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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, 1994
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 April 30, 1994, there were 12,080,060 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,
----------------
1994 1993
------ ------
REVENUES
Product sales and services $40.1 $32.5
Royalties and management fees 8.0 8.2
------ ------
Total Operating Revenues 48.1 40.7
Investment income (securities) 1.2 2.3
Other income 0.2 0.3
------ ------
TOTAL REVENUES 49.5 43.3
COSTS AND EXPENSES
Cost of goods sold and operating expenses 39.5 37.3
Administrative, selling and general expenses 4.0 3.7
Interest expense 1.6 1.6
Other expenses 1.4 0.9
------ ------
TOTAL COSTS AND EXPENSES 46.5 43.5
------ ------
INCOME (LOSS) BEFORE INCOME TAXES 3.0 (0.2)
Income taxes (credits)
Currently payable 0.8 (0.1)
Deferred - -
------ ------
TOTAL INCOME TAXES (CREDITS) 0.8 (0.1)
------ ------
NET INCOME (LOSS) $2.2 ($0.1)
====== ======
INCOME (LOSS) PER COMMON SHARE $0.18 ($0.01)
====== ======
2
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
--------------------------
March 31, December 31
ASSETS 1994 1993
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $63.6 $67.9
Marketable securities 92.5 93.1
----------- -----------
156.1 161.0
Accounts receivable 15.5 36.9
Product inventories 41.3 27.5
Deferred income taxes 14.1 14.1
Other 10.8 10.5
----------- -----------
TOTAL CURRENT ASSETS 237.8 250.0
PROPERTIES 172.0 172.6
Less allowances for depreciation and depletion (137.5) (137.3)
----------- -----------
TOTAL PROPERTIES 34.5 35.3
INVESTMENTS IN ASSOCIATED COMPANIES 149.3 152.3
OTHER ASSETS
Long-term investments 57.7 57.4
Deferred income taxes 6.8 6.5
Other 44.9 43.9
----------- -----------
TOTAL OTHER ASSETS 109.4 107.8
----------- -----------
TOTAL ASSETS $531.0 $545.4
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $50.3 $64.0
LONG-TERM OBLIGATIONS 75.0 75.0
POST-EMPLOYMENT BENEFITS 71.7 71.2
RESERVE FOR CAPACITY RATIONALIZATION 22.5 21.7
OTHER LIABILITIES 32.3 32.8
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
Issued - 16,827,941 shares 16.8 16.8
Capital in excess of par value of shares 61.3 61.4
Retained income 314.4 315.8
Foreign currency translation adjustments (0.1) (0.3)
Unrealized gain on available-for-sale securities, net of tax 0.7 1.3
Cost of 4,748,056 Common Shares in treasury
(1993 - 4,763,824) (113.9) (114.3)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 279.2 280.7
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $531.0 $545.4
=========== ===========
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)
-------------------
1994 1993
------- -------
OPERATING ACTIVITIES
Net income (loss) $2.2 ($0.1)
Depreciation and amortization:
Consolidated 0.5 0.5
Share of Associated Companies 2.7 3.0
Provision for deferred income taxes - -
Charges to capacity rationalization reserve 0.7 1.0
Other 1.4 (1.1)
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Total Before Changes in Operating Asset 7.5 3.3
Changes in operating assets and liabilities
Marketable Securities (increase) decrease 0.6 (95.0)
Other (6.8) (1.7)
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NET CASH FROM (USED BY) OPERATING ACTIV 1.3 (93.4)
INVESTING ACTIVITIES
Purchase of long-term investments (1.0) (2.6)
Capital expenditures (0.9) (0.9)
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NET CASH (USED BY) INVESTING ACTIVITIES (1.9) (3.5)
FINANCING ACTIVITIES
Dividends (3.6) (3.6)
Other 0.3 -
------- -------
NET CASH (USED BY) FINANCING ACTIVITIES (3.3) (3.6)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.4) 0.1
------- -------
(DECREASE) IN CASH AND CASH EQUIVALENTS (4.3) (100.4)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67.9 128.6
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $63.6 $28.2
======= =======
Taxes paid on income $3.8 $ -
Interest paid on debt obligations $1.6 $1.6
4
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1994
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
1993 Annual Report on Form 10-K. In management's opinion, the quarterly
unaudited financial statements present fairly the Company's financial position
and results. 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 - 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 Options 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. Stock option and
restricted award transactions since December 31, 1993 are summarized as
follows:
Stock Options: 1987 Plan 1992 Plan
--------- ---------
Options outstanding as of 12/31/93 95,125 10,000
Granted -0- 500
Exercised (15,768) -0-
Cancelled -0- -0-
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Options outstanding as of 03/31/94 79,357 10,500
Options exercisable as of 03/31/94 10,000
Restricted awards:
Awarded and restricted as of 12/31/93 4,941 15,277
Awarded -0- -0-
Cancelled -0- -0-
Awarded and restricted as of 03/31/94 4,240 15,277
Reserved for future grants or awards
as of 03/31/94 6,501 569,223
5
NOTE C - INVESTMENTS IN ASSOCIATED COMPANIES
Summarized income statement information for a significant
unconsolidated subsidiary, as defined, follows:
TILDEN MINING COMPANY
(A 60% ownership interest at March 31, 1994 and 1993 carried at equity)
STATEMENT OF COSTS AND EXPENSES CHARGED TO ASSOCIATES
(In Millions)
Three Months
Ended March 31
--------------
1994 1993
----- -----
EXPENSES:
Operating costs $ 3.3 $ 3.5
Interest -- --
----- -----
TOTAL EXPENSES $ 3.3 $ 3.5
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In February, 1994, the Company reached agreement in principle with
Algoma Steel Inc. ("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.
