MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 13(a)
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
In 1993, Cleveland-Cliffs earned $31.4 million, or $2.62 a share, excluding
the recovery on the settlement of the Company's bankruptcy claim against The
LTV Corporation (including its wholly-owned, integrated steel company
subsidiary, LTV Steel Company, Inc.; collectively "LTV"). Including the
$23.2 million net recovery, earnings were $54.6 million, or $4.55 per share.
Following is a summary of results for the years 1993, 1992, and 1991:
(In Millions, Except Per Share)
--------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------
Net Income Before Cumulative
Effect of Accounting Changes
- Amount $ 54.6 $ 30.8 $ 53.8
- Per Share 4.55 2.57 4.55
Cumulative Effect of Accounting Changes,
Net of Income Taxes
Other Post Employment Benefits (42.5)
Income Taxes 3.8
------- ------- -------
Total Cumulative Effect (38.7)
------- ------- -------
Net Income (Loss)
- Amount $ 54.6 $( 7.9) $ 53.8
======= ======= =======
- Per Share $ 4.55 $( .66) $ 4.55
======= ======= =======
Year 1991 results included a $14.4 million net gain on the sale of timberlands.
1993 VERSUS 1992
- ----------------
Revenues were $355.9 million in 1993, an increase of $28.9 million from 1992.
Revenues included a $35.7 million pre-tax recovery on the LTV bankruptcy claim
in 1993 and a $2.4 million residual recovery of a bankruptcy claim against
Wheeling-Pittsburgh Steel Corporation ("Wheeling") in 1992. Without these
items, revenues in 1993 were $320.2 million, down $4.4 million from 1992.
Revenues from product sales and services in 1993 totaled $268.1 million, up
$1.2 million from 1992, mainly due to higher sales volume, partially offset by
lower coal revenues related to the Company's exit from the coal business in
1993 and lower average iron ore sales price. North American pellet sales were
6.4 million tons in 1993 compared with 6.0 million tons in 1992. Royalty and
management fee revenues in 1993 totaled $39.7 million, a decrease of $4.1
million from 1992 due primarily to decreased production as a result of a
six-week labor strike in the third quarter of 1993 at the Empire, Hibbing
and Tilden mines, and higher payments to mineral owners.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Net income for the year 1993, excluding a $23.2 million gain on the LTV
bankruptcy settlement, was $31.4 million, an increase of $2.2 million from the
comparable 1992 period, before a $38.7 million after-tax charge in 1992 for
the cumulative effect of adopting two new accounting standards and a $1.6
million after-tax residual Wheeling bankruptcy recovery in 1992.
The earnings improvement of $2.2 million reflected a $13.0 million after-tax
provision for doubtful accounts receivable in 1992, higher sales volume,
inventory reduction, and higher Australian earnings, partially offset by an
estimated $5.4 million after-tax cost of the six-week strike, lower sales
margin, a non-recurring state tax credit in 1992, and lower royalties.
In 1993, the Company recorded a $23.2 million, or $1.93 per share, after-tax
gain on the receipt of securities in settlement of its bankruptcy claim
against LTV. In January, 1992, the Company recorded a $38.7 million, or $3.23
per share, charge for the cumulative effect of adopting new accounting
standards covering retiree medical costs and income taxes. In 1992, the
Company received a $2.4 million supplemental recovery on a prior year
settlement of its bankruptcy claim against Wheeling, which resulted in an
after-tax gain of $1.6 million, or 13 cents per share.
Including the special items, year 1993 net income was $54.6 million, versus a
net loss of $7.9 million in 1992.
1992 VERSUS 1991
- ----------------
Revenues were $327.0 million in 1992, a decrease of $36.3 million from 1991.
Revenues in 1992 included a $2.4 million pre-tax recovery on bankruptcy
claims. Revenues in 1991 included a $21.5 million pre-tax gain on the sale of
forest lands and $5.8 million of pre-tax recoveries on bankruptcy claims.
