NOTE 19 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of financial statement issuance.
|
|
|
|
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and other factors that may affect our future results. We believe it is important to read our Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, as well as other publicly available information.
Overview
Cliffs is the largest flat-rolled steel producer in North America. Founded in 1847 as a mine operator, we are also the largest manufacturer of iron ore pellets in North America. We are vertically integrated from mined raw materials and direct reduced iron to primary steelmaking and downstream finishing, stamping, tooling, and tubing. We serve a diverse range of markets due to our comprehensive offering of flat-rolled steel products and are the largest supplier of steel to the automotive industry in North America. Headquartered in Cleveland, Ohio, we employ approximately 25,000 people across our mining, steel and downstream manufacturing operations in the United States and Canada.
On October 8, 2021, we entered into the FPT Acquisition Agreement, pursuant to which Cliffs will acquire FPT. We expect to complete the FPT Acquisition in the fourth quarter of 2021, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions. Unless otherwise noted, discussion of our business and results of operations in this Quarterly Report on Form 10-Q refers to our continuing operations on a stand-alone basis without giving effect to the pending FPT Acquisition.
Economic Overview
The fundamentals for our business have rebounded strongly since the COVID-19 pandemic disruption that occurred during 2020. The price for domestic HRC, the most significant index in driving our revenues and profitability, currently is at an all-time high. The HRC index averaged $1,500 per net ton for the first nine months of 2021, 188% higher than the same period last year.
The dramatic increase in the HRC price is a result of both supply and demand factors. Healthy consumer balance sheets have driven strong demand for consumer goods, such as HVAC products and appliances. Demand from machinery and equipment producers has also been robust. The demand for light vehicles has also been strong; however, automotive supply chain difficulties have limited the demand for steel from automotive manufacturers. On the supply side, spot steel availability has been limited. Import penetration has grown slightly but remains lower than its prior five-year average due to healthy demand globally as well as trade restrictions such as the Section 232 tariffs.
Along with these supply-demand factors, pricing for HRC has also risen due to the rise in the price of steelmaking input costs both domestically and globally, most notably for iron units. The price of busheling scrap, a necessary input for flat-rolled steel production in EAFs in the U.S., averaged $600 per long ton during the first nine months of 2021, a 107% increase from the prior-year period. We expect the price of busheling scrap to remain elevated due to decreasing prime scrap generation from original equipment manufacturers and the growth of EAF
capacity in the U.S., along with a push for expanded scrap use globally. As we are fully-integrated and have primarily a blast furnace footprint, the rising prices for busheling scrap in the U.S. bolster our competitive advantage, as we source the majority of our iron feedstock from our stable-cost mining and pelletizing operations in Minnesota and Michigan. The rising price of busheling scrap should also enhance the benefit of sourcing more scrap internally following the FPT Acquisition and provide greater cost savings potential for HBI used internally.
While it has fallen in recent months, the price of iron ore has also risen dramatically over the past year, which, along with strong demand, has been an important factor in rising steel prices globally. The Platts 62% Price averaged $177 per metric ton in the first nine months of 2021, a 77% increase compared to the same period in 2020. While higher iron ore prices play a role in increased steel prices, we also directly benefit from higher iron ore prices for the portion of iron ore pellets we sell to third parties.
The largest market for our steel products is the automotive industry in North America, which makes light vehicle production a key driver of demand. In the first nine months of 2021, North American light vehicle production was approximately 9.8 million units, a 7% increase from the prior year’s comparable period. This increase is primarily due to the ongoing recovery from the COVID-19 pandemic, though automotive production has been adversely affected in 2021 by the global semiconductor shortage, as well as other material shortages and supply chain disruptions. This has caused several outages amongst light vehicle manufacturers. In light of these production outages, we have been able to redirect certain volumes originally intended for this end market to the spot market, where demand has been strong and pricing continues to remain near all-time highs.
