- -------------------------------------------------------------------------------
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, 1995
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 28, 1995, there were 11,965,842 Common Shares (par value $1.00 per
share) outstanding.
==============================================================================
PART I - FINANCIAL INFORMATION
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED INCOME
(In Millions,
Except Per
Share Amounts)
Three Months
Ended March 31,
----------------
1995 1994
----- -----
REVENUES:
Product sales and services $51.3 $40.1
Royalties and management fees 8.9 8.0
----- -----
Total operating revenues 60.2 48.1
Investment income (securities) 2.6 1.2
Other income 0.8 0.2
----- -----
TOTAL REVENUES 63.6 49.5
COSTS AND EXPENSES:
Cost of goods sold and operating expenses 49.8 39.5
Administrative, selling and general expenses 3.1 4.2
Interest expense 1.7 1.6
Other expenses 1.9 1.2
----- -----
TOTAL COSTS AND EXPENSES 56.5 46.5
----- -----
INCOME BEFORE INCOME TAXES 7.1 3.0
Income taxes
Currently payable 1.9 0.8
Deferred 0.2 -
----- -----
TOTAL INCOME TAXES 2.1 0.8
----- -----
NET INCOME $5.0 $2.2
===== =====
INCOME PER COMMON SHARE $0.41 $0.18
===== =====
See notes to financial statements
2
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
------------------------
March 31, December 31,
ASSETS 1995 1994
------ -------- ------------
CURRENT ASSETS
Cash and cash equivalents $137.8 $140.6
Marketable securities 0.7 0.8
------ ------
138.5 141.4
Accounts receivable - net 23.9 65.9
Inventories:
Finished products 52.5 24.5
Work in process 0.8 0.6
Supplies 13.5 14.6
------ ------
66.8 39.7
Deferred income taxes 14.7 14.7
Other 6.0 7.4
------ ------
TOTAL CURRENT ASSETS 249.9 269.1
PROPERTIES 251.5 248.7
Less allowances for depreciation and depletion (139.6) (138.3)
------ ------
TOTAL PROPERTIES 111.9 110.4
INVESTMENTS IN ASSOCIATED COMPANIES 150.7 151.7
OTHER ASSETS
Long-term investments 25.7 27.1
Deferred income taxes 8.7 8.7
Other 51.7 49.5
------ ------
TOTAL OTHER ASSETS 86.1 85.3
------ ------
TOTAL ASSETS $598.6 $616.5
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term obligations $5.0 $5.0
Other 80.2 94.6
------ ------
TOTAL CURRENT LIABILITIES 85.2 99.6
LONG-TERM OBLIGATIONS 70.0 70.0
POST EMPLOYMENT BENEFITS 74.5 74.4
RESERVE FOR CAPACITY RATIONALIZATION 24.0 25.7
OTHER LIABILITIES 35.9 35.4
SHAREHOLDERS' EQUITY
Preferred Stock
Class A - No Par Value
Authorized - 500,000 shares; Issued - None - -
Class B - No Par Value
Authorized - 4,000,000 shares; Issued - None - -
Common Shares - Par Value $1 a share
Authorized - 28,000,000 shares 16.8 16.8
Issued - 16,827,941 shares
Capital in excess of par value of shares 64.9 63.1
Retained income 344.9 343.8
Foreign currency translation adjustments 0.4 0.9
Net unrealized (loss) on marketable securities 0.9 1.5
Cost of 4,796,549 Common Shares in treasury
(1994 - 4,728,081) (116.1) (113.4)
Unearned Compensation (2.8) (1.3)
------ ------
TOTAL SHAREHOLDERS' EQUITY 309.0 311.4
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $598.6 $616.5
====== ======
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)
-------------------
1995 1994
-------- --------
OPERATING ACTIVITIES
Net income $5.0 $2.2
Depreciation and amortization:
Consolidated 1.4 0.5
Share of associated companies 2.7 2.7
Provision for deferred income taxes 0.3
Charges to capacity rationalization reserve (1.1) 0.7
Other (2.4) 1.4
-------- --------
Total Before Changes in Operating Assets and Liabilities 5.9 7.5
Changes in operating assets and liabilities
Marketable securities decrease 0.1 0.6
Other (1.3) (6.8)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 4.7 1.3
INVESTMENT ACTIVITIES
Sale (Purchase) of long-term investments-net 0.8 (1.0)
Capital expenditures:
Consolidated (2.9) (0.3)
Share of associated companies (0.8) (0.6)
-------- --------
NET CASH (USED BY) INVESTMENT ACTIVITIES (2.9) (1.9)
FINANCING ACTIVITIES
Dividends (3.9) (3.6)
Other (0.2) 0.3
-------- --------
NET CASH (USED BY) FINANCING ACTIVITIES (4.1) (3.3)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.5) (0.4)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2.8) (4.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 140.6 67.9
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $137.8 $63.6
======== ========
Income taxes paid $2.5 $3.8
Interest paid on debt obligations $1.6 $1.6
See notes to financial statements
4
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
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
1994 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 Option Rights, as Restricted Shares,
