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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 (I.R.S. Employer
of 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 24, 1998, there were 11,353,655 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
-------------------------
1998 1997
---- ----
REVENUES
Product sales and services $ 27.2 $ 20.5
Royalties and management fees 8.4 8.3
--------- --------
Total Operating Revenues 35.6 28.8
Investment income (securities) 1.4 2.2
Other income .8 .3
--------- --------
TOTAL REVENUES 37.8 31.3
COSTS AND EXPENSES
Cost of goods sold and operating expenses 30.1 21.0
Administrative, selling and general expenses 4.7 3.7
Interest expense .2 .9
Other expenses 2.1 1.3
--------- --------
TOTAL COSTS AND EXPENSES 37.1 26.9
--------- --------
INCOME BEFORE INCOME TAXES .7 4.4
INCOME TAXES
Currently payable .1 .6
Deferred .1 .8
--------- --------
TOTAL INCOME TAXES .2 1.4
--------- --------
NET INCOME $ .5 $ 3.0
========= ========
NET INCOME PER COMMON SHARE
Basic $ .04 $ .26
Diluted $ .04 $ .26
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic 11,323 11,375
Diluted 11,403 11,423
See notes to financial statements
2
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
-----------------------------
March 31 December 31
ASSETS 1998 1997
------ ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 58.6 $ 115.9
Accounts receivable - net 45.2 73.4
Inventories
Finished products 104.5 45.7
Work in process .9 .6
Supplies 13.3 15.1
-------- --------
118.7 61.4
Federal income taxes 7.9 7.5
Other 6.5 7.6
-------- --------
TOTAL CURRENT ASSETS 236.9 265.8
PROPERTIES 188.9 272.3
Allowances for depreciation and depletion (56.3) (138.3)
-------- --------
TOTAL PROPERTIES 132.6 134.0
INVESTMENTS IN ASSOCIATED COMPANIES 222.3 218.3
OTHER ASSETS
Prepaid pensions 41.3 40.4
Other 41.5 35.8
-------- --------
TOTAL OTHER ASSETS 82.8 76.2
-------- --------
TOTAL ASSETS $ 674.6 $ 694.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $ 72.2 $ 91.8
LONG-TERM OBLIGATIONS 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 69.9 70.1
OTHER LIABILITIES 56.6 55.0
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 72.4 69.8
Retained income 468.9 472.1
Accumulated other comprehensive loss, net of tax (.3) (2.0)
Cost of 5,483,336 Common Shares in treasury
(1997 - 5,519,027 shares) (146.2) (146.2)
Unearned compensation (5.7) (3.1)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 405.9 407.4
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 674.6 $ 694.3
======== ========
See notes to financial statements
3
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions,
Brackets Indicate
Cash Decrease)
Three Months Ended
March 31
--------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income $.5 $3.0
Depreciation and amortization:
Consolidated 2.1 1.7
Share of associated companies 3.1 2.8
Provision for deferred income taxes .1 .8
Other (3.6) (7.3)
------ ------
Total before changes in operating assets and liabilities 2.2 1.0
Changes in operating assets and liabilities (46.4) (38.5)
------ ------
NET CASH (USED BY) OPERATING ACTIVITIES (44.2) (37.5)
INVESTING ACTIVITIES
Purchase of property, plant and equipment:
Consolidated (2.3) (3.1)
Share of associated companies (7.2) (10.3)
Sale of marketable securities - 2.0
Other 1.3 .8
------ ------
NET CASH (USED BY) INVESTING ACTIVITIES (8.2) (10.6)
FINANCING ACTIVITIES
Dividends (3.7) (3.7)
Repurchases of Common Shares (1.2) (1.7)
------ ------
NET CASH (USED BY) FINANCING ACTIVITIES (4.9) (5.4)
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS (57.3) (53.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 115.9 165.4
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $58.6 $111.9
====== ======
See notes to financial statements
4
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
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
1997 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
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 June, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income and its
components in a full set of financial statements. The statement was adopted in
the first quarter of 1998. Prior financial statements have been restated to
reflect this change in disclosure.
