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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 September 30, 1996
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 November 6, 1996, there were 11,367,717 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 Nine Months
Ended Sept. 30, Ended Sept. 30,
-------------------- --------------------
1996 1995 1996 1995
---------- -------- -------- ---------
REVENUES:
Product sales and services $ 148.7 $ 127.1 $ 319.5 $ 281.7
Royalties and management fees 15.0 14.4 37.6 36.2
------- ------- ------- -------
Total operating revenues 163.7 141.5 357.1 317.9
Investment income (securities) 2.8 2.2 6.6 6.9
Property damage insurance recovery 2.0
Other income 0.2 0.9 1.6 2.3
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TOTAL REVENUES 166.7 144.6 367.3 327.1
COSTS AND EXPENSES:
Cost of goods sold and operating expenses 126.6 108.1 279.5 247.7
Administrative, selling and general expenses 4.0 3.9 11.5 10.7
Interest expense 1.1 1.6 3.5 4.8
Other expenses 1.6 4.3 6.3 18.4
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TOTAL COSTS AND EXPENSES 133.3 117.9 300.8 281.6
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INCOME BEFORE INCOME TAXES 33.4 26.7 66.5 45.5
Income taxes (credits)
Currently payable 9.9 8.0 19.5 13.0
Deferred 2.2 1.4 4.3 (10.7)
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TOTAL INCOME TAXES 12.1 9.4 23.8 2.3
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NET INCOME $ 21.3 $ 17.3 $ 42.7 $ 43.2
======= ======= ======= =======
NET INCOME PER COMMON SHARE $ 1.84 $ 1.45 $ 3.66 $ 3.61
======= ======= ======= =======
See notes to financial statements
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CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
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September 30, December 31,
ASSETS 1996 1995
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CURRENT ASSETS
Cash and cash equivalents $145.0 $139.9
Marketable securities 11.3 8.9
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156.3 148.8
Accounts receivable - net 67.8 61.8
Inventories:
Finished products 42.5 38.0
Work in process 0.9 0.7
Supplies 14.6 17.0
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58.0 55.7
Deferred income taxes 14.1 14.1
Other 9.3 12.3
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TOTAL CURRENT ASSETS 305.5 292.7
PROPERTIES 265.6 260.0
Less allowances for depreciation and depletion (144.5) (140.0)
------ ------
TOTAL PROPERTIES 121.1 120.0
INVESTMENTS IN ASSOCIATED COMPANIES 155.0 152.0
OTHER ASSETS
Long-term investments 10.6 16.3
Deferred income taxes 7.3 11.2
Other 59.1 52.4
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TOTAL OTHER ASSETS 77.0 79.9
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TOTAL ASSETS $658.6 $644.6
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $108.6 $103.5
LONG-TERM OBLIGATIONS 70.0 70.0
POST EMPLOYMENT BENEFITS 67.2 67.3
RESERVE FOR CAPACITY RATIONALIZATION 13.9 17.2
OTHER LIABILITIES 44.2 44.0
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 67.7 65.2
Retained income 417.4 386.1
Foreign currency translation adjustments 0.4 0.3
Net unrealized (loss) on marketable securities (1.1) 0.1
Cost of 5,460,224 Common Shares in treasury
(1995 - 4,998,674) (142.5) (123.8)
Unearned Compensation (4.0) (2.1)
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TOTAL SHAREHOLDERS' EQUITY 354.7 342.6
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $658.6 $644.6
====== ======
See notes to financial statements
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CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase (Decrease)
in Cash and Cash
Equivalents for
Nine Months Ended
Sept. 30,
(In Millions)
------------------------
1996 1995
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OPERATING ACTIVITIES
Net income $ 42.7 $ 43.2
Depreciation and amortization:
Consolidated 4.8 4.5
Share of associated companies 8.3 8.4
Provision for deferred income taxes 4.3 2.6
Increase (decrease) in capacity rationalization reserve 2.5 (0.2)
Tax credit (12.2)
Increases to environmental reserve 1.8 10.7
Other 1.8 0.9
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Total Before Changes in Operating Assets and Liabilities 66.2 57.9
Changes in operating assets and liabilities
Marketable securities (2.4) 0.6
Other (7.6) (26.1)
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NET CASH FROM OPERATING ACTIVITIES 56.2 32.4
INVESTMENT ACTIVITIES Capital expenditures:
Consolidated (6.3) (12.7)
Share of associated companies (14.0) (3.2)
Other 0.5
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NET CASH (USED BY) INVESTMENT ACTIVITIES (20.3) (15.4)
FINANCING ACTIVITIES
Dividends (11.4) (11.7)
Repurchase of common stock (19.5) (8.0)
Principal payment of long-term debt (5.0)
Other 0.2
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NET CASH (USED BY) FINANCING ACTIVITIES (30.9) (24.5)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.1 (0.6)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5.1 (8.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 139.9 140.6
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $145.0 $132.5
====== ======
Income taxes paid $ 11.4 $ 24.3
Interest paid on debt obligations $ 2.4 $ 4.8
See notes to financial statements
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CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
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
1995 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 - MCLOUTH BANKRUPTCY
On September 29, 1995, McLouth Steel Products Corporation, Inc.