During the first nine months of 2021, light vehicle sales in the U.S. saw a seasonally adjusted annualized rate of 15.7 million units with 3.5 million passenger cars and 12.2 million light trucks sold, representing a 13% increase over the first nine months of 2020. These improved sales, combined with continued production difficulties, brought light vehicle inventories to an all-time low of 22 days' supply during the third quarter of 2021.
Competitive Strengths
As the largest flat-rolled steel producer in North America, we benefit from having the size and scale necessary in a competitive, capital intensive business. Our sizeable operating footprint provides us with the operational leverage, flexibility and cost performance to achieve competitive margins throughout the business cycle. We also have a unique vertically integrated profile, which begins at the mining stage and goes all the way through the manufacturing of steel products, including stamping, tooling and tubing. This positioning gives us both lower and more predictable costs throughout the supply chain and more control over both our manufacturing inputs and our end product destination.
Our legacy business of producing iron ore pellets, which is our primary steelmaking raw material input, is another competitive advantage. By controlling our iron ore pellet supply, our primary steelmaking raw material feedstock can be secured at a stable and predictable cost and not be subject to factors outside of our control.
We are also the largest supplier of automotive-grade steel in the U.S. Compared to other steel end markets, automotive steel is generally higher quality and more operationally and technologically intensive to produce. As such, it often generates higher through-the-cycle margins, making it a desirable end market for the steel industry. With our continued technological innovation, as well as leading delivery performance, we expect to remain the leader in supplying this industry.
We believe we offer the most comprehensive flat-rolled steel product selection in the industry, along with several complementary products and services. A sampling of this offering includes advanced high-strength steel, hot-dipped galvanized, aluminized, galvalume, electrogalvanized, galvanneal, HRC, cold-rolled coil, plate, tinplate, grain oriented electrical steel, non-oriented electrical steel, stainless steels, tool and die, stamped components, rail and slabs. Across the quality spectrum and the supply chain, our customers can frequently find the solutions they need from our product selection.
We are the first and the only producer of HBI in the Great Lakes region. Construction of our Toledo, Ohio, direct reduction plant was completed in the fourth quarter of 2020. From this modern plant, we produce a high-quality, low-cost and low-carbon intensive HBI product that can be used in our blast furnaces as a productivity enhancer for our BOFs and EAFs as a scrap alternative. With increasing tightness in the scrap market and our own internal needs for scrap and metallics, we expect our Toledo direct reduction plant to support healthy Steelmaking margins for us going forward.
Strategy
Optimizing Our Fully-Integrated Steelmaking Footprint
We have transformed into a fully-integrated steel enterprise with the size and scale to achieve improved through-the-cycle margins and are the largest flat-rolled steel producer in North America. We will also bolster our raw material portfolio with the FPT Acquisition, a leading prime scrap processor in the U.S.
Our focus is on meeting the currently strong demand environment for steel. We have the scale and technical capabilities necessary in a competitive and increasingly quality-focused marketplace. We have implemented improvements in logistics, procurement, utilization and quality, and will continue to explore opportunities to do so.
Maximizing Our Commercial Strengths
We offer a full suite of flat steel products encompassing all steps of the steel manufacturing process. We have an industry-leading market share in the automotive sector, where our portfolio of high-end products delivers a broad range of differentiated solutions for this highly sought after customer base.
We believe we have the broadest flat steel product offering in North America and can meet customer needs from a variety of end markets and quality specifications. We have several finishing and downstream facilities with advanced technological capabilities.
We are also proponents of the “value over volume” approach in terms of steel supply. We take our leadership role in the industry very seriously and intend to manage our steel output in a responsible manner.
Expand our Ferrous Scrap Recycling Presence
Throughout our entire footprint, we consume a very significant amount of scrap in our EAFs and BOFs, of which currently more than half must be purchased from third parties. Prime scrap supply has been shrinking in the U.S. for the last 50 years and is unlikely to grow materially in the future. As the steel industry continues to increase its focus on decarbonization and with the new flat-rolled EAF capacity set to come online over the next five years, securing access to prime scrap has become an important strategic initiative.
