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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 September 30, 1999
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 October 14, 1999, there were 11,053,349 Common Shares (par value $1.00 per
share) outstanding.
================================================================================
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PART I - FINANCIAL INFORMATION
CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In Millions, Except Per Share Amounts)
-------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES
Product sales and services $ 80.2 $ 158.1 $ 176.7 $ 328.5
Royalties and management fees 10.3 15.5 33.0 36.8
----------- ----------- ----------- -----------
Total Operating Revenues 90.5 173.6 209.7 365.3
Interest income .5 1.5 2.4 3.7
Other income .8 1.1 2.6 3.3
----------- ----------- ----------- -----------
Total Revenues 91.8 176.2 214.7 372.3
COSTS AND EXPENSES
Cost of goods sold and operating expenses 100.3 141.1 191.0 298.8
Administrative, selling and general expenses 3.3 3.4 11.2 13.0
Interest expense 1.2 .1 2.4 .4
Other expenses 3.5 4.4 12.3 9.4
----------- ----------- ----------- -----------
Total Costs and Expenses 108.3 149.0 216.9 321.6
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (16.5) 27.2 (2.2) 50.7
INCOME TAXES (CREDIT) (5.8) 7.1 (2.0) 13.2
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (10.7) $ 20.1 $ (.2) $ 37.5
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (.96) $ 1.80 $ (.02) $ 3.33
Diluted $ (.96) $ 1.78 $ (.02) $ 3.30
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic 11,112 11,207 11,160 11,286
Diluted 11,112 11,264 11,160 11,363
DIVIDENDS PER COMMON SHARE $ .375 $ .375 $ 1.125 $ 1.075
See notes to consolidated financial statements.
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CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
-------------------------
September 30 December 31
1999 1998
------------ -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33.1 $ 130.3
Accounts receivable - net 47.0 58.8
Inventories
Iron ore 112.4 43.4
Supplies and other 14.2 16.2
------- -------
126.6 59.6
Deferred income taxes 10.5 5.1
Other 5.9 6.1
------- -------
TOTAL CURRENT ASSETS 223.1 259.9
PROPERTIES 222.2 210.9
Allowances for depreciation and depletion (68.1) (60.9)
------- -------
TOTAL PROPERTIES 154.1 150.0
INVESTMENTS IN ASSOCIATED COMPANIES 229.2 235.4
OTHER ASSETS
Prepaid pensions 40.4 40.0
Miscellaneous 41.8 38.2
------- -------
TOTAL OTHER ASSETS 82.2 78.2
------- -------
TOTAL ASSETS $ 688.6 $ 723.5
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 77.1 $ 89.2
LONG-TERM DEBT 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 65.7 70.5
OTHER LIABILITIES 57.1 56.2
SHAREHOLDERS' EQUITY
Preferred Stock
Class A - no par value
Authorized - 500,000 shares; Issued - none -- --
Class B - no par value
Authorized - 4,000,000 shares; Issued - none -- --
Common Shares - par value $1 a share
Authorized - 28,000,000 shares;
Issued - 16,827,941 shares 16.8 16.8
Capital in excess of par value of shares 67.6 70.9
Retained income 500.4 513.2
Accumulated other comprehensive loss, net of tax (4.5) (4.3)
Cost of 5,774,592 Common Shares in treasury
(1998 - 5,677,287 shares) (159.5) (155.9)
Unearned compensation (2.1) (3.1)
------- -------
TOTAL SHAREHOLDERS' EQUITY 418.7 437.6
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 688.6 $ 723.5
======= =======
See notes to consolidated financial statements.
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CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions,
Brackets Indicate
Cash Decrease)
Nine Months Ended
September 30
--------------------
1999 1998
------- -------
OPERATING ACTIVITIES
Net income (loss) $ (.2) $ 37.5
Depreciation and amortization:
Consolidated 7.2 6.4
Share of associated companies 9.1 9.4
Provision for deferred income taxes (1.1) 5.6
Other 2.1 (1.7)
------- -------
Total before changes in operating assets and liabilities 17.1 57.2
Changes in operating assets and liabilities (71.7) 2.4
------- -------
Net cash from (used by) operating activities (54.6) 59.6
INVESTING ACTIVITIES
Purchase of property, plant and equipment:
Consolidated (12.2) (18.8)
Share of associated companies (4.0) (8.1)
Investment in Cliffs and Associates Limited (3.0) (10.8)
Other (5.6) 1.3
------- -------
Net cash (used by) investing activities (24.8) (36.4)
FINANCING ACTIVITIES
Dividends (12.6) (12.1)
Repurchases of Common Shares (5.2) (11.5)
------- -------
Net cash (used by) financing activities (17.8) (23.6)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (97.2) (.4)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 130.3 115.9
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33.1 $ 115.5
======= =======
See notes to consolidated financial statements.