("McLouth"), a significant customer, petitioned for protection under Chapter 11
of the U.S. Bankruptcy Code. The Company had periodically extended credit to
McLouth. At the time of the bankruptcy filing, the Company had an unreserved
receivable from McLouth of $5.0 million, secured by first liens on certain
McLouth fixed assets. A $2.7 million reserve against the receivable was recorded
in September, 1995.
On March 15, 1996, McLouth announced that it had begun a shutdown of
its operations due to inadequate funds. The Company had supplied approximately
120,000 tons of pellets per month to McLouth in 1996 prior to shutdown. The
Company has reserved all financial exposure from the McLouth shutdown, except
the $2.3 million unreserved receivable which is secured by first liens on
property and equipment.
On June 26, 1996, the bankruptcy court approved the sale of McLouth's
assets and an agreement to settle secured claims, including the Company's
secured claim. Based on the terms of the agreement, the Company expects to
recover the carrying value of its secured claim. Proceeds from the sale of
McLouth's assets will be used primarily to satisfy administrative claims,
including the Company's administrative claim.
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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 required 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 cost 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 reserve.
During the first nine months of 1996, the Company provided $1.8 million
of additional environmental reserves and made payments of $1.1 million. The
additional environmental provision reflects the Company's continuing review of
estimated restoration expense at all known sites.
At September 30, 1996, the Company has an environmental reserve of
$23.5 million, of which $4.2 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, 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 estimates of remedial investigations and remedial
actions prepared by outside consultants engaged by the potential
responsible parties. The Company continues to evaluate the
recommendations and other means for site clean-up. Significant
site clean-up activities have taken place at Cliffs-Dow since late
1993.
- Wholly-owned active and idle operations, including Northshore mine
and Silver Bay power plant in Minnesota, which was 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 current and former operations, for which
reserves are based on the Company's estimated cost of
investigation and remediation of sites where expenditures may be
incurred.
Estimated environmental expenditures under current laws and regulations are not
expected to materially impact the Company's consolidated financial statements.
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NOTE D - INSURANCE RECOVERY
In January, 1996, the Company's Northshore Mining Company sustained
property damage to 42 railroad ore cars relating to a train derailment. The
property damage, less deductible, resulted in a net insurance recovery of $2.0
million pre-tax.
NOTE E - ACCOUNTING AND DISCLOSURE CHANGES
In October, 1995, the Financial Accounting Standards Board issued
Statement 123, entitled, "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The standard is effective for years that begin
after December 15, 1995. Management is evaluating the accounting and disclosure
alternatives; however, no significant financial statement effect is expected.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
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COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS - 1996 AND 1995
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Net income for the third quarter was $21.3 million, or $1.84 per share.
Earnings in the third quarter of 1995 were $17.3 million, or $1.45 a share.
The $4.0 million increase in third quarter earnings was principally due
to increased volume and price realization on North American sales, a $1.8
million after-tax reserve against accounts receivable in 1995, and higher
Australian earnings, partly offset by higher operating costs.
Net income for the first nine months of 1996 was $42.7 million, or
$3.66 a share, including a $1.3 million after-tax property damage insurance
recovery on a January, 1996 ore train derailment. In the first nine months of
1995, earnings were $43.2 million, or $3.61 a share, including income from two
special items recorded in the second quarter: a $12.2 million tax credit
resulting from the settlement of prior years' tax issues, partly offset by a
$6.7 million after-tax increase in the reserve for environmental expenditures.
Excluding the special items in both years, 1996 nine month earnings were $41.4
million, or $3.55 a share, compared with $37.7 million, or $3.15 a share, in
1995.
The $3.7 million increase in nine month earnings before special items
was mainly due to higher Australian earnings, increased North American sales
volume, a $1.8 million after-tax reserve against account receivable in 1995,
increased royalties and fees, and lower interest expense, partly offset by
higher operating costs and a higher effective income tax rate in 1996.