Our expansion in this area will be accomplished with the FPT Acquisition. As the largest supplier of flat-rolled steel in North America, we are the largest source of the steel that generates prime scrap in manufacturing facilities. Based on this, we seek to leverage our long-standing flat-rolled automotive and other customer relationships into recycling partnerships to grow our prime scrap presence. The FPT Acquisition will also allow us to optimize productivity at our existing EAFs and BOFs, as we have no current plans to add additional steelmaking capacity.
Advancing our Participation in the Green Economy
We are seeking to expand our customer base with the rapidly growing and desirable electric vehicle market. At this time, we believe the North American automotive industry is approaching a monumental inflection point, with the adoption of electrical motors in passenger vehicles. As this market grows, it will require more advanced steel applications to meet the needs of electric vehicle producers and consumers. With our unique technical capabilities, we believe we are positioned better than any other North American steelmaker to supply the steel and parts necessary to fill these needs.
We also have the right products to meet the growing demand for renewable energy as well as for the modernization of the U.S. electrical grid. We offer plate products that can be used in windmills, which we estimate contain 130 tons of steel per megawatt of electricity. In addition, panels for solar power are heavy consumers of galvanized steel, where we are a leading producer. We estimate solar panels consume 40 tons of steel per megawatt of electricity.
We are currently the sole producer of electrical steel in the U.S., which can facilitate the modernization of the U.S. electrical grid. Along with charging networks, electrical steels are also needed in the motors of electric vehicles.
Enhance our Commitment to Environmental Sustainability
Our commitment to operating our business in a more environmentally responsible manner remains constant. One of the most important issues impacting our industry, our stakeholders and our planet is climate change. In early 2021, we announced our commitment to reduce GHG emissions 25% from 2017 levels by 2030. This goal represents combined Scope 1 (direct) and Scope 2 (indirect) GHG emission reductions across all of our operations.
Prior to setting this goal with our newly acquired steel assets, we exceeded our previous 26% GHG reduction target at our legacy facilities six years ahead of our 2025 goal. In 2019, we reduced our combined Scope 1 and Scope 2 GHG emissions by 42% on a mass basis from 2005 baseline levels. Our goal is to further reduce those emissions in coming years.
Additionally, many of our steel assets have improved plant and energy efficiency through participation in programs like the U.S. Department of Energy’s Better Plants program and the EPA’s Energy Star program. With our longstanding focus on plant and energy efficiency, we aim to build on our previous successes across our newly integrated enterprise.
Our GHG reduction commitment is based on executing the following five strategic priorities:
•Developing domestically sourced, high quality iron ore feedstock and utilizing natural gas in the production of HBI;
•Implementing energy efficiency and clean energy projects;
•Investing in the development of carbon capture technology;
•Enhancing our GHG emissions transparency and sustainability focus; and
•Supporting public policies that facilitate GHG reduction in the domestic steel industry.
Improving Financial Flexibility
Given the cyclicality of our business, it is important to us to be in the financial position to easily withstand any negative demand or pricing pressure we may encounter. During the COVID-19 pandemic, we were able to issue secured debt to provide insurance capital through the uncertain industry conditions caused by the pandemic. Now that business conditions have improved, allowing us to generate a healthy free cash flow during 2021, we have the ability to make investments to both improve and grow our business, particularly as it pertains to scrap metal. We have also been able to reduce our diluted share count and effectively return capital to shareholders via the cash redemption of our Series B Participating Redeemable Preferred Stock during the third quarter of 2021.
We anticipate that the current strong market environment will provide us ample opportunities to reduce our debt with our own free cash flow generation. We will also continue to review the composition of our debt, as we are interested in both extending our average maturity profile and increasing our ratio of unsecured debt to secured debt, which we demonstrated by executing a series of favorable debt and equity capital markets transactions during February 2021. In addition, in June 2021, we redeemed all $396 million aggregate principal amount outstanding of our 5.750% 2025 Senior Notes. These actions will better prepare us to navigate more easily through potentially volatile industry conditions in the future.