In June, 1997, the FASB issued Statement 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement changes the
way that segment information is defined and reported in annual and interim
financial statements. Statement 131 is effective for fiscal years beginning
after December 15, 1997, although segment information is not required to be
reported in interim financial statements in 1998. Management is evaluating the
new standard and has not determined what effect, if any, it may have on future
disclosure.
In February, 1998, the FASB issued Statement 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The overall
objective of this statement is to improve and standardize disclosures about
pensions and other postretirement benefits and to make the information easier
to prepare and more
5
understandable. Statement 132 is effective for fiscal years beginning after
December 15, 1997. This statement addresses disclosure issues only and does not
change the measurement or recognition of pensions or other postretirement
benefits.
In March, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company is evaluating the new standard but does not expect it to have a
material impact on the Company's consolidated financial statements.
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, 1998, the Company had an environmental reserve,
including its share of the environmental obligations of associated companies, of
$22.4 million, of which $2.0 million was classified as 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 potentially 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 potentially 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. The City of Marquette,
Michigan has purchased the Cliffs-Dow plant site, located within
the City, from the Company and has agreed to assume any future
environmental responsibilities with respect to that site.
o Wholly-owned active and idle operations, including Northshore
mine and Silver Bay power plant in Minnesota. The
Northshore/Silver Bay reserve is based on an environmental
investigation conducted by the Company and an outside consultant
in connection with the 1994 acquisition.
6
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.
NOTE D - COMPREHENSIVE INCOME
Comprehensive Income is "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources." It includes Net Income and Other Comprehensive Income,
net of tax, consisting of unrealized gains (losses) on securities, foreign
currency translation adjustments and minimum pension liability adjustments.
Components of Comprehensive Income include:
(In Millions)
March 31
---------------
1998 1997
---- ----
Net Income $ .5 $3.0
Other Comprehensive Income -
Unrealized Gain on Securities 1.7 .4
----- ----
Comprehensive Income $ 2.2 $3.4
===== ====
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
COMPARISON OF FIRST QUARTER - 1998 AND 1997
Earnings for the first quarter of 1998 were $.5 million, or $.04 per
diluted share (all per share earnings are "diluted earnings per share" unless
stated otherwise). In the first quarter of 1997, earnings were $3.0 million, or
$.26 per share. First quarter results are not representative of annual results
due to seasonally low shipments on the Great Lakes.
The $2.5 million decrease in first quarter net income was mainly due to
the March, 1997 termination of Savage River Mine operations in Australia. Savage
River, which produced its last iron ore pellets in December, 1996, earned $2.5
million in the first quarter of 1997 on sales of its remaining inventory. The
reduction in first quarter sales margin was due to the non-recurring favorable
impact of the sell-off of remaining Savage River inventory on 1997 earnings.
Excluding the impact of the Savage River sales, 1998 earnings were unchanged,
with higher earnings from an increase in North American sales volume offset by
higher administrative expenses, increased costs of reduced iron development
activities and higher operating costs due to the kiln outage at the Tilden Mine
(owned 40 percent by the Company).
The $1.0 million increase in administrative expense principally
reflects the effect of a 17 percent increase in the Company's stock price in the
first quarter of 1998 on the cost of Performance Share grants, a key component
of senior management compensation. Grant expense is accrued over a three-year
vesting period, with stock prices marked to market on a cumulative basis. Lower
investment income as a result of lower cash balances was largely offset by
reduced interest expense due to increased capitalization of interest on the
Company's share of construction costs on the Cliffs and Associates Limited
reduced iron project.
The Company's North American iron ore pellet sales in the first quarter
of 1998 were .7 million tons, up from .3 million tons in 1997. The increase
reflected new sales arrangements, a relatively mild winter which allowed
additional lake shipments, and certain all-rail shipments.
The Company's managed mines in North America produced 9.4 million tons
of iron ore pellets in the first quarter, compared with 9.6 million tons in
1997. The Company's share of the production was 2.7 million tons in 1998 versus
2.6 million tons in 1997.