Without these items, revenues in 1992 were $324.6 million, down $11.4 million
from 1991. Revenues from product sales and services in 1992 totaled $266.9
million, a decrease of $4.7 million from 1991 mainly due to the sale of
coal interests in 1992 and reduced Savage River sales realization, partially
offset by increased service revenues. North American pellet sales were 6.0
million tons in both years. Royalties and management fee revenue in 1992
totaled $43.8 million, a decrease of $2.0 million from 1991 due primarily to
the Company's reduced coal business and higher payments to mineral owners.
Net income before the cumulative effect of accounting changes of $30.8
million in 1992 decreased $23.0 million from results in 1991. The decrease
primarily reflected a $21.5 million pre-tax gain on the sale of timberlands
in 1991 and a $17.5 million provision for doubtful accounts receivable in
1992, a less favorable sales mix, higher effective income tax rate, and lower
net interest income, partially offset by lower mine development costs, a $3.9
million credit for resolution of a state tax dispute, and higher dividend
income.
In 1992, the Company adopted Financial Accounting Standards ("FAS") 106
and 109 effective January 1, 1992. (See Note A to Consolidated Financial
Statements).
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The prior years' cumulative effect of FAS 106, "Accounting for Post-Retirement
Benefits Other than Pensions" ("OPEB"), resulted in a one-time, after-tax
charge against first quarter 1992 results of $42.5 million, or $3.54 per common
share.
The prior years' cumulative effect of FAS 109, "Accounting for Income Taxes,"
which changes the accounting for income taxes from the deferred method to the
liability method, resulted in a non-cash credit to income of $3.8 million, or
31 cents per share, in the first quarter of 1992.
OPERATING RESULTS IN 1994
- -------------------------
The following items are expected to affect 1994 results of operations versus
1993:
bullet Higher labor contract costs
bullet Lower Australian pellet price
bullet Increased pension and OPEB costs due to lower interest rates
bullet Development costs for reduced iron projects
bullet Higher average North American pellet price
bullet Extremely severe winter weather in U.S. mining regions in
early 1994
bullet Non-recurring strike impact in 1993, including inventory
liquidation
CASH FLOW AND LIQUIDITY
- -----------------------
At December 31, 1993, the Company had cash and equivalents totaling $67.9
million, including $3.1 million dedicated to fund Australian mine
obligations. During the year 1993, the Company converted $90.0 million of
cash equivalents to highly-liquid marketable securities to improve its return
on those funds. At year-end, these marketable securities were $93.1
million. In addition, the full amount of a $75.0 million unsecured revolving
credit agreement was available.
Since December 31, 1992, cash and marketable securities have increased by
$32.4 million to $161.0 million due mainly to cash flow from operating
activities (excluding changes in operating assets and liabilities), $33.8
million, and decreases in operating assets and liabilities other than
marketable securities, $36.5 million, partially offset by cash dividends,
$26.4 million, capital expenditures, $5.0 million, and debt repayments, $4.4
million.
Excluding the $93.1 million investment in marketable securities, working
capital decreased by $36.5 million primarily due to a decrease in product
inventories, $21.9 million, decreased receivables from associated companies,
$5.6 million, and lower deferred tax assets, $3.6 million.