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CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 1998 Annual Report on Form 10-K. In management's opinion, the
quarterly unaudited consolidated 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 March, 1998, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Adoption of the SOP in the first quarter of 1999
did not have a material impact on the Company's consolidated financial
statements.
In April, 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which requires such costs to be expensed as incurred
instead of being capitalized and amortized. Adoption of the SOP in the first
quarter of 1999 did not have a material impact on the Company's consolidated
financial statements.
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NOTE C - ENVIRONMENTAL RESERVES
At September 30, 1999, the Company had an environmental reserve,
including its share of ventures, of $21.1 million, of which $1.8 million was
classified as 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 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. Reserves are based on
Company estimates and 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. Also included in the reserve are wholly-owned active and closed
mining operations, and other sites, including former operations, for which
reserves are based on the Company's estimated cost of investigation and
remediation.
NOTE D - COMPREHENSIVE INCOME
(In Millions)
----------------------------------------------
Third Quarter First Nine Months
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
Net Income (Loss) $ (10.7) $ 20.1 $ (.2) $ 37.5
Other Comprehensive Income -
Unrealized (Loss) on Securities (.6) (1.9) (.2) (2.1)
------- ------- ------- -------
Comprehensive Income (Loss) $ (11.3) $ 18.2 $ (.4) $ 35.4
======= ======= ======= =======
NOTE E - SEGMENT REPORTING
The Company has two reportable segments offering different iron
products and services to the steel industry. Iron Ore is the Company's dominant
segment. The Ferrous Metallics segment is in the development stage, consisting
mainly of the hot briquetted iron venture project in Trinidad and Tobago.
"Other" includes non-reportable segments, and unallocated corporate
administrative and other income and expense.
(In Millions)
--------------------------------------------------------
Iron Ferrous Segments Consolidated
Ore Metallics Total Other Total
------ --------- -------- ------ ------------
Third Quarter 1999
Sales and services to external customers $ 80.2 $ $ 80.2 $ $ 80.2
Royalties and management fees 10.3 10.3 10.3
------ ------ ------ ------ ------
Total operating revenues 90.5 90.5 90.5
====== ====== ====== ====== ======
Income (loss) before taxes (10.4) (2.9) (13.3) (3.2) (16.5)
Equity (loss)* (2.4) (2.4) (2.4)
Investments in equity method investees 151.3 77.9 229.2 229.2
Other identifiable assets 427.8 6.7 434.5 24.9 459.4
------ ------ ------ ------ ------
Total assets 579.1 84.6 663.7 24.9 688.6
====== ====== ====== ====== ======
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(In Millions)
--------------------------------------------------------
Iron Ferrous Segments Consolidated
Ore Metallics Total Other Total
------ --------- -------- ------ ------------
Third Quarter 1998
Sales and services to external customers $158.1 $ $158.1 $ $158.1
Royalties and management fees 15.5 15.5 15.5
------ ------ ------ ------ ------
Total operating revenues 173.6 173.6 173.6
====== ====== ====== ====== ======
Income (loss) before taxes 29.9 (1.2) 28.7 (1.5) 27.2
Equity (loss)* (.4) (.4) (.4)
Investments in equity method investees 155.8 70.0 225.8 225.8
Other identifiable assets 462.7 .5 463.2 13.6 476.8
------ ------ ------ ------ ------
Total assets 618.5 70.5 689.0 13.6 702.6
====== ====== ====== ====== ======
(In Millions)
-------------------------------------------------------
Iron Ferrous Segments Consolidated
Ore Metallics Total Other Total
------ --------- -------- ------ ------------
First Nine Months 1999
Sales and services to external customers $176.7 $ $176.7 $ $176.7
Royalties and management fees 33.0 33.0 33.0
------ ------ ------ ------ ------
Total operating revenues 209.7 209.7 209.7
====== ====== ====== ====== ======
Income (loss) before taxes 15.9 (8.2) 7.7 (9.9) (2.2)
Equity (loss)* (5.8) (5.8) (5.8)
(In Millions)
-------------------------------------------------------
Iron Ferrous Segments Consolidated
Ore Metallics Total Other Total
------ --------- -------- ------ ------------
First Nine Months 1998
Sales and services to external customers $328.5 $ $328.5 $ $328.5
Royalties and management fees 36.8 36.8 36.8
------ ------ ------ ------ ------
Total operating revenues 365.3 365.3 365.3
====== ====== ====== ====== ======
Income (loss) before taxes 62.8 (3.7) 59.1 (8.4) 50.7
Equity (loss)* (1.5) (1.5) (1.5)
* Included in income (loss) before taxes.