Following is a summary of results:
(In Millions, Except Per Share)
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Third Quarter Nine Months
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1996 1995 1996 1995
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Income Before Special Items:
Amount $ 21.3 $ 17.3 $ 41.4 $ 37.7
Per Share 1.84 1.45 3.55 3.15
Special Items:
Amount -- -- 1.3 5.5
Per Share -- -- .11 .46
Net Income:
Amount 21.3 17.3 42.7 43.2
Per Share 1.84 1.45 3.66 3.61
Earnings per share in the third quarter and first nine months of 1996
reflect the favorable effect of repurchasing shares under the Company's stock
repurchase program.
Australian pre-tax earnings were $4.9 million and $14.1 million in the
third quarter and first nine months of 1996. Comparable earnings in the third
quarter and first nine months of 1995 were $3.9 million and $7.4 million
respectively. The Australian operation is projected to cease operations in the
first quarter of 1997.
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* * *
The Company's managed mines in North America produced 10.6 million tons
of pellets in the third quarter of 1996, unchanged from 1995. Nine month
production was 29.4 million tons in 1996, which was also unchanged from 1995.
The Company's North American iron ore pellet sales in the third quarter
of 1996 were 3.8 million tons compared with 3.2 million tons in 1995. Nine month
sales were 7.7 million tons versus 7.0 million tons in 1995. Sales for 1996 are
expected to approximate 11.0 million tons versus 10.4 million tons sold in 1995.
Sales tonnage includes ore purchased for resale.
LIQUIDITY
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At September 30, 1996, the Company had cash and marketable securities
of $156.3 million. Since December 31, 1995, cash and marketable securities have
increased $7.5 million due to cash flow from operations, $66.2 million,
partially offset by capital expenditures, $20.3 million, repurchases of common
stock, $19.5 million, dividends, $11.4 million, and increased working capital,
$7.6 million.
Capital additions and replacements at the six Company-managed mines in
North America are projected to total approximately $71 million in 1996. The
Company's share of such 1996 expenditures is expected to approximate $24
million.
On April 15, 1996, the Company announced an international joint venture
to produce and market premium quality reduced iron briquettes to the steel
industry. All definitive project documents were subsequently signed on May 8,
1996. The venture's participants, through subsidiaries, will be Cleveland-Cliffs
Inc, 46.5 percent; The LTV Corporation, 46.5 percent; and Lurgi AG of Germany, 7
percent. The Company will manage the $150 million project, to be located in
Trinidad and Tobago, and will be responsible for sales by the venture company,
Cliffs and Associates Limited. The Company's share of capital expenditures is
estimated to be $70 million, of which $17 million ($9.2 million through
September 30) is expected to be spent in 1996. No project financing will be
utilized.
Cliffs and Associates Limited 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
fluctuation with respect to the 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 $14.9 million and an aggregate estimated fair value of $14.4 million,
at September 30, 1996.
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 was amended in July, 1996 to extend the expiration date by one
year to March 1, 2001. The Company was in compliance with all financial
covenants and restrictions of the agreements.
In January, 1995, the Company commenced a program to repurchase up to
600,000 shares of its common shares in the open market or in negotiated
transactions. In July, 1996, the Company announced the expansion of this program
to 1.0 million shares, an increase of 400,000 shares. Under the combined program
the Company has repurchased 780,300 shares through October 14 at a total cost of
$30.3 million.
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The Company initially established a reserve in 1983 for expected costs
of reorienting its mining joint ventures and facilities to adjust to changed
market conditions. The reserve balance is principally for the planned shutdown
of Savage River Mines in Tasmania, Australia, in the first quarter of 1997, and
the permanent shutdown of the Republic Mine, which was announced on January 30,
1996. The Republic Mine has been idle since 1981. Expenditures for the next
twelve months, for both Savage River Mines and Republic Mine, are projected to
approximate $16.3 million.
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" under the Benefit Act.
The Company is making premium payments under protest and is contesting the
assignments that it believes were incorrect. Premium payments by the Company
were $.2 million in the third quarter of 1996 and $.2 million in the third
quarter of 1995. Additionally, 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 additional beneficiaries related to
two formerly operated joint venture coal mines. The Company is actively
contesting the complaint. Monthly premiums 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 September 30,
1996, the Company's coal retiree reserve was $9.7 million, of which $1.3 million
is expected to be paid in 1996. The reserve is reflected at present value, using
a discount rate of 7.25%. Constitutional and other legal challenges to various
provisions of the Benefit Act by other former coal producers are pending in the
Federal Courts.
CAPITALIZATION
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Long-term obligations effectively serviced by the Company at September
30, 1996, including the current portion, totalled $76.8 million. The following
table sets forth information concerning long-term obligations guaranteed and
effectively serviced by the Company.