in payment of Performance Shares or Performance Units that have been earned, as
Deferred Shares, or in payment of dividend equivalents paid with respect to
awards made under the Plan. Such shares may be shares of original issuance or
treasury shares or a combination of both. Transactions since December 31, 1994
are summarized as follows:
Stock Options: 1987 Plan 1992 Plan
--------- ---------
Options outstanding as of 12/31/94 68,682 13,500
Granted -0- -0-
Exercised (4,532) (500)
Cancelled -0- -0-
------- -------
Options outstanding as of 3/31/95 64,150 13,000
Options exercisable as of 3/31/95 64,150 13,000
Restricted Awards:
Awarded and restricted as of 12/31/94 3,996 9,268
Awarded -0- -0-
Vested (180) (208)
Cancelled -0- -0-
------- -------
Awarded and Restricted as of 3/31/95 3,816 9,060
Performance Shares:
Allocated as of 12/31/94 -0- 41,317
Allocated -0- 47,450
Forfeited -0- -0-
------- -------
Performance Shares as of 3/31/95 -0- 88,767
Reserved for future grants or awards
as of 3/31/95 4,501 469,956
5
NOTE C - INVESTMENTS IN ASSOCIATED COMPANIES
In February, 1994, the Company reached general agreement 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
are 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 has increased from 33.33% to 40.0% with an
associated increase in the Company's obligation for its share of mine costs,
(3) the Company is receiving a higher royalty, (4) the Company has the right to
supply any additional iron ore pellet requirements of Algoma from Tilden or the
Company, and (5) any partner may take additional production with payment of
certain fees to the Partnership. The parties implemented the general agreement
effective January 1, 1994 and are resolving the detailed provisions of the
definitive agreement. The agreement has not had a material financial effect on
the Company's consolidated financial statements.
NOTE D - ENVIRONMENTAL MATTERS
The Company's policy is to conduct business in a manner that promotes
environmental quality. The Company's obligations for any environmental problems
at wholly-owned active mining operations and idle and closed mining and other
sites have been recognized based on specific estimates for known conditions and
required investigations. Environmental costs of associated companies for active
operations are included in current operating and capital costs. Any potential
insurance recoveries have not been reflected in the determination of the
financial reserve.
At March 31, 1995, the Company has an environmental reserve of $8.1
million, of which $1.5 million is current. The reserve includes the Company's
obligations related to:
o Federal and State Superfund and Clean Water Act sites where the
Company is named as a potential responsible party, including
Cliffs-Dow and Kipling sites in Michigan, the Arrowhead Refinery
site in Minnesota, the Summitville mine site in Colorado, and the
Rio Tinto mine site in Nevada, all of which sites are independent
of the Company's iron mining operations. The reserves are based on
the Company's share of engineering study estimates prepared by
outside consultants engaged by the potential responsible parties.
The Company continues to evaluate the recommendations of the
studies and other means for site clean-up. Significant site
clean-up activities have taken place at Cliffs-Dow since
late-1993. An agreement in principle has been reached among the
federal and state governments and approximately 224 individuals
and companies wherein clean-up at the Arrowhead site will begin in
1995 with significant funding provided by the federal and state
governments. The agreement has been lodged with the U.S. District
Court. The Company's share of Arrowhead costs is expected to total
approximately $145,000 which includes $31,000 of funded
remediation costs and $114,000 of incurred legal and other costs.
6
o Wholly-owned active and idle operations, including the recently
acquired Northshore mine and Silver Bay power plant in Minnesota
and the idled Republic mine and processing facilities in Michigan.
The Northshore/Silver Bay reserve is based on an environmental
investigation conducted by the Company and an outside consultant
in connection with the purchase and reflects expected future
Company expenditures, primarily for asbestos abatement and power
plant fly ash disposal. The Republic Mine reserve primarily
reflects the cost of underground fuel oil storage tank removal and
related soil remediation.
o Other sites, including former operations, for which reserves are
based on the Company's estimated cost of investigation and
remediation of sites where expenditures may be incurred.