NOTE F - COST OF GOODS SOLD ADJUSTMENTS
The third quarter and the first nine months of 1999 cost of goods sold
and operating expenses include approximately $25 million of fixed costs relating
to production curtailments by the Company, which were undertaken to reduce
inventory levels. This was partially offset by favorable adjustments, recorded
mainly in the first quarter, of approximately $7 million primarily related to
recoveries of prior years' state taxes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS - 1999 AND 1998
Net losses were $10.7 million, or $.96 per share (all per share results
are "per diluted share" unless stated otherwise) in the third quarter, and $.2
million, or $.02 per share in the first nine months. In 1998, third quarter
earnings were $20.1 million, or $1.78 per share, and first nine months earnings
were $37.5 million, or $3.30 per share.
The $30.8 million decrease in third quarter earnings and $37.7 million
decrease in nine month results were primarily due to production curtailments,
which were undertaken to reduce inventory levels because of lower sales volume.
Year-to-date sales volume in 1999 was adversely affected by the extended
shutdown of a large customer's blast furnaces due to a power plant explosion and
significant imports of unfairly traded steel. Included in third quarter and nine
months cost of goods sold and operating expenses is approximately $25 million of
fixed costs related to the production curtailments. This was partially offset by
favorable adjustments, recorded mainly in the first quarter, of $7 million,
primarily related to recoveries of prior years' state taxes. Lower price
realization and reduced royalty and management fee income also contributed to
the decrease in results.
Pellet sales in the third quarter of 1999 were 2.3 million tons versus
4.4 million tons in 1998. Pellet sales were 5.0 million tons in the first nine
months, 4.0 million tons below 1998 nine-month sales of 9.0 million tons.
Costs of ferrous metallics activities, which are included in other
expenses, were $2.9 million in the third quarter and $8.2 million in the first
nine months. Comparable costs in 1998 were $1.2 million in the third quarter and
$3.7 million in the first nine months. The 1999 costs include the Company's
share of the start-up expenses of the joint venture plant in Trinidad and Tobago
of $2.4 million in the third quarter and $5.8 million in the first nine months
compared to $.4 million and $1.5 million in the third quarter and first nine
months of 1998, respectively.
Interest expense increased in the third quarter and the first nine
months of 1999 versus 1998 due to the absence of capitalized interest during
construction of the hot briquetted iron plant in Trinidad and Tobago.
"Mechanical completion" of the plant occurred on April 7, 1999. Interest income
declined for the quarter and year-to-date compared to last year reflecting lower
cash balances, resulting from higher product inventory levels.
Tax credits recorded in the third quarter and first nine months
reflected the benefit of percentage depletion and other permanent tax
differences.
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CASH FLOW AND LIQUIDITY
At September 30, 1999, the Company had cash and cash equivalents of
$33.1 million compared to $130.3 million at December 31, 1998 and $115.5 million
at September 30, 1998. In the first nine months of 1999, cash and cash
equivalents decreased $97.2 million, primarily due to increased working capital,
$71.7 million, capital and project expenditures, $24.8 million, dividends, $12.6
million, and common share repurchases, $5.2 million, partially offset by cash
flow from operations, $17.1 million. The $71.7 million increase in working
capital was primarily due to higher pellet inventory, $68.4 million.
Pellet inventory, which was $111.8 million at September 30, 1999, is
expected to be reduced in the fourth quarter to a level comparable to year-end
1998.