Recent Developments
Acquisition of FPT
On October 8, 2021, we entered into the FPT Acquisition Agreement, pursuant to which Cliffs will acquire FPT for an aggregate purchase price of $775 million, on a cash-free, debt-free basis and subject to customary adjustment. We expect to complete the FPT Acquisition in the fourth quarter of 2021. Completion of the FPT Acquisition is subject to various customary closing conditions, including the receipt of required regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, and it is possible factors outside of our control could result in the FPT Acquisition being completed at a later time or not at all. The FPT Acquisition Agreement also contains certain termination rights that may be exercised by either party. We plan to complete the FPT Acquisition as soon as reasonably practicable following the satisfaction or waiver of all applicable conditions.
COVID-19 Vaccination Incentive Program
During the third quarter of 2021, we launched a COVID-19 vaccination incentive program with the intent of protecting our workforce by providing employees with an incentive of up to $3,000 per employee to get vaccinated. We achieved a company-wide vaccination rate of 75%, or nearly 19,000 employees out of our workforce of
approximately 25,000 employees. The incentive, which totaled $45 million, was primarily paid out during the third quarter of 2021.
Series B Participating Redeemable Preferred Stock Redemption
During the third quarter of 2021, we redeemed with cash all 583,273 shares outstanding of our Series B Participating Redeemable Preferred Stock at a redemption price of $1.3 billion. There were no accumulated and unpaid dividends on the Series B Participating Redeemable Preferred Stock as of the redemption date.
Labor Agreements
On October 4, 2021, we reached a tentative agreement with the UAW for a new three-year labor contract for our Rockport Works employees. The new contract is retroactively effective from October 1, 2021 through September 30, 2024, and will cover approximately 350 UAW-represented workers.
On August 5, 2021, we reached a tentative agreement with the UAW for a new three-year labor contract for our Dearborn Works employees. The new contract is retroactively effective from August 1, 2021 through July 31, 2024, and will cover approximately 1,000 UAW-represented workers.
Results of Operations
Overview
For the three and nine months ended September 30, 2021, we had Net income of $1,282 million and $2,134 million, respectively, compared to Net income of $2 million and Net loss of $155 million for the three and nine months ended September 30, 2020, respectively. Our Revenues, diluted EPS and Adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020 were as follows:
See "— Results of Operations — Adjusted EBITDA" below for a reconciliation of our Net income (loss) to Adjusted EBITDA.
Revenues
During the three and nine months ended September 30, 2021, our consolidated Revenues increased by $4.4 billion and $12.0 billion, respectively, compared to the prior-year periods. The increase for the three months ended September 30, 2021, was primarily due to our Steelmaking segment, which had an increase in steel shipments of 3.0 million net tons and an increase in the average steel product selling price of $334 per net ton. The increase for the nine months ended September 30, 2021, was primarily due to the addition of 10.6 million net tons of steel shipments from our Steelmaking segment, along with an increase in the average steel product selling price of $111 per net ton and increased demand.
Revenues by Product Line
The following represents our consolidated Revenues by product line for the three months ended:
The following represents our consolidated Revenues by product line for the nine months ended:
The change in product mix for 2021, compared to 2020, is due to the inclusion of full-period results for the 2020 Acquisitions. The results for 2020 include AK Steel operations subsequent to March 13, 2020, and our results from operations previously reported as part of our historical Mining and Pelletizing segment.