(Millions)
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September 30, 1996 December 31, 1995
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Total Total
Long-Term Long-Term
Obligations Obligations Obligations Obligations
Effectively and Effectively and
Serviced Guarantees Serviced Guarantees
Consolidated $70.0 $70.0 $70.0 $70.0
Share of Unconsolidated
Affiliates 6.8 13.4* 6.3 12.9*
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Total $76.8 $83.4 $76.3 $82.9
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Ratio to Shareholders'
Equity .2:1 .2:1 .2:1 .2:1
<FN>
* Includes $6.6 million of Empire Mine debt obligations which are
serviced by LTV and Wheeling and mature in December, 1996.
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At September 30, 1996, the Company was in compliance with all financial
covenants and restrictions related to its medium-term, unsecured senior note
agreement.
The fair value of the Company's long-term debt (which had a carrying
value of $70.0 million) at September 30, 1996 was estimated at $66.6 million
based on a discounted cash flow analysis and estimates of current borrowing
rates.
Following is a summary of common shares outstanding:
1996 1995 1994
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March 31 11,832,767 12,031,392 12,079,885
June 30 11,614,517 11,892,092 12,080,560
September 30 11,367,717 11,898,467 12,091,310
December 31 11,829,267 12,099,860
AUSTRALIAN OPERATIONS
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The Company's subsidiary, Pickands Mather & Co. International ("PMI"),
has received notice from the Tasmanian government asserting certain
environmental obligations in connection with rehabilitating the Savage River
Mine site. PMI asserts that all obligations to rehabilitate the mine and plant
sites are specified in the Rehabilitation Plan agreement between the State of
Tasmania and PMI, which agreement was formalized in June, 1990 by an Act of
Parliament and was a condition of PMI's acquisition of interests in the mine
from Japanese steel companies. PMI has provided reserves for all environmental
and other rehabilitation obligations specified in the Rehabilitation Plan. The
government is discussing continuation of mining at the site with another
party. PMI is discussing these matters with the government and expects a
satisfactory resolution.
OTHER DEVELOPMENT
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The labor contract economic reopeners at the Empire, Hibbing Taconite
and Tilden mines were settled based on the pattern of the recent steel company
settlements. The contracts expire on August 1, 1999.
OUTLOOK FOR 1996
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North American steel production volume remains strong with operating
rates at relatively high levels. The steel order rate in the third quarter
showed surprising firmness in the usually weakest period of the year.
Steelmakers in the U.S. and Canada are shipping steel at a pace that
projects full-year 1996 shipments to exceed the 112 million tons shipped in
1995, and to be the highest recorded since 1979. Industry analysts are
optimistic that 1997 steel shipments will approximate 1996.
The six North American mines managed by the Company are operating at
nearly full capacity and are scheduled to produce 39.8 million tons, a slight
decrease from the previous forecast but still slightly higher than the 39.6
million tons produced in 1995. The Company's share of scheduled production is
10.4 million tons in 1996 versus 9.8 million tons in 1995.
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BUSINESS RISK
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In addition to the preparation of financial statements in conformity
with generally accepted accounting principles, as described in Note A - Basis of
Presentation, this report contains forward-looking statements. Such statements
include discussions of capital expenditures, production and sales, development
of a new venture, and financial obligations. These forward-looking statements
are based on the Company's current expectations that are subject to risks and
uncertainties, which could materially impact the expected results.
The Company's dominant business is the production and sale of iron ore,
and is, therefore, subject to the cyclical nature of the steel industry. The
North American 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 better operating results and increased equity
capital. However, the integrated steel industry continues to have relatively
high fixed costs and obligations.
The improvement in most steel companies' financial positions has
reduced the major near-term 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.
QUARTERLY FLUCTUATIONS
- ----------------------
Quarterly shipments and financial results can fluctuate significantly
within each year due to customer-dictated timing of shipments and winter ice
conditions on the Great Lakes.
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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 September 30, 1996.
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 November 13, 1996 By /s/ J. S. Brinzo
------------------ -------------------------------------
J. S. Brinzo
Executive Vice President-Finance and
Principal Financial Officer
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EXHIBIT INDEX
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Exhibit
Number Exhibit
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4(a) Admendment dated as of July 19, 1996, to the Credit Filed
Agreement dated as of March 1, 1995, among Cleveland- Herewith
Cliffs Inc, the banks named therein and the Chase
Manhattan Bank, as Agent
10(a) Amended and Restated Cleveland-Cliffs Inc Retirement Filed
Plan for Non-Employee Directors, effective as of Herewith
July 1, 1995
10(b) Cleveland-Cliffs Inc Nonemployee Directors' Filed
Supplemental Compensation Plan, effective as of Herewith
July 1, 1995
11 Statement re computation of earnings per share Filed
Herewith
27 Consolidated Financial Data Schedule submitted for
Securities and Exchange Commission information only
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