LIQUIDITY
At March 31, 1998, the Company had cash and cash equivalents of $58.6
million. Since December 31, 1997, cash and cash equivalents have decreased $57.3
million primarily due to increased working capital, $46.4 million, and project
investments and capital expenditures, $9.5 million (mainly Cliffs and Associates
Limited, $5.9
8
million), dividends, $3.7 million, and repurchases of common shares, $1.2
million, partially offset by cash flow from operations, $2.2 million, and sale
of certain Republic Mine assets, $1.3 million, having a net book value of $1.2
million (property, plant and equipment of $85.3 million, less allowance for
depreciation of $84.1 million). The $46.4 million increase in working capital
was primarily due to increased inventories, $57.3 million, which is normal for
the first quarter. Inventories at March 31, 1998 increased $12.3 million from
March 31, 1997.
Capital additions and replacements at the six Company-managed mines in
North America are expected to total approximately $98 million in 1998. The
Company's share of such 1998 expenditures is expected to approximate $37
million.
Construction is progressing on the Cliffs and Associates Limited joint
venture project, located in Trinidad and Tobago (owned 46.5 percent by the
Company), to produce and market premium quality reduced iron briquettes. The
facilities are scheduled to start up in the fourth quarter of 1998 and are
expected to be producing at the design level of 500,000 tons per year by
mid-1999. Total estimated cost of the project is $160 million, with the
Company's share equal to $74.4 million. The Company's cumulative share of
spending as of March 31, 1998, was $62.3 million, with $12.1 million to be spent
in the remainder of 1998.
The Company anticipates further investment in ferrous metallic
projects. During the first half of 1998, the Company and Mannesmann Demag are
completing an engineering study for a plant to produce 700,000 metric tons of
high quality pig iron per year at the Company's wholly-owned Northshore Mine in
Minnesota. The plant would employ the "Redsmelt" process developed by Mannesmann
Demag that combines the technologies of a rotary reduction furnace, using coal
as the reductant fuel, and a submerged arc furnace. The Company has initiated
the environmental review and permitting process with the Minnesota Pollution
Control Agency for the potential facility in Silver Bay, Minnesota. If the
results of the engineering study are positive and other economic and marketing
issues are satisfactorily resolved, a decision whether to proceed with the
project will likely be made in mid-1998.
Under the Company's program to repurchase up to 1.5 million of its
Common Shares in the open market or in negotiated transactions, the Company has
repurchased 921,400 Common Shares through March 31, 1998, at a total cost of
$36.7 million, including 28,000 Common Shares repurchased in the first quarter
of 1998, at a total cost of $1.5 million (including $.3 million accrued at March
31, 1998).
CAPITALIZATION
Long-term debt of the Company consists of $70.0 million of senior
unsecured notes payable to an insurance company group. The notes, placed in
December, 1995, bear a fixed interest rate of 7.0 percent and are scheduled to
be repaid with a single principal payment in December, 2005. In addition, the
Company has a $100 million revolving credit agreement. No borrowings are
outstanding under this agreement, which
9
expires on March 1, 2002. 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, 1998, was estimated at $70.9 million based
on a discounted cash flow analysis and estimates of current borrowing rates.
Following is a summary of common shares outstanding:
1998 1997 1996
-------------- -------------- -------------
March 31 11,344,605 11,377,322 11,832,767
June 30 11,374,448 11,614,517
September 30 11,379,357 11,367,717
December 31 11,308,914 11,369,717
TILDEN MINE KILN OUTAGE
Welding repairs on one of the mine's two pelletizing kilns were
completed earlier than expected, and the kiln was put back in service on April
9. Production at the Tilden Mine for the full year is now expected to be 6.8
million tons, up from the prior estimate of 6.7 million tons. The mine was
scheduled to produce 7.0 million tons prior to the kiln outage. The lower
production level at Tilden will have no effect on the Company's 1998 planned
sales volume. Expected production of 6.8 million tons is .8 million tons, or 13
percent, above 1997 production. The Company's share of the kiln repair costs,
$.6 million, was recorded in the first quarter.
OUTLOOK FOR 1998
Steel markets in the U.S. and Canada continue to be strong with
producers generally reporting high operating rates and good shipment levels;
however, steel imports are an increasing concern due to the Asian crisis, unfair
trading practices and the strength of the U.S. dollar. The Company remains
optimistic about the outlook for iron ore and expects record North American
pellet sales in 1998. International pellet prices have increased by about 3
percent and will favorably affect the pricing on most of the Company's
multi-year sales contracts. The Company's North American iron ore pellet sales
for the full year 1998 are expected to be at least 11.5 million tons, which
would be a new record and represent an 11 percent increase over 1997 sales.