Revenues by Market
The following table represents our consolidated Revenues and percentage of revenues from each of the markets we supply:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Revenue
|
|
%
|
|
Revenue
|
|
%
|
|
Revenue
|
|
%
|
|
Revenue
|
|
%
|
Automotive
|
$
|
1,254
|
|
|
21
|
%
|
|
$
|
913
|
|
|
55
|
%
|
|
$
|
3,883
|
|
|
26
|
%
|
|
$
|
1,389
|
|
|
45
|
%
|
Infrastructure and Manufacturing
|
1,615
|
|
|
27
|
%
|
|
199
|
|
|
12
|
%
|
|
3,922
|
|
|
26
|
%
|
|
446
|
|
|
14
|
%
|
Distributors and Converters
|
2,465
|
|
|
41
|
%
|
|
143
|
|
|
9
|
%
|
|
5,721
|
|
|
38
|
%
|
|
344
|
|
|
11
|
%
|
Steel Producers
|
670
|
|
|
11
|
%
|
|
391
|
|
|
24
|
%
|
|
1,572
|
|
|
10
|
%
|
|
919
|
|
|
30
|
%
|
Total revenues
|
$
|
6,004
|
|
|
|
|
$
|
1,646
|
|
|
|
|
$
|
15,098
|
|
|
|
|
$
|
3,098
|
|
|
|
Operating Costs
Cost of goods sold
During the three and nine months ended September 30, 2021, Cost of goods sold increased by $2.7 billion and $8.7 billion, respectively, as compared to the prior-year periods. The increases were primarily due to the addition of 3.0 million and 10.6 million net tons of steel shipments from our Steelmaking segment for the three and nine months ended September 30, 2021, respectively.
Selling, general and administrative expenses
As a result of the 2020 Acquisitions, our Selling, general and administrative expenses increased by $53 million and $162 million during the three and nine months ended September 30, 2021, respectively, as compared to the prior-year periods.
Acquisition-related costs
The following table represents the components of Acquisition-related costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Severance
|
$
|
(3)
|
|
|
$
|
(2)
|
|
|
$
|
(15)
|
|
|
$
|
(38)
|
|
Third-party expenses
|
(1)
|
|
|
(5)
|
|
|
(3)
|
|
|
(30)
|
|
Total
|
$
|
(4)
|
|
|
$
|
(7)
|
|
|
$
|
(18)
|
|
|
$
|
(68)
|
|
Refer to NOTE 3 - ACQUISITIONS for further information on the 2020 Acquisitions.
Miscellaneous – net
Miscellaneous – net decreased by $7 million and $3 million for the three and nine months ended September 30, 2021, respectively, as compared to the prior-year periods. The decreases were primarily due to the decrease in expenses incurred at our Toledo direct reduction plant recorded in Miscellaneous – net prior to start of production in December 2020. The decrease during the nine months ended September 30, 2021 was partially offset by the acquisition-related loss on equity method investment.
Other Income (Expense)
Interest expense, net
Interest expense, net increased by $13 million and $90 million for the three and nine months ended September 30, 2021, respectively, as compared to the prior-year periods. The increase for the three months ended September 30, 2021 was primarily due to borrowings on the ABL Facility, and a decrease in capitalized interest during 2021, due to the completion of our Toledo direct reduction plant in December 2020, partially offset by the debt restructuring activities during 2021, which reduced interest expense on our senior notes. The increase during the nine months ended September 30, 2021 was primarily due to the incremental debt that we incurred in connection with the AK Steel Merger, borrowings on the ABL Facility and a decrease in capitalized interest during 2021, due to the completion of our Toledo direct reduction plant in December 2020.
Gain (loss) on extinguishment of debt
The loss on extinguishment of debt of $88 million for the nine months ended September 30, 2021, primarily resulted from the redemption of $396 million aggregate principal amount of 5.750% 2025 Senior Notes and the repurchase of $25 million aggregate principal amount of 9.875% 2025 Senior Secured Notes. The nine months ended September 30, 2021 was also impacted by the redemption of $322 million in aggregate principal amount of 9.875% 2025 Senior Secured Notes and repurchase of $535 million in aggregate principal amount of our outstanding senior notes of various other series in the first quarter of 2021.