NORTH AMERICAN IRON ORE
Rouge Industries, Inc., a major customer of the Company, incurred an
extended shutdown of its blast furnaces due to an explosion on February 1 at a
power generating facility that supplies Rouge. The Company is pursuing a
business interruption claim under its property insurance program, which would
partially mitigate the earnings impact of lost pellet sales to Rouge.
As a result of the extended shutdown of Rouge and significant imports
of unfairly traded steel, especially semi-finished steel, year-to-date sales
volume was adversely affected. Full year 1999 sales are expected to be about 8.7
million tons as compared to the record sales of 12.1 million tons in 1998.
The Company's managed mines are expected to produce 36.6 million tons
in 1999 as compared to 40.3 million tons in 1998. First nine months production
in 1999 was 26.9 million tons down from 30.2 million tons in 1998, and third
quarter production was 6.8 million tons in 1999 versus 10.8 million tons in
1998. The Company's share of 1999 production was 7.1 million tons through nine
months and 1.4 million tons in the quarter versus 8.4 million tons and 3.0
million tons in the respective periods of 1998.
Pellet inventory increased substantially in the first half of the year
pending the settlement of labor contracts on July 31. After the successful
completion of labor negotiations, production curtailments were implemented for
the second half of 1999. The schedule of production curtailments by mine was:
Shutdown Restart Shutdown
Date Date Days
-------- ------- --------
Empire Mine Sept. 3 Oct. 17 42
Hibbing Mine Aug. 8 Sept. 11 34
Tilden Mine Aug. 2 Oct. 17 75
Wabush Mines Aug. 2 Sept. 5 34
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In addition, the small pelletizing line at Northshore was taken down in mid-July
and is not scheduled to return to production until the end of the year. Although
production curtailments largely occurred in the third quarter, the Company has
estimated that fourth quarter fixed costs related to curtailments will
approximate $10 million.
New five-year labor agreements between the United Steelworkers of
America (USWA) and the Empire, Hibbing, and Tilden Mines were ratified by the
union membership in August. The agreements, which were patterned after
agreements negotiated earlier by major steel companies, provide employees with
improvements in pensions, wages, and other benefits. The agreements also commit
the mines and the union to jointly seek operating cost improvements. LTV Steel
Mining Company, in separate negotiations, also entered into a new five-year
pattern agreement with the USWA. The Wabush Mine in Canada settled on a new
five-year contract in July.
Capital additions and replacements at the six mining ventures and
supporting operations in North America are expected to total approximately $52
million in 1999, with the Company's share approximately $24 million ($16 million
through September 30). The Company's share of expenditures in the fourth quarter
of 1999 is expected to total approximately $8 million, which will be funded from
current operations.
FERROUS METALLICS
In the third quarter, Cliffs and Associates Limited (a joint venture
with Company ownership of 46.5 percent) produced a modest quantity of hot
briquetted iron at its plant in Trinidad and Tobago. While the plant has
experienced numerous mechanical problems during the start-up process, the
Company remains confident in the Circored(R) process technology and expects to
have the plant operational by the end of 1999. The briquettes meet most of the
expected quality specifications, including metallization of 93 percent. The
Company expects that the plant will be able to produce at least 400,000 metric
tons in 2000. The demand for ferrous metallics products, including CIRCAL(TM)
briquettes, has improved primarily as a result of higher operating rates at
steel plants utilizing electric arc furnaces.
Project capital expenditures through September 30, 1999 were $157.2
million (Company share - $73.1 million). The current estimate for total project
capital expenditures of $165 million (Company share - $77 million) includes the
settlement of disputed suppliers' claims, on which tentative agreements were
reached in the third quarter.
STRATEGIC INVESTMENTS
The Company is seeking additional investment opportunities,
domestically and internationally, to broaden its scope as a supplier of iron
units to the steel industry, including investments in iron ore mines or ferrous
metallics facilities. In the normal course of business, the Company examines
opportunities to increase profitability and strengthen its business position by
evaluating various investment opportunities consistent with its business
strategy. In the event of any future acquisitions or joint
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venture opportunities, the Company may consider using available liquidity,
incurring additional indebtedness, project financing, or other sources of
funding to make investments.
CAPITALIZATION
Long-term debt of the Company consists of $70.0 million of senior
unsecured notes payable to an insurance company group. The notes bear a fixed
interest rate of 7.0 percent and are scheduled to be repaid on December 15,
2005. In addition to the senior unsecured notes, the Company has a $100 million
revolving credit agreement. No borrowings are outstanding under this agreement,
which expires on May 31, 2003. 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 September 30, 1999, was estimated at $65.0 million
based on a discounted cash flow analysis and estimates of current borrowing
rates.