Environmental expenditures under current laws and regulations are not expected
to materially impact the Company's consolidated financial statements.
NOTE E - ACCOUNTING CHANGES
Certain prior year amounts have been reclassified to conform to
current year classifications.
NOTE F - INVESTMENTS
On October 4, 1994, the Financial Accounting Standards Board issued
Statement 119 entitled, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments", which requires expanded footnote
disclosure about certain financial instruments. Presently, the Company's
exposure to risk associated with derivative instruments is limited to forward
foreign exchange contracts. These forward exchange contracts are hedging
transactions that have been entered into with the objective of managing the
risk associated with currency fluctuations with respect to the on-going
obligations of the Company's Australian and Canadian operations denominated in
those currencies. Gains and losses are recognized in the same period as the
hedged transactions. At March 31, 1995, the Company had $27.2 million of
forward exchange contracts with a fair value, based on the March 31, 1995
forward rate, of $26.6 million.
On March 20, 1995, the Company received a second and final
distribution of 22,689 shares of LTV Common Stock from the Company's bankruptcy
claim against LTV Steel Company. This brings the total number of shares
retained by the Company as an available-for-sale investment to approximately
842,000 shares with a market value at March 31, 1995 of $12.8 million.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF FIRST QUARTER - 1995 AND 1994
- -------------------------------------------
Net income for the first quarter of 1995 was $5.0 million, or $.41 per
share. Comparable earnings in the first quarter of 1994 were $2.2 million, or
$.18 per share. First quarter results are traditionally not representative of
annual results due to seasonal effects.
The increase of $2.8 million in first quarter results was mainly due
to higher North American sales volume, lower operating and administrative
costs, increased investment income, and higher royalties and management fees,
partially offset by lower Australian earnings and increased mine development
expenses. An extension of the 1994 Great Lakes shipping season into January,
1995, and the acquisition of Northshore Mining Company on September 30, 1994,
contributed to the improvement in first quarter earnings.
* * *
The Company's North American pellet sales in the first quarter of 1995
were 1.2 million tons versus .7 million tons in 1994. Pellet inventory at March
31, 1995 was 1.7 million tons versus 1.2 million tons one year ago. The
Company's pellet sales, including resale of purchased ore, for the year 1995
are estimated to be 10.0 million tons versus 8.2 million tons in 1994. Sales
volume in excess of production volume in 1994 was satisfied from inventory and
purchased ore.
The Company's managed mines in North America produced 9.0 million tons
of iron ore pellets in the first quarter of 1995 versus 7.7 million tons in
1994. Production nominations for the full year 1995, which have not changed
from the beginning of the year, total 39.6 million tons, a 13 percent increase
from the 35.2 million tons produced in 1994. The Company's share of scheduled
production is 10.0 million tons in 1995 compared with 6.8 million tons in 1994.
Capital and leasing outlays for mining and processing equipment are
being significantly increased in 1995 to satisfy orebody development
requirements and reduce operating costs. The Company's share of capital
equipment additions is expected to approximate $24 million, including a $6
million Northshore expansion.
LIQUIDITY
- ---------
At March 31, 1995, the Company had cash and marketable securities of
$138.5 million, including $12.1 million dedicated to fund Australian mine
obligations.
Annual payments on the Company's $75.0 million, medium-term, unsecured
senior notes will commence on May 1, 1995. Payments of principal in 1995 and
1996 are $5.0 million and $12.1 million, respectively.
Effective March 1, 1995, the Company terminated its $75 million
three-year revolving credit agreement, due to expire on April 30, 1995, and
entered into a five-year, $100 million agreement. No borrowings are outstanding
under the agreement.
Since December 31, 1994, cash and marketable securities have decreased
$2.9 million due to dividends, $3.9 million, and capital expenditures, $3.7
million, partially offset by cash flow from operating activities, $4.7 million.
These changes since year-end 1994 reflect the normal seasonal pattern.
8
As announced in January, 1995, the Company commenced the periodic
repurchase of up to 600,000 shares of its common stock. As of March 31, 1995,
73,500 shares have been repurchased.