The gain on extinguishment of debt of $133 million for the nine months ended September 30, 2020, primarily resulted from the repurchase of $748 million aggregate principal amount of our outstanding senior notes. The nine months ended September 30, 2020, was also impacted by the repurchase of $57 million aggregate principal amount of 7.500% 2023 AK Senior Notes and $9 million aggregate principal amount of 7.625% 2021 AK Senior Notes.
Refer to NOTE 8 - DEBT AND CREDIT FACILITIES for further details.
Net periodic benefit credits other than service cost component
The increases in Net periodic benefit credits other than service cost component of $37 million and $109 million for the three and nine months ended September 30, 2021, respectively, as compared to the prior-year periods, primarily relate to an increase in the expected return on pension and voluntary employee benefit association trust assets acquired as a result of the 2020 Acquisitions. Refer to NOTE 10 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further details.
Income Taxes
Our effective tax rate is impacted by permanent items, primarily depletion. It also is affected by discrete items that may occur in any given period but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Income tax benefit (expense)
|
$
|
(334)
|
|
|
$
|
22
|
|
|
$
|
(559)
|
|
|
$
|
98
|
|
Effective tax rate
|
21
|
%
|
|
110
|
%
|
|
21
|
%
|
|
39
|
%
|
The difference in the effective rate and income tax expense from the comparable prior-year period primarily relates to the change in income.
Our 2021 estimated annual effective tax rate before discrete items is 21%. This estimated annual effective tax rate mirrors the U.S. statutory rate of 21%, as the adjusting items, including percentage depletion in excess of cost depletion, net to zero. The 2020 estimated annual effective tax rate before discrete items at September 30, 2020 was 36%. The decrease in the estimated annual effective tax rate before discrete items is driven by the change in income.
Adjusted EBITDA
We evaluate performance on an operating segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel industry. In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.
The following table provides a reconciliation of our Net income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income (loss)
|
$
|
1,282
|
|
|
$
|
2
|
|
|
$
|
2,134
|
|
|
$
|
(155)
|
|
Less:
|
|
|
|
|
|
|
|
Interest expense, net
|
(81)
|
|
|
(68)
|
|
|
(258)
|
|
|
(168)
|
|
Income tax benefit (expense)
|
(334)
|
|
|
22
|
|
|
(559)
|
|
|
98
|
|
Depreciation, depletion and amortization
|
(239)
|
|
|
(72)
|
|
|
(664)
|
|
|
(184)
|
|
Total EBITDA
|
$
|
1,936
|
|
|
$
|
120
|
|
|
$
|
3,615
|
|
|
$
|
99
|
|
Less:
|
|
|
|
|
|
|
|
EBITDA of noncontrolling interests1
|
$
|
17
|
|
|
$
|
16
|
|
|
$
|
60
|
|
|
$
|
41
|
|
Gain (loss) on extinguishment of debt
|
—
|
|
|
—
|
|
|
(88)
|
|
|
133
|
|
Severance costs
|
(3)
|
|
|
(2)
|
|
|
(15)
|
|
|
(38)
|
|
Acquisition-related costs excluding severance costs
|
(1)
|
|
|
(5)
|
|
|
(3)
|
|
|
(30)
|
|
Acquisition-related loss on equity method investment
|
—
|
|
|
—
|
|
|
(18)
|
|
|
—
|
|
Amortization of inventory step-up
|
(11)
|
|
|
(15)
|
|
|
(129)
|
|
|
(74)
|
|
Impact of discontinued operations
|
1
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Total Adjusted EBITDA
|
$
|
1,933
|
|
|
$
|
126
|
|
|
$
|
3,806
