- --------------------------------------------------------------------------------
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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______ .
Commission File Number: 1-8944
CLEVELAND-CLIFFS INC
(Exact name of registrant as specified in its charter)
Ohio 34-1464672
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
1100 Superior Avenue, Cleveland, Ohio 44114-2589
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of May 6, 1997, there were 11,366,478 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,
----------------
1997 1996
------- ------
REVENUES:
Product sales and services $20.5 $47.9
Royalties and management fees 8.3 9.2
------ ------
Total operating revenues 28.8 57.1
Investment income (securities) 2.2 2.2
Other income 0.3 0.5
------ ------
TOTAL REVENUES 31.3 59.8
COSTS AND EXPENSES:
Cost of goods sold and operating expenses 21.0 46.7
Administrative, selling and general expenses 3.7 3.8
Interest expense 0.9 1.2
Other expenses 1.3 2.8
------ ------
TOTAL COSTS AND EXPENSES 26.9 54.5
------ ------
INCOME BEFORE INCOME TAXES 4.4 5.3
INCOME TAXES
Currently payable 0.6 1.4
Deferred 0.8 0.3
------ ------
TOTAL INCOME TAXES 1.4 1.7
------ ------
NET INCOME $3.0 $3.6
====== ======
INCOME PER COMMON SHARE $0.26 $0.30
====== ======
See notes to financial statements
2
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
-----------------------
March 31, December 31,
ASSETS 1997 1996
------ -----------------------
CURRENT ASSETS
Cash and cash equivalents $98.3 $152.3
Marketable securities 15.6 17.1
------ ------
113.9 169.4
Accounts receivable - net 32.8 70.2
Inventories:
Finished products 91.0 28.7
Work in process 0.9 0.9
Supplies 14.5 15.4
------ ------
106.4 45.0
Deferred income taxes 4.4 4.4
Other 11.0 11.8
------ ------
TOTAL CURRENT ASSETS 268.5 300.8
PROPERTIES 270.1 269.3
Less allowances for depreciation and depletion (141.0) (141.6)
------ ------
TOTAL PROPERTIES 129.1 127.7
INVESTMENTS IN ASSOCIATED COMPANIES 169.0 161.9
OTHER ASSETS
Long-term investments 10.6 10.8
Deferred income taxes 10.9 11.9
Prepaid Pensions 36.6 34.8
Other 22.9 25.8
------ ------
TOTAL OTHER ASSETS 81.0 83.3
------ ------
TOTAL ASSETS $647.6 $673.7
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $86.4 $105.5
LONG-TERM OBLIGATIONS 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 71.0 67.5
RESERVE FOR CAPACITY RATIONALIZATION 6.8 15.5
OTHER LIABILITIES 44.4 44.6
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 69.6 68.8
Retained income 431.3 432.0
Foreign currency translation adjustments 0.1 0.1
Net unrealized (loss) on marketable securities (0.6) (1.0)
Cost of 5,450,619 Common Shares in treasury
(1996 - 5,458,224) (142.9) (142.5)
Unearned Compensation (5.3) (3.6)
------ ------
TOTAL SHAREHOLDERS' EQUITY 369.0 370.6
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $647.6 $673.7
====== ======
See notes to financial statements
3
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase (Decrease)
in Cash and Cash
Equivalents for
Three Months Ended
March 31,
(In Millions)
-----------------------
1997 1996
--------- --------
OPERATING ACTIVITIES
Net income $3.0 $3.6
Depreciation and amortization:
Consolidated 1.7 1.7
Share of associated companies 2.8 2.6
Provision for deferred income taxes 0.8 0.3
Increase (decrease) in capacity rationalization reserve (8.6) 1.6
Other 1.3 (0.6)
------ ------
Total Before Changes in Operating Assets and Liabilities 1.0 9.2
Changes in operating assets and liabilities (38.5) (22.3)
------ ------
NET CASH (USED BY) OPERATING ACTIVITIES (37.5) (13.1)
INVESTMENT ACTIVITIES
Capital expenditures:
Consolidated (3.1) (2.4)
Share of associated companies (10.3) (1.7)
Other 2.3 --
------ ------
NET CASH (USED BY) INVESTMENT ACTIVITIES (11.1) (4.1)
FINANCING ACTIVITIES
Dividends (3.7) (3.8)
Repurchases of common stock (1.7) --
------ ------
NET CASH (USED BY) FINANCING ACTIVITIES (5.4) (3.8)
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 0.2
------ ------
(DECREASE) IN CASH AND CASH EQUIVALENTS (54.0) (20.8)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 152.3 139.9
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $98.3 $119.1
====== ======
Taxes paid on income $1.4 $0.7
Interest paid on debt obligations $ -- $ --
See notes to financial statements
4
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
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
1996 Annual Report on Form 10-K. In management's opinion, the quarterly
unaudited financial statements present fairly the Company's financial position
and results in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
References to the "Company" mean Cleveland-Cliffs Inc and consolidated
subsidiaries, unless otherwise indicated. Quarterly results are not necessarily
representative of annual results due to seasonal and other factors.