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.
NOTE D - ENVIRONMENTAL MATTERS
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.
6
At March 31, 1994, the Company has provided an environmental reserve
of $10.1 million, of which $3.1 million is current. The components are as
follows:
o $4.2 million for the Cliffs-Dow site in Michigan, which is
independent of the Company's mining operations. The reserve is based
on an engineering study prepared by outside consultants engaged by
the responsible parties. The Company continues to evaluate the study
recommendations and other means to clean-up the site. Significant
site clean-up activities have taken place in the fourth quarter of
1993 and the first quarter of 1994.
o $5.9 million for other identified environmental exposures, including
the Arrowhead Refinery site in Minnesota, the Rio Tinto mine site in
Nevada and the Summitville mine site in Colorado, which sites are
independent of the Company's iron mining operations. The reserve is
based on the estimated cost of investigation and remediation of
sites where expenditures may be incurred. Final plans and
allocations among the involved parties are undetermined.
NOTE E - ACCOUNTING CHANGES
In November, 1992, the Financial Accounting Standards Board issued
Statement 112, "Employers' Accounting for Postemployment Benefits." Statement
112 requires accrual accounting for benefits provided to former or inactive
employees after employment but before retirement. Although Statement 112 is
effective for years beginning after December 15, 1993, the Company elected to
adopt the provisions of this standard for the year ended December 31, 1993. The
effect of adopting this statement was not material to the consolidated
financial statements.
In May, 1993, the Financial Accounting Standards Board issued
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities," which establishes standards of financial accounting and reporting
investments in equity securities that have readily determinable fair values and
for investments in debt securities. This statement, which is effective for
years beginning after December 15, 1993, has been adopted for the year ended
December 31, 1993. The effect of adopting this statement was not material to
the consolidated financial statements.
Prior year financial statements have not been restated for adoption of
the two standards. However, certain prior year amounts have been reclassified
to conform to current year classifications.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF FIRST QUARTER 1994 AND 1993
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Net income for the first quarter of 1994 was $2.2 million, or $.18 per
share. In the first quarter of 1993, the Company recorded a net loss of
$100,000, or 1 cent per share. First quarter results are traditionally not
representative of annual results due to seasonal effects.
The $2.3 million increase in first quarter results was mainly due to
higher sales realization and volume in North America, and higher sales volume
in Australia due to shipment timing, partially offset by lower net investment
income and higher operating costs. First quarter 1994 results included a net
$1.0 million after-tax loss on marketable securities due to higher interest
rates. Excluding the loss on marketable securities, earnings would have been
$3.2 million, or $.26 per share.
* * *
Cliffs' North American iron ore pellet sales in the first quarter of
1994 were 736,000 tons versus 652,000 tons in 1993. Pellet inventory at March
31, 1994 was 1.2 million tons versus 2.1 million tons one year ago. Cliffs'
pellet sales, including resale of purchased ore, are estimated to be 6.8
million tons for the year 1994 versus 6.4 million tons in 1993.
Cliffs-managed mines in North America produced 7.7 million tons of
iron ore pellets in the first quarter, down from 8.1 million tons in 1993.
Operating costs in the first quarter of 1994 were substantially higher than the
year ago quarter due to unusually severe weather, mining difficulties, and
higher employment costs. Production nominations for the full year 1994, which
have not changed from the beginning of the year, total 34.5 million tons, a 7
percent increase from 1993 production.