North American pellet inventories at December 31, 1993 were .8 million tons or
$19.4 million, a decrease of .7 million tons, or $20.1 million, from December
31, 1992. The decrease reflected lower production due to the six-week strike
and increased sales, partially offset by strike-related pellet purchases.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
FOLLOWING IS A SUMMARY OF 1993 CASH FLOW:
(Millions)
-----------
Cash Flow from Operating Activities
excluding changes in operating assets and liabilities........... $ 33.8
Changes in Operating Assets and Liabilities:
Marketable Securities........................................... ( 93.1)
Other .......................................................... 36.5
--------
Net Cash (Used by) Operations.................................. ( 22.8)
Dividends......................................................... ( 26.4)
Capital Expenditures.............................................. ( 5.0)
Debt Payments..................................................... ( 4.4)
Purchase of Long-Term Investments................................. ( 3.6)
Other (net) ...................................................... 1.5
--------
Net (Decrease) in Cash and Cash Equivalents.................... $( 60.7)
Increase in short-term Marketable Securities...................... 93.1
---------
Net Increase in Cash and Marketable Securities................. $ 32.4
=========
FOLLOWING IS A SUMMARY OF KEY LIQUIDITY MEASURES:
At December 31
(Millions)
------------------------------------
1993 1992 1991
------ -------- --------
Cash and Temporary Investments
Cash and Cash Equivalents ................. $ 67.9 $128.6 $ 95.9
Marketable Securities...................... 93.1 -- --
------ ------- -------
Total $161.0 $128.6 $ 95.9
====== ======= =======
Working Capital.............................. $186.0 $188.9 $139.7
====== ======= =======
Ratio of Current Assets to Current
Liabilities................................ 3.9:1 4.1:1 3.1:1
LONG-TERM INVESTMENTS
- ---------------------
Total cash and long-term securities at December 31, 1993 dedicated to fund
the eventual Savage River closedown liability were $15.5 million, including
Australian government securities, $12.4 million, and cash of $3.1 million.
Additionally at December 31, 1993, the Company had other long-term investments
as follows:
bullet Weirton Steel Corporation 12-1/2 percent redeemable issue of
preferred stock, with a par value of $25.0 million, due in 2003.
bullet LTV Common Stock, .8 million shares with a market value of $13.2
million.
bullet Long-term government and corporate bonds, $6.9 million.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
NORTH AMERICAN IRON ORE
- -----------------------
Since the integrated steel industry in North America has experienced
difficult business conditions and substantial financial losses over a period
of years, the major business risk faced by the Company is the potential
financial failure and shutdown of one or more of its significant customers and
partners, with the resulting loss of ore sales and royalty and management fee
income. If any such shutdown were to occur without mitigation through
replacement sales volume or cost reduction, it would represent a significant
adverse financial development to the Company. The iron mining business has
relatively high operating leverage because "fixed" costs are a large portion
of the cost structure. Therefore, loss of sales volume due to failure of a
customer or other loss of business would have an adverse income effect
proportionately greater than the revenue effect.
Sharon Steel Corporation ("Sharon"), which was a significant customer,
suspended its blast furnace operations in September, 1992, and filed for
protection from its creditors under Chapter 11 of the U. S. Bankruptcy Code
on November 30, 1992. The Company's sales of iron ore to Sharon, which for
the year 1992 totaled .7 million tons through August, were suspended when
Sharon's blast furnace operations were idled prior to the bankruptcy filing.
No shipments of iron ore were made to Sharon in the fourth quarter of 1992 or
for the entire year 1993. Sharon is attempting to reorganize, but it is
highly unlikely that such reorganization efforts will be successful in
restarting blast furnace operations. The Company was able to replace the lost
Sharon sales for the year 1993.
Another significant customer of the Company, McLouth Steel Corporation
("McLouth") continues to encounter financial difficulties. Temporary
concessions were extended by the Company, other suppliers and McLouth employees
during 1993. Sales to McLouth totaled 1.5 million tons in 1993 which
represented 23 percent of sales volume and contributed $8.9 million to net
income before fixed cost absorption. Included in the Company's December 31,
1993 inventory was .2 million tons consigned to McLouth in accordance with
long-standing practice.
The Company has fully reserved its accounts receivable from McLouth and Sharon.
Algoma Steel Inc. ("Algoma"), one of the Company's significant partners,
emerged from Canadian financial restructuring proceedings on June 5, 1992. The
Company purchased Algoma's Tilden Mine hematite production rights as part of
the restructuring in return for certain commercial and financial benefits.