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
1 EBITDA of noncontrolling interests includes the following:
|
Net income attributable to noncontrolling interests
|
$
|
8
|
|
|
$
|
12
|
|
|
$
|
39
|
|
|
$
|
31
|
|
Depreciation, depletion and amortization
|
9
|
|
|
4
|
|
|
21
|
|
|
10
|
|
EBITDA of noncontrolling interests
|
$
|
17
|
|
|
$
|
16
|
|
|
$
|
60
|
|
|
$
|
41
|
|
The following table provides a summary of our Adjusted EBITDA by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
Steelmaking
|
$
|
1,969
|
|
|
$
|
127
|
|
|
$
|
3,901
|
|
|
$
|
117
|
|
Other Businesses
|
6
|
|
|
18
|
|
|
25
|
|
|
22
|
|
Corporate and eliminations
|
(42)
|
|
|
(19)
|
|
|
(120)
|
|
|
(72)
|
|
Total Adjusted EBITDA
|
$
|
1,933
|
|
|
$
|
126
|
|
|
$
|
3,806
|
|
|
$
|
67
|
|
Adjusted EBITDA from our Steelmaking segment for the three and nine months ended September 30, 2021, increased by $1,842 million and $3,784 million, respectively, as compared to the prior-year periods. The results were favorably impacted by the operating results related to the acquired steelmaking operations. Our Steelmaking segment Adjusted EBITDA included $66 million and $180 million of Selling, general and administrative expenses for the three and nine months ended September 30, 2021, respectively. See "—Steelmaking" below for further detail.
Adjusted EBITDA from Corporate and eliminations primarily relates to Selling, general and administrative expenses at our Corporate headquarters.
Steelmaking
The following is a summary of our Steelmaking segment results included in our consolidated financial statements for the three and nine months ended September 30, 2021 and 2020. The results for 2021 include full-period results for all Steelmaking operations. The results for 2020 include AK Steel operations subsequent to March 13, 2020, and our results from operations previously reported as part of our Mining and Pelletizing segment.
The following is a summary of our Steelmaking segment operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Operating Results - In Millions
|
|
|
|
|
|
|
|
Revenues
|
$
|
5,869
|
|
|
$
|
1,506
|
|
|
$
|
14,710
|
|
|
$
|
2,866
|
|
Cost of goods sold
|
$
|
(4,098)
|
|
|
$
|
(1,405)
|
|
|
$
|
(11,472)
|
|
|
$
|
(2,882)
|
|
Selling Price - Per Ton
|
|
|
|
|
|
|
|
Average net selling price per net ton of steel products
|
$
|
1,334
|
|
|
$
|
1,000
|
|
|
$
|
1,122
|
|
|
$
|
1,011
|
|
The following tables represent our Steelmaking segment Revenues by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Millions,
Sales Volumes In Thousands)
|
|
Three Months Ended
September 30,
|
|
2021
|
|
2020
|
|
Revenue
|
|
Volume1
|
|
Revenue
|
|
Volume1
|
Hot-rolled steel
|
$
|
1,800
|
|
|
1,332
|
|
|
$
|
89
|
|
|
134
|
|
Cold-rolled steel
|
935
|
|
|
728
|
|
|
126
|
|
|
179
|
|
Coated steel
|
1,635
|
|
|
1,291
|
|
|
604
|
|
|
656
|
|
Stainless and electrical steel
|
441
|
|
|
177
|
|
|
296
|
|
|
146
|
|
Plate steel
|
357
|
|
|
244
|
|
|
—
|
|
|
—
|
|
Other steel products
|
374
|
|
|
381
|
|
|
—
|
|
|
—
|
|
Iron products
|
252
|
|
|
1,426
|
|
|
384
|
|
|
3,703
|
|
Other
|
75
|
|
|
N/A
|
|
7
|
|
|
N/A
|
Total
|
$
|
5,869
|
|
|
|
|
$
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
1 All steel product volumes are stated in net tons. Iron product volumes are stated in long tons.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Millions,
Sales Volumes In Thousands)