Pursuant to the Coal Industry Retiree Health Benefit Act of 1992
("Benefit Act"), the Trustees of the UMWA Combined Benefit Fund have assigned
responsibility to the Company for premium payments with respect to retirees,
dependents and "orphans" (unassigned beneficiaries), representing less than
one-half of one percent of all "assigned beneficiaries". The Company is making
premium payments under protest and is contesting the assignments that it
believes were incorrect. At March 31, 1995, the Company continues to pay
premiums on 338 assigned retirees and dependents and 116 "orphans".
Additionally, in December, 1993, a complaint was filed in U. S. District Court
by the Trustees of the United Mine Workers of America 1992 Benefit Plan against
the Company demanding the payment of premiums on an additional 79 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 Trustees, pending outcome of the
litigation. At March 31, 1995, the coal retiree reserve maintained by the
Company is $11.0 million, of which $.9 million is current. In the first quarter
of 1995, the Company increased its coal retiree reserve by $.2 million
(reflecting accretion of discount), and made payments of $.2 million. The
reserve is reflected at present value, utilizing an assumed discount rate of
8.5%. Constitutional and other legal challenges to various provisions of the
Benefit Act by other former coal producers are pending in the Federal Courts.
CAPITALIZATION
- --------------
Long-term obligations effectively serviced by the Company at March 31,
1995, including the current portion, totalled $85.1 million. The Company
guarantees Empire mine debt obligations of LTV and Wheeling-Pittsburgh Steel
Corporation ("Wheeling") which totalled $13.7 million at March 31, 1995. The
following table sets forth information concerning long-term obligations
guaranteed and effectively serviced by the Company.
(Millions)
-----------------------------------------------------------------
March 31, 1995 December 31, 1994
---------------------------- ----------------------------
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 10.1 23.8* 9.2 22.9*
------ ------- ------- -------
TOTAL $ 85.1 $ 98.8 $ 84.2 $ 97.9
====== ======= ======= =======
RATIO TO SHAREHOLDERS'
EQUITY .3:1 .3:1 .3:1 .3:1
* Includes $13.7 million of Empire Mine debt obligations which are serviced by LTV and Wheeling.
9
At March 31, 1995, 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, 1995, was estimated at $77.0 million based
on a discounted cash flow analysis and estimates of current borrowing rates.
In addition, on March 1, 1995, the Company terminated its existing $75
million three-year revolving credit agreement, originally due to expire on
April 30, 1995, and entered into a five-year, $100 million agreement.
Following is a summary of common shares outstanding:
1995 1994 1993
---------- ---------- ----------
March 31 12,031,392 12,079,885 11,992,804
June 30 12,080,560 12,008,065
September 30 12,091,310 12,038,092
December 31 12,099,860 12,064,117
OUTLOOK FOR 1995
- ----------------
There has been little change from the 1995 outlook described in the
Company's recent Annual Report. While there have been some signs of a slowdown
in the automotive industry and there are surplus inventories in some steel
products, North American steel producers continue to operate at high levels and
the forecasts of industry shipments remain level with the 110 million tons
shipped in 1994. Declining U.S. and Canadian currency exchange rates and
strengthening offshore economies are increasing the price of offshore imports
while improving export opportunities.
The North American iron ore industry continues to schedule the
production of 85 million tons of pellets in 1995, equal to full capacity.
Company-managed mines are expected to produce 39.6 million tons, or 47 percent
of the industry total. The Company's related sales projection remains at 10.0
million tons versus the 8.2 million tons sold in 1994. Therefore, higher
operating earnings in 1995 are expected.
OTHER DEVELOPMENTS
- ------------------
The $6 million expansion of Northshore Mining Company, which will
raise the mine's annual production capacity by 25 percent, is progressing on
schedule and budget.
Development of a commercial reduced iron project is a significant
pursuit of the Company. Various activities continue toward this objective as
described in the Annual Report.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(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, 1995.
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 2, 1995 By /s/ J. S. Brinzo
----------------------- -----------------------------------
J. S. Brinzo
Senior Executive-Finance and
Principal Financial Officer
11
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit
- ------- ----------------------------------------------------- ------
10(a) Cleveland-Cliffs Inc Voluntary Non-Qualified Deferred Filed
Compensation Plan, Amended and Restated as of Herewith
January 1, 1995
10(b) Cleveland-Cliffs Inc Supplemental Retirement Benefit Filed
Plan, Amended and Restated Effective January 1, 1995 Herewith
11 Statement re computation of earnings per share Filed
Herewith
27 Consolidated Financial Data Schedule submitted for --
Securities and Exchange Commission information
12