In September, 1999, the Company announced the expansion of its share
repurchase program to 2.0 million shares, an increase of 500,000 shares from its
previous authorization. Under the program, the Company had repurchased 1,298,775
shares at a total cost of $51.9 million at September 30, 1999.
Following is a summary of common shares outstanding:
1999 1998 1997
---- ---- ----
March 31 11,209,734 11,344,605 11,377,322
June 30 11,211,376 11,322,047 11,374,448
September 30 11,053,349 11,148,453 11,379,357
December 31 11,150,654 11,308,914
YEAR 2000 TECHNOLOGY
Year 2000 compliance, a major business priority of the Company over the
past two and one-half years, is near completion. The Company-wide Year 2000
Compliance Program ("Compliance Program") includes a dedicated team headed by a
Project Executive, with representation from Internal Control, Information
Technology, Process Control, and functional project leaders from the Company's
ventures. Additionally, two outside engineering firms and one information
technology service firm were utilized to support and assist in process control
compliance activities. The status of the Compliance Program continues to be
reported regularly to the Year 2000 Compliance Steering Committee, consisting of
the Chief Executive Officer and other Officers of the Company, and to the
Company's Board of Directors.
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The Compliance Program was divided into five phases: 1) inventory, 2)
assessment, 3) renovation, 4) unit testing, and 5) system integration testing.
The inventory, assessment, renovation and unit testing phases were substantially
completed in 1998. Renovation and unit testing of critical items (impacting
production, safety or quality) are essentially complete with minor delays
attributable to availability of manufacturers' support personnel and
hardware/software upgrades. The percentage of completion of unit testing at
operational locations ranges from 95 to 100 percent. System integration testing
has been substantially completed for operating locations.
A substantial portion of Year 2000 information technology compliance
has been achieved as a result of the Company's Information Technology Plan ("IT
Plan"). The IT Plan, initiated in 1996, involved the implementation of a
purchased, mining-based, Year 2000 compliant, software suite to replace legacy
programs for operations and administrative mainframe systems servicing most
domestic locations. In addition to avoiding Year 2000 problems, the IT Plan
resulted in improved system and operating effectiveness. Implementation was
achieved at the Michigan mines in the first quarter of 1999, and at the
Minnesota mines in the second quarter of 1999. Implementation at the corporate
office and central service locations was achieved in the third quarter of 1999.
Year 2000 compliance of the new software suite is expected to be confirmed in
the fourth quarter upon completion of system integration testing. The Company
charged to operations current state assessment, process re-engineering, and
training costs associated with the IT Plan.
For legacy programs and locations not included in the IT Plan,
modifications and/or replacement of existing programs for achieving Year 2000
compliance were completed at a cost of $1.1 million.
In addition to addressing software legacy program issues, the
Compliance Program has addressed the impact of the date change on the Company's
mainframe computer system, technical infrastructure, end user-computing, process
control systems, environmental and safety monitoring, and security and access
systems. Emphasis has been placed on those systems which affect production,
quality or safety. The Company has completed internal audits at various
operations to verify that progress is on schedule toward timely completion of
the Compliance Program. The incremental expense of achieving Year 2000
compliance on systems not covered by the IT Plan and other software legacy
programs is estimated to be $4.4 million for the Company and its ventures.
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Following is a summary of the Year 2000 total project compliance cost
and project cost incurred to date:
(In Millions)
-----------------------------------------
September 30, 1999 Total Project
------------------ -------------------
Company's Company's
Share Total Share Total
--------- ----- --------- -----
IT Plan:
Capital $15.2 $16.3 $16.9* $18.0
Operating 1.7 5.9 2.0 7.0
----- ----- ----- -----
Total IT Plan 16.9 22.2 18.9 25.0
Other** 1.7 4.3 2.2 5.5
----- ----- ----- -----
Total $18.6 $26.5 $21.1 $30.5
===== ===== ===== =====
* Includes amounts reimbursable by mining ventures of $14.3 million.
** Includes charges for legacy software not covered by the IT Plan,
hardware, process control systems, environmental and safety
monitoring, etc.