Certain prior year amounts have been reclassified to conform to current
year classifications.
NOTE B - ACCOUNTING AND DISCLOSURE CHANGES
In February, 1997, the Financial Standards Board issued Statement 128,
"Earnings per Share", which simplifies the standards for computing earnings per
share and makes them comparable to international standards. Under the new
requirements, basic earnings per share is expected to approximate currently
reported earnings per share and the impact of the diluted earnings per share
calculation is not expected to be material under the Company's present capital
structure. This Statement is effective for years ending after December 15, 1997.
Early application is not permitted.
In February, 1997, the Financial Accounting Standards Board issued
Statement 129, "Disclosure of Information about Capital Structure", which is
effective for years ending after December 15, 1997. It contains no change in
disclosure requirements for the Company.
In October, 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
96-1, "Environmental Remediation Liabilities," the purpose of which is to
improve the manner in which existing authoritative accounting literature is
applied in recognizing, measuring and disclosing environmental remediation
liabilities. The adoption of this statement in the first quarter of 1997 did not
have a significant effect on recorded earnings.
5
NOTE C - ENVIRONMENTAL RESERVES
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for known
environmental problems at active mining operations, idle and closed mining
operations and other sites have been recognized based on estimates of the cost
of investigation and remediation at each site. If the cost can only be estimated
as a range of possible amounts with no specific amount being most likely, the
minimum of the range is accrued in accordance with generally accepted accounting
principles. Estimates may change as additional information becomes available.
Actual costs incurred may vary from the estimates due to the inherent
uncertainties involved. Any potential insurance recoveries have not been
reflected in the determination of the financial reserves.
At March 31, 1997, the Company has an environmental reserve, including
its share of the environmental obligations of associated companies, of $23.6
million, of which $3.5 million is current. The reserve includes the Company's
obligations related to:
- Federal and State Superfund and Clean Water Act sites where the
Company is named as a potential responsible party, including
Cliffs-Dow and Kipling sites in Michigan, 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
engineering studies 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
Rio Tinto and Cliffs-Dow.
- Wholly-owned active and idle operations, including Northshore mine
and Silver Bay power plant in Minnesota, acquired on September 30,
1994. The Northshore/Silver Bay reserve is based on an
environmental investigation conducted by the Company and an
outside consultant in connection with the purchase.
- Other sites, including former operations, for which reserves are
based on the Company's estimated cost of investigation and
remediation of sites where expenditures may be incurred.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF FIRST QUARTER - 1997 AND 1996
- -------------------------------------------
Earnings for the first quarter of 1997 were $3.0 million, or $.26 per
share. In the first quarter of 1996, earnings were $3.6 million, or $.30 per
share. First quarter results are traditionally not representative of annual
results due to seasonally low shipments on the Great Lakes.
The $.6 million decrease in first quarter earnings was mainly due to
lower North American sales volume, partly offset by a non-recurring $.5 million
charge in 1996 for an insurance deductible on an ore train derailment and by
lower interest expense.
The Savage River Mine, which terminated all activities as planned in
March, recorded pre-tax earnings of $3.7 million in the first quarter of 1997.
Comparable first quarter 1996 earnings were $3.5 million.
* * *
The Company's managed mines in North America produced 9.6 million tons
of iron ore pellets in the first quarter, up from 9.0 million tons in 1996. The
Company's share of North American production was 2.6 million tons in the first
quarter of 1997 versus 2.5 million tons in 1996. Winter weather was unusually
severe in the first quarter of 1996.
