by segment:
| | | | | | | | | | | |
(In millions) | March 31, 2023 | | December 31, 2022 |
Assets: | | | |
Steelmaking | $ | 18,018 | | | $ | 18,070 | |
Other Businesses | 312 | | | 315 | |
Total segment assets | 18,330 | | | 18,385 | |
Corporate/Eliminations | 322 | | | 370 | |
Total assets | $ | 18,652 | | | $ | 18,755 | |
The following table summarizes our depreciation, depletion and amortization and capital additions by segment:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Depreciation, depletion and amortization: | | | |
Steelmaking | $ | (231) | | | $ | (291) | |
Other Businesses | (11) | | | (10) | |
Total depreciation, depletion and amortization | $ | (242) | | | $ | (301) | |
| | | |
Capital additions1: | | | |
Steelmaking | $ | 127 | | | $ | 175 | |
Other Businesses | 1 | | | 6 | |
| | | |
Total capital additions | $ | 128 | | | $ | 181 | |
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1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information. |
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
| | | | | | | | | | | |
(In millions) | March 31, 2023 | | December 31, 2022 |
Land, land improvements and mineral rights | $ | 1,390 | | | $ | 1,388 | |
Buildings | 927 | | | 921 | |
Equipment | 9,359 | | | 9,289 | |
Other | 244 | | | 238 | |
Construction in progress | 580 | | | 552 | |
Total property, plant and equipment1 | 12,500 | | | 12,388 | |
Allowance for depreciation and depletion | (3,550) | | | (3,318) | |
Property, plant and equipment, net | $ | 8,950 | | | $ | 9,070 | |
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1 Includes right-of-use assets related to finance leases of $424 million and $408 million as of March 31, 2023 and December 31, 2022, respectively. |
We recorded depreciation and depletion expense of $239 million and $298 million for the three months ended March 31, 2023 and 2022, respectively. Depreciation and depletion expense for the three months ended March 31, 2022 includes $68 million of accelerated depreciation related to the indefinite idle of the Indiana Harbor #4 blast furnace.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES
GOODWILL
The following is a summary of Goodwill by segment:
| | | | | | | | | | | |
(In millions) | March 31, 2023 | | December 31, 2022 |
Steelmaking | $ | 956 | | | $ | 956 | |
Other Businesses | 174 | | | 174 | |
Total goodwill | $ | 1,130 | | | $ | 1,130 | |
INTANGIBLE ASSETS AND LIABILITIES
The following is a summary of our intangible assets and liabilities:
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| March 31, 2023 | | December 31, 2022 |
(In millions) | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Intangible assets1: | | | | | | | | | | | |
Customer relationships | $ | 90 | | | $ | (15) | | | $ | 75 | | | $ | 90 | | | $ | (13) | | | $ | 77 | |
Developed technology | 60 | | | (11) | | | 49 | | | 60 | | | (10) | | | 50 | |
Trade names and trademarks | 18 | | | (4) | | | 14 | | | 18 | | | (4) | | | 14 | |
Mining permits | 72 | | | (27) | | | 45 | | | 72 | | | (27) | | | 45 | |
Supplier relationships | 29 | | | (2) | | | 27 | | | 29 | | | (1) | | | 28 | |
Total intangible assets | $ | 269 | | | $ | (59) | | | $ | 210 | | | $ | 269 | | | $ | (55) | | | $ | 214 | |
Intangible liabilities2: | | | | | | | | | | | |
Above-market supply contracts | $ | (71) | | | $ | 20 | | | $ | (51) | | | $ | (71) | | | $ | 19 | | | $ | (52) | |
| | | | | | | | | | | |
1 Intangible assets are classified as Other non-current assets. Amortization related to mining permits is recognized in Cost of goods sold. Amortization of all other intangible assets is recognized in Selling, general and administrative expenses. |
2 Intangible liabilities are classified as Other non-current liabilities. Amortization of all intangible liabilities is recognized in Cost of goods sold. |
Amortization expense related to intangible assets was $4 million for both the three months ended March 31, 2023 and 2022. Estimated future amortization expense is $9 million for the remainder of 2023 and $13 million annually for the years 2024 through 2028.
Income from amortization related to the intangible liabilities was $1 million for both the three months ended March 31, 2023 and 2022. Estimated future income from amortization is $4 million for the remainder of 2023 and $5 million annually for the years 2024 through 2028.