The Company has sent Year 2000 compliance questionnaires to 305 of its
major suppliers and customers as part of the Year 2000 readiness program. Of
these, 44 vendors have been identified as critical and on site assessments have
been performed, with vendor assessments classified as "low risk" and the
remaining vendors classified as "medium risk". Follow-up assessments for medium
risk vendors are in progress.
Interruption of electrical power supplied to the Company's ventures has
been identified as having the greatest potential adverse impact. Failure of
electric power suppliers of the Company's mining ventures to become Year 2000
compliant could cause power interruptions resulting in significant production
losses and potential equipment damage. The Company's wholly-owned Northshore and
managed LTV Steel Mining Company mines are equipped with electric power
generation facilities capable of providing nearly all of their power
requirements.
The Company has developed specific contingency plans at each location
to mitigate Year 2000 compliance failures of the Company or any of its key
suppliers or customers. The contingency plans involve specific actions designed
to maintain employee safety, production and quality. The contingency plans
include a range of actions, including low technology or manual alternatives to
current automated processes. Alternatives for key suppliers have been
identified, and, where alternative suppliers do not exist, other actions (e.g.,
increased inventory) are planned. While focused on continuing production, by
necessity the plans include procedures for reducing production or orderly
temporary suspension of operations, if required to protect employees, property
and the environment. Contingency plans, although considered complete, will
continue to be refined throughout 1999, incorporating assessments of areas where
risk is greatest.
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The Company expects to be Year 2000 compliant; however, statements with
regard to such expectations are subject to various risk factors which may
materially affect the Company's Year 2000 compliance efforts. Risk factors
include availability of trained personnel, ability to detect, locate and correct
system codes, evaluation of the wide variety of IT software and hardware,
failure of software vendors to deliver upgrades or make repairs as promised, and
failure of key vendors to become compliant. Although the Company has taken
actions that it believes are appropriate and reasonable to determine the
readiness of third parties, it must in part rely on third party representations.
The Company is attempting to reduce these risks and others by utilizing an
organized approach, conducting audits and extensive testing, identifying
alternative sources of supply, and other contingency plans.
FORWARD-LOOKING STATEMENTS
The preceding discussion and analysis of the Company's operations,
financial performance and results, as well as material included elsewhere in
this report, includes statements not limited to historical facts. Such
statements are "forward-looking statements" (as defined in the Private
Securities Litigation Reform Act of 1995) 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. Factors that could cause the Company's
actual results to be materially different from the Company's expectations
include the following:
- Changes in the financial condition of the Company's partners
and/or customers. The potential financial failure of one or more
significant customers or partners without mitigation could
represent a significant adverse development;
- Unanticipated changes in the market value of steel, iron ore or
ferrous metallics;
- Substantial changes in imports of steel, iron ore, or ferrous
metallic products;
- Development of alternative steel-making technologies;
- Displacement of steel by competing materials;
- Displacement of North American integrated steel production and/or
electric furnace production by imported semi-finished steel or pig
iron;
- Domestic or international economic and political conditions;
- Major equipment failure, availability, and magnitude and duration
of repairs;
- Unanticipated geological conditions or ore processing changes;
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- Process difficulties, including the failure of new technology to
perform as anticipated;
- Availability and cost of the key components of production (e.g.,
labor, electric power, fuel, water);
- Weather conditions (e.g., extreme winter weather, availability of
process water due to drought);
- Timing and successful completion of construction projects;
- Failure or delay in achieving Year 2000 compliance by the Company
or any of its key suppliers or customers;
- Changes in tax laws (e.g., percentage depletion allowance);
- 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 principle or policy changes 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.
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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 17.
(b) During the quarter for which this 10-Q Report is filed, the
Company filed two Current Reports on Form 8-K, one dated August 1,
1999 and the other dated September 14, 1999, both covering
information reported under ITEM 5. OTHER EVENTS. There were no
financial statements filed as part of the Current Reports on Form
8-K.
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 October 27, 1999 By /s/ C. B. Bezik
------------------------ ---------------------------------
C. B. Bezik
Senior Vice President-Finance and
Principal Financial Officer
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EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ ------- --------
27 Consolidated Financial Data Schedule submitted for -
Securities and Exchange Commission information
only
99(a) Cleveland-Cliffs Inc News Release published on Filed
October 20, 1999, with respect to third quarter Herewith
1999 loss
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