The Company's North American iron ore pellet sales in the first quarter
of 1997 were 264,000 tons versus 1.0 million tons in 1996. The decrease
reflected the March, 1996 shutdown of McLouth Steel Products Corporation, which
had traditionally purchased consigned ore during the winter months, and lower
shipments at the end of the recent 1996-1997 shipping season.
LIQUIDITY
At March 31, 1997, the Company had cash and marketable securities of
$113.9 million. Since December 31, 1996, cash and marketable securities have
decreased $55.5 million primarily due to increased working capital, $38.5
million, and project investments and capital expenditures, $13.4 million
(including investment in a reduced iron joint venture in Trinidad and Tobago,
$9.8 million), payments associated with closing Savage River Mines and
transferring related assets and liabilities, $8.6 million, dividends, $3.7
million, and repurchases of common stock, $1.7 million, partially offset by cash
flow from operations, $7.6 million.
Capital additions and replacements at the six Company-managed mines in
North America are expected to total approximately $76 million in 1997. The
Company's share of such 1997 expenditures is expected to approximate $25
million.
In 1996, the Company announced an international joint venture (with LTV
Corporation and Lurgi AG of Germany), located in Trinidad and Tobago, to produce
and market premium quality reduced iron briquettes to the steel industry. The
Company's share of capital expenditures is estimated to be $70 million, of which
$18.7 million has been spent through March 31, 1997 and $40 million is expected
to be spent in the remainder of 1997. No project financing will be used.
Start-up is expected to occur in the fourth quarter 1998.
7
Cliffs and Associates Limited, the venture company, has entered into
forward currency exchange contracts to hedge the Deutsche Mark as part of the
construction project. The purpose of the contracts is to manage the risk of
exchange rate fluctuations with respect to a portion of project construction
costs denominated in the Deutsche Mark. The Company's share of outstanding
contracts, which have varying maturity dates to June 1, 1998, have an aggregate
contract value of $8.1 million and an aggregate estimated fair value of $7.1
million, at March 31, 1997.
The Company anticipates further investment in reduced iron projects.
Under the Company's program to repurchase up to 1,000,000 of its common
shares in the open market or in negotiated transactions, the Company has
repurchased 821,900 shares through April 30, 1997, at a total cost of $32.0
million.
The UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan have
assigned responsibility to the Company for premium payments with respect to
retirees, dependents, and "orphans" (unassigned beneficiaries) under the Coal
Industry Retiree Health Benefit Act of 1992. The Company is making premium
payments under protest and is contesting the assignments that it believes are
incorrect. At March 31, 1997, the Company's coal retiree reserve was $10.1
million, of which $.9 million is expected to be paid in 1997 ($1.3 million to be
spent, less $.4 million received in April, 1997 as a refund of contested
premiums).
CAPITALIZATION
- --------------
The Company has $70.0 million of senior unsecured notes outstanding
with a group of private investors. The notes, which have a fixed interest rate
of 7.0 percent, are due in December, 2005. In addition, the Company has a $100
million revolving credit agreement. No borrowings are outstanding under this
agreement which expires on March 1, 2001. The Company was in compliance with all
financial covenants and restrictions of the agreements.
The fair value of the Company's long-term debt (which had a carrying
value of $70.0 million) at March 31, 1997, was estimated at $65.7 million based
on a discounted cash flow analysis and estimates of current borrowing rates.
Following is a summary of common shares outstanding:
1997 1996 1995
---------- ---------- -------
March 31 11,377,322 11,832,767 12,031,392
June 30 11,614,517 11,892,092
September 30 11,367,717 11,898,467
December 31 11,369,717 11,829,267
AUSTRALIAN OPERATIONS
- ---------------------
On March 26, 1997 the remaining assets (including $8.6 million in cash)
of Savage River Mines and all related environmental and rehabilitation
obligations were transferred to the Tasmanian government. The release from these
obligations includes not only release from previously identified environmental
and rehabilitation obligations but also release from any such obligations that
may be asserted in the future, whether presently known or unknown.
8
Estimated costs associated with the planned closure of Savage River
Mines, including estimates of previously agreed environmental and rehabilitation
obligations, had been fully provided for in the Capacity Rationalization
Reserve. In light of the completion of the transaction with the Tasmanian
government, the Company is reviewing the Capacity Rationalization Reserve as it
relates to the continuing liabilities associated with winding up Savage River
Mines.