NOTE 7 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) |
Debt Instrument | | Issuer1 | | Annual Effective Interest Rate | | March 31, 2023 | | December 31, 2022 |
Senior Secured Notes: | | | | | | | | |
6.750% 2026 Senior Secured Notes | | Cliffs | | 6.99% | | $ | 829 | | | $ | 829 | |
Senior Unsecured Notes: | | | | | | | | |
7.000% 2027 Senior Notes | | Cliffs | | 9.24% | | 73 | | | 73 | |
7.000% 2027 AK Senior Notes | | AK Steel | | 9.24% | | 56 | | | 56 | |
5.875% 2027 Senior Notes | | Cliffs | | 6.49% | | 556 | | | 556 | |
4.625% 2029 Senior Notes | | Cliffs | | 4.63% | | 368 | | | 368 | |
4.875% 2031 Senior Notes | | Cliffs | | 4.88% | | 325 | | | 325 | |
6.250% 2040 Senior Notes | | Cliffs | | 6.34% | | 235 | | | 235 | |
ABL Facility | | Cliffs2 | | Variable3 | | 2,171 | | | 1,864 | |
Total principal amount | | | | | | 4,613 | | | 4,306 | |
Unamortized discounts and issuance costs | | | | | | (54) | | | (57) | |
Total long-term debt | | | | | | $ | 4,559 | | | $ | 4,249 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
1 Unless otherwise noted, references in this column and throughout this NOTE 7 - DEBT AND CREDIT FACILITIES to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation). |
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility. |
3 Our ABL Facility annual effective interest rate was 6.40% and 5.60%, respectively, as of March 31, 2023 and December 31, 2022. |
Subsequent to the quarter ended March 31, 2023, we issued $750 million aggregate principal amount of 6.750% 2030 Senior Notes. We used the net proceeds from the offering to repay a portion of the borrowings under our ABL Facility. Refer to NOTE 18 - SUBSEQUENT EVENTS for further information.
ABL FACILITY
As of March 31, 2023, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
The following represents a summary of our borrowing capacity under the ABL Facility:
| | | | | | | | |
(In millions) | | March 31, 2023 |
Available borrowing base on ABL Facility1 | | $ | 4,500 | |
Borrowings | | (2,171) | |
Letter of credit obligations2 | | (147) | |
Borrowing capacity available | | $ | 2,182 | |
| | |
1 As of March 31, 2023, the ABL Facility has a maximum available borrowing base of $4.5 billion. The borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment. |
2 We issued standby letters of credit with certain financial institutions in order to support business obligations, including, but not limited to, workers' compensation, employee severance, insurance, operating agreements and environmental obligations. |
DEBT MATURITIES
The following represents a summary of our maturities of debt instruments based on the principal amounts outstanding at March 31, 2023 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
$ | — | | | $ | — | | | $ | 2,171 | | | $ | 829 | | | $ | 685 | | | $ | 928 | | | $ | 4,613 | |
NOTE 8 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB plans to a significant portion of our employees and retirees. Benefits are also provided through multiemployer plans for certain union members.
The following are the components of defined benefit pension and OPEB costs (credits):
DEFINED BENEFIT PENSION COSTS (CREDITS)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2023 | | 2022 |
Service cost | | | | | $ | 8 | | | $ | 12 | |
Interest cost | | | | | 59 | | | 32 | |
Expected return on plan assets | | | | | (79) | | | (92) | |
Amortization: | | | | | | | |
Prior service costs | | | | | 4 | | | — | |
Net actuarial loss | | | | | 1 | | | 4 | |
Net periodic benefit credits | | | | | $ | (7) | | | $ | (44) | |
OPEB COSTS (CREDITS)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2023 | | 2022 |
Service cost | | | | | $ | 2 | | | $ | 11 | |
Interest cost | | | | | 16 | | | 20 | |
Expected return on plan assets | | | | | (11) | | | (10) | |
Amortization: | | | | | | | |
Prior service credits | | | | | (4) | | | — | |
Net actuarial gain | | | | | (36) | | | (3) | |
Net periodic benefit costs (credits) | | | | | $ | (33) | | | $ | 18 | |
Based on funding requirements, we made no defined benefit pension contributions for the three months ended March 31, 2023 and March 31, 2022. Based on funding requirements, we made no contributions to our voluntary employee benefit association trust plans for the three months ended March 31, 2023. We made contributions of $28 million to our voluntary employee benefit association trust plans for the three months ended March 31, 2022.