LIQUIDITY
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At March 31, 1994, the Company had cash and marketable securities of
$156.1 million, including $6.2 million dedicated to fund Australian mine
obligations. In addition, the full amount of a $75.0 million unsecured
revolving credit was available. The Company was in compliance with all
financial covenants and restrictions of the revolving credit agreement.
Since December 31, 1993, cash and marketable securities have decreased
$4.9 million due to increased working capital, $6.8 million, dividends, $3.6
million, capital expenditures, $1.0 million, and purchase of long-term
investments, $1.0 million, partially offset by cash flow from operating
activities, $7.5 million.
North American pellet inventories were 1.2 million tons at March 31,
1994, versus .8 million tons at December 31, 1993 and 2.1 million tons one year
ago. The increase of .4 million tons from December 31, 1993 reflects the
seasonal nature of the Great Lakes shipping season.
8
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 currently paying
premiums under protest and is evaluating each assignment and expects to contest
those it believes were incorrectly assigned. In addition, the constitutionality
of the Benefit Act is being litigated by others. 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. At March 31, 1994, the coal retiree reserve maintained by the
Company is $10.6 million, of which $1.0 million is current. First quarter 1994
payments were $.4 million. The reserve is reflected at present value,
utilizing an assumed discount rate of 7.25%. Constitutional and other legal
challenges to various provisions of the Act by other former coal producers are
pending in the Federal Courts.
CAPITALIZATION
- - --------------
Long-term obligations effectively serviced by the Company at March 31,
1994, including the current portion, totalled $88.6 million. The Company
guarantees Empire mine debt obligations of LTV and Wheeling which totalled
$20.8 million at March 31, 1994. The following table sets forth information
concerning long-term obligations guaranteed and effectively serviced by the
Company.
(Millions)
------------------------------------------------------------------
March 31, 1994 December 31, 1993
----------------------------- -----------------------------
Total Total
Long-Term Long-Term
Obligations Obligations Obligations Obligations
Effectively and Effectively and
Serviced Guarantees Serviced Guarantees
----------- ----------- ----------- -----------
CONSOLIDATED $ 75.0 $ 75.0 $ 75.0 $ 75.0
SHARE OF UNCONSOLIDATED
AFFILIATES 13.6 34.4* 13.6 34.4*
------- ------- ------- -------
TOTAL $ 88.6 $ 109.4 $ 88.6 $ 109.4
====== ======= ======= =======
RATIO TO SHAREHOLDERS'
EQUITY .3:1 .4:1 .3:1 .4:1
* Includes Empire Mine debt obligations which are serviced by LTV and Wheeling.
9
At March 31, 1994, the Company was in compliance with all financial
covenants and restrictions related to its $75.0 million, medium- term,
unsecured senior note agreement.
The fair value of the Company's long term debt (which had a carrying
value of $75.0 million) at March 31, 1994, was estimated at $78.0 million based
on a discounted cash flow analysis and estimates of current borrowing rates.
In addition, 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. The Company may convert amounts
outstanding at the end of three years to a three-year term loan. The Company
was in compliance with all financial covenants and restrictions of the
revolving credit agreement at March 31, 1994.
Following is a summary of common shares outstanding:
1994 1993 1992
-------- -------- --------
March 31 12,079,885 11,992,804 11,979,764
June 30 12,008,065 11,985,804
September 30 12,038,092 11,987,554
December 31 12,064,117 11,988,554
POTENTIAL INVESTMENTS
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The Company continues to investigate investment opportunities in the
iron ore business and the extension of its business scope to produce and supply
"reduced iron feed" for steel and iron production.
The potential reactivation of the Republic Mine to produce reduced
iron briquettes has been delayed due to the withdrawal of technology support
for a coal-fired process by the technology supplier. The earliest start-up date
for a project using this process is now estimated to be 1997.
The Company is proceeding with the evaluation of possible production
of iron carbide in South America and the Pacific Rim utilizing a natural
gas-based process.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(a) List of Exhibits - Refer to Exhibit Index on page 12.
(b) There were no reports on Form 8-K filed during the
three months ended March 31, 1994.
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 11, 1994 By /s/ J. S. Brinzo
------------------------ -------------------------
J. S. Brinzo
Senior Executive-
Finance and Principal
Financial Officer
11
EXHIBIT INDEX
Exhibit Page
Number Exhibit Number
- - ------ -------------------------------------------------------- ------
11 Statement re computation of earnings per share 13
12