Algoma also renewed its guarantee of the Tilden obligations of Algoma's
wholly-owned subsidiary.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In February, 1994, the Company reached agreement in principle with Algoma and
Stelco Inc. to restructure and simplify the Tilden Mine operating agreement
effective January 1, 1994. The principal terms of the new agreement are (1)
the participants' tonnage entitlements and cost-sharing will be based on a
6.0 million ton target normal production level instead of the previous 4.0
million ton base production level, (2) the Company's interest in the Tilden
Magnetite Partnership increases from 33.33% to 40.0% with an associated
increase in the Company's obligation for mine costs, (3) the Company will
receive an increased royalty, (4) the Company has the right to supply any
additional iron ore pellet requirements of Algoma from Tilden or the Company,
and (5) a partner may take additional production with certain fees paid to the
Partnership. The agreement is not expected to have a material financial effect
on the Company's consolidated financial statements. In a related transaction,
Algoma repaid $4.2 million to the Company on December 30, 1993, in
connection with cancellation of the Hematite Entitlement Agreement. The
Company's investments in associated companies, $152.2 million, reflect an $8.8
million reduction, related to such cancellation. The new Tilden arrangements
reflect an underlying plan of operating improvements and will allow a
lengthening of the magnetite ore reserve life. Additional capital and
development expenditures are expected in connection with the improvement plan.
On June 28, 1993, LTV, another significant partner of the Company, emerged
from Chapter 11 bankruptcy. In final settlement of its allowed claim, the
Company received 2.3 million shares of LTV Common Stock and 4.4 million
Contingent Value Rights. The settlement, reflected in the Company's operating
results, totaled $35.7 million before tax and $23.2 million after-tax.
Labor contracts expired at four of the mines managed by the Company during
1993. The Wabush Mines' contract expired on February 28, 1993; however, the
employees have continued to work under the terms of the previous agreement.
Six-year, no strike agreements between the United Steelworkers of America and
three U.S. iron ore mining operations managed by the Company were ratified by
the union members after the six-week strike that began August 1. The
agreements cover the Empire and Tilden Mines in Michigan and the Hibbing Mine
in Minnesota.
The agreements follow the wage and signing bonus pattern of the earlier
settlements by major steel companies, grant higher pension benefits during
the six-year term, increase vacation time and incentive pay, and allow certain
work force productivity gains. On-going employment costs per hour are
expected to rise approximately 10 percent by July 31, 1996. At that time, the
agreements can be reopened for limited economic and other matters, subject to
binding arbitration or conformity to certain steel company contract changes.
Important objectives achieved were the six-year term, limited economic
reopener, and improved work rule flexibility. Also, the agreements do not
have the employment guarantee, joint decision-making, and asset lien
provisions of the recent steel company labor contracts. The union obtained
certain economic gains beyond the steel company pattern.
The Company's inventory and contingent purchase agreements in 1993 were
sufficient to satisfy customer requirements during the strike period.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Domestic steel shipments, which were 88 million tons in 1993, are expected to
exceed 90 million tons in 1994, the highest level since 1979. Continuing
strong demand from the automotive industry combined with improving markets for
other steel products are resulting from strengthening U.S. and Canadian
economies.
The five North American mines operated by the Company have initially scheduled
34.5 million tons of pellet production for 1994 which is nearly 100 percent
of active capacity. The Company's share of scheduled production is 6.0
million tons. In 1993, total production at the Company-managed mines was
32.3 million tons and the Company's share totaled 5.3 million tons. Production
schedules are subject to change throughout the year.
The Company's North American pellet sales under the Company's current
multi-year contracts are expected to total about 5.0 million tons in 1994,
which represents 83% of its 1994 production nomination. In 1993, total pellet
sales were 6.4 million tons including spot market sales. Each year, the
Company makes substantial sales in the spot market. Multi-year contracts
generally have pre-determined price escalation provisions.