NOTE 9 - INCOME TAXES
Our 2023 estimated annual effective tax rate before discrete items as of March 31, 2023 is 22%. The estimated annual effective tax rate exceeds the U.S. statutory rate of 21%, as state income tax expense exceeds the percentage depletion in excess of cost depletion. The 2022 estimated annual effective tax rate before discrete items as of March 31, 2022 was 22%.
NOTE 10 - ASSET RETIREMENT OBLIGATIONS
The accrued closure obligation provides for contractual and legal obligations related to our indefinitely idled and closed operations and for the eventual closure of our active operations. The closure date for each of our active mine sites was determined based on the exhaustion date of the remaining mineral reserves, and the amortization of the related asset and accretion of the liability is recognized over the estimated mine lives. The closure date and expected timing of the capital requirements to meet our obligations for our indefinitely idled or closed mines is determined based on the unique circumstances of each property. For indefinitely idled or closed mines, the accretion of the liability is recognized over the anticipated timing of remediation. As the majority of our asset retirement obligations at our steelmaking operations have indeterminate settlement dates, asset retirement obligations have been recorded at present values using estimated ranges of the economic lives of the underlying assets.
The following is a summary of our asset retirement obligations:
| | | | | | | | | | | |
(In millions) | March 31, 2023 | | December 31, 2022 |
Asset retirement obligations1 | $ | 524 | | | $ | 520 | |
Less: current portion | 24 | | | 21 | |
Long-term asset retirement obligations | $ | 500 | | | $ | 499 | |
| | | |
1 Includes $279 million and $277 million related to our active operations as of March 31, 2023 and December 31, 2022, respectively. |
The following is a roll forward of our asset retirement obligation liability:
| | | | | | | | | | | |
(In millions) | 2023 | | 2022 |
Asset retirement obligation as of January 1 | $ | 520 | | | $ | 449 | |
Accretion expense | 8 | | | 7 | |
| | | |
Revision in estimated cash flows | — | | | 7 | |
Remediation payments | (4) | | | (3) | |
Asset retirement obligation as of March 31 | $ | 524 | | | $ | 460 | |
NOTE 11 - FAIR VALUE MEASUREMENTS
The carrying values of certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Other current liabilities) approximate fair value and, therefore, have been excluded from the table below. See NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING for information on our derivative instruments, which are accounted for at fair value on a recurring basis.
A summary of the carrying value and fair value of other financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 | | December 31, 2022 |
(In millions) | Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Senior notes | Level 1 | | $ | 2,388 | | | $ | 2,356 | | | $ | 2,385 | | | $ | 2,311 | |
ABL Facility - outstanding balance | Level 2 | | 2,171 | | | 2,171 | | | 1,864 | | | 1,864 | |
Total | | | $ | 4,559 | | | $ | 4,527 | | | $ | 4,249 | | | $ | 4,175 | |
The valuation of financial assets classified in Level 2 were determined using a market approach based upon quoted prices for similar assets in active markets or other inputs that were observable.
NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING
We are exposed to fluctuations in market prices of raw materials and energy sources. We may use cash-settled commodity swaps to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. Our hedging strategy is to reduce the effect on earnings from the price volatility of these various commodity exposures, including timing differences between when we incur raw material commodity costs and when we receive sales surcharges from our customers based on those raw materials.
Our commodity contracts are designated as cash flow hedges for accounting purposes, and we record the gains and losses for the derivatives in Accumulated other comprehensive income until we reclassify them into Cost of goods sold when we recognize the associated underlying operating costs. Refer to NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME for further information.
Our commodity contracts are classified as Level 2 as values were determined using a market approach based upon quoted prices for similar assets in active markets or other inputs that were observable.
The following table presents the notional amount of our outstanding hedge contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Notional Amount |
Commodity Contracts | | Unit of Measure | | Maturity Dates | | March 31, 2023 | | December 31, 2022 |
Natural Gas | | MMBtu | | April 2023 - November 2025 | | 148,340,000 | | | 127,790,000 | |
| | | | | | | | |
Electricity | | Megawatt hours | | April 2023 - January 2025 | | 2,040,206 | | | 432,043 | |
Tin | | Metric tons | | April 2023 - December 2023 | | 135 | | | 180 | |
The following table presents the fair value of our cash flow hedges and the classification in the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | |
Balance Sheet Location (In millions) | March 31, 2023 | | December 31, 2022 |
Other current assets | $ | 1 | | | $ | 15 | |
Other non-current assets | 11 | | | 30 | |
Other current liabilities | (141) | | | (87) | |
Other non-current liabilities | ( |