OTHER DEVELOPMENTS
- ------------------
On March 13, 1997, the Company announced the acquisition of Inland
Steel Company's 15 percent interest in the Wabush Mines iron ore joint venture
in Canada for $15 million, effective January 1, 1997. The acquisition raises the
Company's interest in the Company-managed venture to 22.8 percent. The
additional interest represents approximately 900,000 tons of capacity, raising
the Company's Wabush capacity share to 1.4 million tons per year. Subject to the
first refusal rights of the other participants which are due to expire in the
second quarter of 1997, closing is anticipated to occur at the end of June,
1997.
Separately, the Company revised existing sales arrangements with Inland
to supply Inland's pellet requirements beyond its 40 percent ownership in the
Company-managed Empire Mine in Michigan and Inland's wholly-owned Minorca Mine
in Minnesota. Sales to Inland under this new 10-year contract are expected to
range between 800,000 and 900,000 tons in 1997.
OUTLOOK FOR 1997
- ----------------
Steel markets in the U.S. and Canada continue to be strong with
producers reporting full order books, high operating rates and good shipment
levels. Steel prices have shown improvement but analysts speculate that prices
could weaken later in the year as new electric furnace steelmaking capacity
comes on-line. Steel imports are also an increasing concern due to unfair
trading practices and the rising value of the U.S. dollar.
The six North American mines managed by the Company are operating on a
schedule that would produce 41.5 million tons of iron ore for the year 1997
versus 39.9 million tons in 1996. However, this schedule is subject to change
due to factors such as revised production nominations, market conditions,
unplanned outages, and energy availability.
BUSINESS RISK
- -------------
The North American integrated steel industry has experienced high
operating rates in recent years. Most steel company partners and customers of
the Company have improved their financial condition due to improved operating
results and increased equity capital. However, the integrated steel industry
continues to have relatively high fixed costs and obligations.
The improvement in most integrated steel companies' financial positions
has reduced the major business risk faced by the Company, i.e., the potential
financial failure and shutdown of one or more of its significant customers or
partners, with the resulting loss of ore sales or royalty and management fee
income. However, if any such shutdown were to occur without mitigation through
replacement sales or cost reduction, it would represent a significant adverse
financial development to the Company.
9
FORWARD-LOOKING STATEMENTS
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. In addition to historical information,
this report contains forward-looking statements that are subject to risks and
uncertainties that could cause future results to differ materially from expected
results. Such statements are based on management's beliefs and assumptions made
on information currently available to it.
The Company's dominant business is the production and sale of iron ore
pellets, which is subject to the cyclical nature of the integrated steel
industry. Factors that could cause the Company's actual results to be materially
different from projected results include the following:
- Changes in the financial condition of integrated steel company
partners and customers;
- Domestic or international economic and political conditions;
- Unanticipated geological conditions or ore processing changes;
- Substantial changes in imports of steel or iron ore;
- Development of alternative steel-making technologies;
- Displacement of integrated steel production by electric furnace
production;
- Displacement of steel by competitive materials;
- Energy costs and availability;
- Labor contract negotiations;
- Changes in individual customers' iron ore requirements;
- Changes in tax laws directly affecting mineral exploration and
development;
- Changes in laws, regulations or enforcement practices governing
environmental site remediation requirements and the technology
available to complete required remediation. Additionally, the
impact of inflation, the identification and financial condition of
other responsible parties, as well as the number of sites and
quantity and type of material to be removed, may significantly
affect estimated environmental remediation liabilities;
- Changes in laws, regulations or enforcement practices governing
compliance with environmental and safety standards at operating
locations; and,
- Accounting principles or policies imposed by the Financial
Accounting Standards Board or the Securities and Exchange
Commission.
The Company is under no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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, 1997.
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 9, 1997 By /s/ J. S. Brinzo
---------------------- ------------------
J. S. Brinzo
Executive Vice President-Finance and
Principal Financial Officer
11
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit
- ------- ------------------------------------------------------ ---------
10(a) Form of Instrument of Amendment of Nonqualified Stock Filed
Option Agreements for Nonemployee Directors, dated Herewith
as of March 17, 1997
11 Statement re computation of earnings per share Filed
Herewith
27 Consolidated Financial Data Schedule submitted for ---
Securities and Exchange Commission information only
12