AUSTRALIA
- ---------
Savage River Mines in Tasmania, Australia operated at its capacity of 1.5
million tons in 1993 with continued satisfactory financial results. A decrease
in the international pellet price in 1993 was largely offset by a favorable
currency exchange effect. International iron ore prices are expected to
decrease in 1994 due to weak markets in Japan and Europe. The current
operation is projected to continue until early 1997. Potential mine life
extension is under study. Savage River closedown costs are included in
the Capacity Rationalization Reserve with investments in Australian
government securities and cash to fund the obligations.
COAL
- ----
The Company's sale of the Turner Elkhorn Mining Company and the termination
of management and administrative support of the Chisholm Mine in early 1993
completed the Company's exit from the coal business. No material effect on the
Company's consolidated financial statements resulted.
Pursuant to the Coal Industry Retiree Health Benefit Act of 1992, the
Trustees of the UMWA Combined Benefit Fund have assigned responsibility to the
Company for premium payments with respect to 366 retirees and dependents and
111 "orphans" (unassigned beneficiaries), representing less than one-half of
one percent of all "assigned beneficiaries." The Company is evaluating each
assignment and expects to contest those it believes were incorrectly
assigned. Premium payments by the Company in 1993 were $.3 million. 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 75 beneficiaries related to two formerly operated
joint venture coal mines. The Company is actively contesting the complaint.
Monthly premium payments 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. In 1993, the Company
increased its coal retiree reserve to $11.0 million, of which $1.3 million is
current, net of the 1993 payments. The reserve is reflected at present
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
value, utilizing an assumed discount rate of 7.25%. The Company's liability
has been adequately covered in its capacity rationalization costs.
Constitutional and other legal challenges to various provisions of the Act by
other former coal producers are pending in the Federal Courts.
ACTUARIAL ASSUMPTIONS
- ---------------------
As a result of declining long-term interest rates, the Company has
re-evaluated the interest rates used to calculate its pension and OPEB
obligations. Financial accounting standards require that the discount rates
used to calculate the actuarial present value of such benefits reflect the
rate of interest on high quality fixed income securities. The discount rates
used to calculate the Company's pension and OPEB obligations were reduced
to 7.25% at December 31, 1993. At December 31, 1992, the discount rates
used for determining pension and OPEB obligations were 8.0% and 8.5%,
respectively. The Company also reduced its assumed long-term rate of return
on pension assets from 9% at December 31, 1992 to 8% at December 31, 1993.
The decrease in interest rates did not affect year 1993 financial results;
however, in 1994 and subsequent years, the Company will realize a non-cash
decrease in pension credits and a non-cash increase in OPEB expense. The
decrease in annual net income resulting from the lower discount rate and
decreased long-term rate of return assumptions is estimated to approximate $1.7
million.
ENVIRONMENTAL COSTS
- -------------------
The Company's policy is to conduct business in a manner that promotes
environmental quality. Environmental costs at active operations are included
in current operating and capital costs. The Company's environmental
obligations for idle and closed mining and other sites have been recognized
based on specific estimates for known conditions and required
investigations. Any potential insurance recoveries have not been reflected
in the determination of the reserve.
At December 31, 1993, the Company has provided an environmental reserve of
$10.3 million, of which $3.1 million is current. The components are as
follows:
bullet $4.2 million for the Cliffs-Dow sites under the Federal Superfund
and Michigan Environmental Response and Liability Act, based on a
clean-up plan prepared by outside consultants engaged by the
several responsible parties. Remediation activities are in progress
at these non-mining sites and costs to date are consistent with the
estimate.
bullet $6.1 million for other actual and potential exposures for
long-terminated activities, including the Arrowhead Refining site
in Minnesota, the Rio Tinto mine site in Nevada, and the
Summitville mine and Colorado School of Mining Research Institute
sites in Colorado, which are independent of the Company's iron
mining operations. The reserve is based on the estimated cost of
investigation and remediation, to the extent determinable, of
sites where expenditures may be required. Final obligations,
plans and cost allocations among the involved parties are
undetermined. Therefore, additional costs could be incurred but the
range is unknown.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Environmental expenditures are not expected to materially impact the Company's
consolidated financial statements. However, operations owned and managed by
the Company are subject to numerous federal, state and local environmental
laws and regulations. These laws and regulations have been constantly
evolving and becoming more complex and more stringent. Their impact may not be
immediately known or determinable.