The six North American mines managed by the Company are expected to
produce a record 40.5 million tons of iron ore in the full year 1998, with the
Company's share being a record 11.4 million tons. In 1997, the mines produced
39.6 million tons, with the Company's share being 10.9 million tons. The
increases in 1998 production are mainly due to higher scheduled production at
the Tilden Mine.
10
YEAR 2000 TECHNOLOGY
The Company is in the process of identifying and assessing various
areas of risk and implementing strategies to resolve the year 2000 technology
issue. A substantial portion of year 2000 information technology compliance will
be achieved as a result of the Company's Information Technology Plan ("IT
Plan"). Implementation of the IT Plan is estimated to cost approximately $25
million, $17 million of which will be classified as capital expenditures and $8
million charged to operations (Company's share $6.9 million total; $4.6 million
capital, $2.3 million operating). Since implementation and through March 31,
1998, $5.5 million (Company's share - $1.5 million) was expended with $2.7
million (Company's share $.7 million) charged to operations as incurred. Project
completion is expected in the third quarter of 1999. The Company is charging to
operations current state assessment, process re-engineering, and training costs
associated with the IT Plan. In addition to the IT Plan, a year 2000 compliance
program has been initiated to identify, assess and mitigate the impact of the
date change on information technology not covered by the IT Plan, process
control systems, transmission facilities, technical infrastructure, and other
systems. Costs of achieving year 2000 compliance are charged to operations as
incurred. Completion of this program is targeted for mid-1999. Year 2000
compliance is not expected to have a material adverse impact on the operations
of the Company.
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:
o Changes in the financial condition of integrated steel company
partners and customers;
o Domestic or international economic and political conditions;
o Unanticipated geological conditions or ore processing changes;
o Substantial changes in imports of steel or iron ore;
o Development of alternative steel-making technologies;
o Displacement of integrated steel production by electric furnace
production;
11
o Displacement of steel by competitive materials;
o Energy costs and availability;
o Difficulties or delays in achieving Year 2000 compliance,
including the availability and cost of trained personnel, the
ability to locate and correct system codes, and similar
uncertainties;
o Major equipment failure, availability, and magnitude and duration
of repairs;
o Labor contract negotiations;
o Changes in tax laws directly affecting mineral exploration and
development;
o 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;
o Changes in laws, regulations or enforcement practices governing
compliance with environmental and safety standards at operating
locations; and,
o Accounting principle or policy changes by the Financial Accounting
Standards Board or the Securities and Exchange Commission.
Most steel company partners and customers of the Company have improved
their financial condition due to improved operating results and increased equity
capital. The improvement in most integrated steel companies' financial positions
has reduced a 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.
Additionally, the Company's projection of construction cost, start-up
date and production rate for its reduced iron project could change due to
inherent risks such as construction delays, process difficulties, or increased
costs.
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.
12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits - Refer to Exhibit Index on page 14.
(b) There were no reports on Form 8-K filed during the three months
ended March 31, 1998.
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 1, 1998 By /s/ C. B. Bezik
---------------------------------
C. B. Bezik
Senior Vice President-Finance and
Principal Financial Officer
13
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
---------
10(a) Amendment No. 1 to Cleveland-Cliffs Inc Supplemental Filed
Retirement Benefit Plan (as amended and restated Herewith
effective January 1, 1997), effective as of
November 1, 1997, dated March 31, 1998.
10(b) Amendment No. 1 to Cleveland-Cliffs Inc Voluntary Non- Filed
Qualified Deferred Compensation Plan (amended and Herewith
restated effective December 1, 1996), effective as of
November 1, 1997, dated March 31, 1998.
10(c) Amendment No. 1 to Severance Pay Plan for Key Filed
Employees of Cleveland-Cliffs Inc (as amended and Herewith
restated as of February 1, 1997), effective as of November
1, 1997, dated March 31, 1998.
27 Consolidated Financial Data Schedule submitted for
Securities and Exchange Commission information
only:
27.1 March 31, 1998 --
27.2 March 31, 1997 --
14