CAPITAL EXPENDITURES
- --------------------
The Company's corporate strategy includes extending its business scope to
produce and supply direct reduced iron for steelmakers. Current activities
involve investigation of various potential projects, including reactivation
of the Company's idle Republic Mine to produce hot briquetted iron in
conjunction with several steel companies. A commercial decision could occur on
this $65 to $75 million project during the first half of 1994 with production
beginning by late 1995 or early 1996. The Company expects to have approximately
a 33 percent interest in the project or, depending on contractual
arrangements, a higher interest. The Company's share of the project
expenditures in 1994 would range between $5.1 and $15.0 million. The project
may be organized as a partnership with financing of a substantial portion of
the investment. Other capital expenditures in 1994 are expected to total
$8.3 million, including the Company's $4.7 million share of associated
companies' expenditures. The year 1993 capital expenditures totaled $5.0
million.
CAPITALIZATION
- --------------
On May 21, 1992, the Company completed a private placement of $75.0 million of
medium term, unsecured senior notes pursuant to agreements with an insurance
company group. The proceeds were partially used to retire the Company's existing
$41.0 million term loan. One-third of the notes have an interest rate of 8.5
percent, and two-thirds have an interest rate of 8.8 percent. The notes require
annual repayments of principal beginning in 1995 and 1996, respectively, with
final maturities of 1999 and 2002, respectively. The aggregate maturities for the
five years succeeding December 31, 1993 are $5.0 million for 1995 and $12.1
million for 1996 through 1998. Following is a summary of long-term obligations:
LONG-TERM OBLIGATIONS AT DECEMBER 31
(In Millions)
------------------------------------------------------------------------------------
Effectively Serviced Obligations
----------------------------------------------
Share of
Associated Guaranteed Total
Consolidated Companies Total Obligations Obligations
------------ ---------- ----- ----------- -----------
1993 $ 75.0 $ 13.6 $ 88.6 $ 20.8 $109.4
1992 75.1 17.0 92.1 27.9 120.0
1991 41.2 23.8 65.0 35.4 100.4
On April 30, 1992, the Company entered into a $75.0 million three-year
revolving credit agreement. No borrowings are outstanding under the revolving
credit facility which expires on April 30, 1995.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
At December 31, 1993, guaranteed obligations principally
represented the Empire Mine debt obligations of LTV and
Wheeling. In June, 1993, LTV emerged from bankruptcy pursuant
to its reorganization plan approved by the Bankruptcy Court.
As part of the settlement of the Company's claim asserted
against LTV and in the bankruptcy proceedings, LTV has
affirmed its ongoing interest in the Empire Mine,
substantially reducing the Company's financial exposure on the
guaranteed obligations. On January 1, 1992, the Company
transferred 2.4875% of its Empire Mine interest to Wheeling
which reduced the Company's share of effectively serviced
Empire Mine debt obligations by $2.3 million with a
corresponding increase in guaranteed obligations. The Empire
Mine long-term debt is scheduled to be fully extinguished
in December, 1996 (the Company's share of Empire long-term
debt principal payments is $4.3 million in 1994 and 1995 and
$3.9 million in 1996).
The ratio of effectively serviced long-term obligations to
shareholders' equity was .3:1 at December 31, 1993 versus
.3:1 at December 31, 1992, and .2:1 at December 31, 1991.
(The "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains two graphs,
one entitled "Cumulative Earnings & Dividends" and the
other entitled "Components of Invested Capital". For a
description of the graph of "Cumulative Earnings & Dividends"
see graph A in Appendix A to this report, and for a
description of the graph of "Components of Invested Capital"
see graph B in Appendix A to this report.)
40