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
Revenue
|
|
Volume1
|
|
Revenue
|
|
Volume1
|
Hot-rolled steel
|
$
|
4,204
|
|
|
3,900
|
|
|
$
|
150
|
|
|
228
|
|
Cold-rolled steel
|
2,352
|
|
|
2,196
|
|
|
242
|
|
|
342
|
|
Coated steel
|
4,338
|
|
|
3,907
|
|
|
995
|
|
|
1,088
|
|
Stainless and electrical steel
|
1,201
|
|
|
512
|
|
|
560
|
|
|
268
|
|
Plate steel
|
929
|
|
|
792
|
|
|
—
|
|
|
—
|
|
Other steel products
|
1,009
|
|
|
1,195
|
|
|
—
|
|
|
—
|
|
Iron products
|
477
|
|
|
2,875
|
|
|
903
|
|
|
8,772
|
|
Other
|
200
|
|
|
N/A
|
|
16
|
|
|
N/A
|
Total
|
$
|
14,710
|
|
|
|
|
$
|
2,866
|
|
|
|
|
|
|
|
|
|
|
|
1 All steel product volumes are stated in net tons. Iron product volumes are stated in long tons.
|
Operating Results
Steelmaking revenues for the three and nine months ended September 30, 2021 increased by $4,363 million and $11,844 million, respectively, compared to the prior-year periods, primarily due to the addition of sales following the 2020 Acquisitions. The three and nine months ended September 30, 2021 included results of the operations acquired in the 2020 Acquisitions for the full nine months, compared to the three and nine months ended September 30, 2020, which included the operating results from AK Steel during the period of March 13, 2020 through September 30, 2020. Results for the three and nine months ended September 30, 2021 were impacted positively by the increase in the price for domestic HRC, which is the most significant index driving our revenues and profitability. The HRC index averaged $1,500 per net ton for the first nine months of 2021, 188% higher than the same period last year and currently at an all-time high as a direct result of favorable supply-demand dynamics following the COVID-19 pandemic. We have also benefited from higher steel shipments due to stronger demand.
Cost of goods sold for the three and nine months ended September 30, 2021 increased by $2,693 million and $8,590 million, respectively, compared to the prior-year periods, predominantly due to additional sales as discussed above.
As a result, Adjusted EBITDA was $1,969 million and $3,901 million for the three and nine months ended September 30, 2021, respectively, compared to $127 million and $117 million for the three and nine months ended September 30, 2020, respectively. Adjusted EBITDA for the three and nine months ended September 30, 2021 was positively impacted by the addition of sales following the 2020 Acquisitions, the increase in the price for HRC and the higher demand for steel products, as discussed above.
Production
During the first nine months of 2021, we produced 14.3 million net tons of raw steel, 21.0 million long tons of iron ore products and 2.2 million net tons of coke. We restarted our temporarily idled Columbus Coatings and Monessen facilities during the second and third quarters of 2021, respectively. As a result of our HBI use in our blast furnaces and associated reduction of coke needs, we temporarily idled the coke battery at Middletown Works during the third quarter of 2021. During the first nine months of 2020, we produced 2.1 million net tons of raw steel, 11.4 million long tons of iron ore pellets and 0.3 million net tons of coke.
Liquidity, Cash Flows and Capital Resources
Our primary sources of liquidity are Cash and cash equivalents and cash generated from our operations, availability under the ABL Facility and other financing activities. Our capital allocation decision-making process is focused on preserving healthy liquidity levels while maintaining the strength of our balance sheet and creating financial flexibility to manage through the inherent cyclical demand for our products and volatility in commodity prices. We are focused on maximizing the cash generation of our operations, reducing debt, and aligning capital investments with our strategic priorities and the requirements of our business plan, including regulatory and permission-to-operate related projects.
Following the onset of the COVID-19 pandemic in the U.S. in 2020, our primary focus was to maintain adequate levels of liquidity to manage through a potentially prolonged economic downturn. Now that business conditions have improved, allowing us to generate a healthy free cash flow during 2021, we have the ability to make investments to both improve and grow our business, particularly as it pertains to scrap metal. We have also been able to reduce our diluted share count and effectively return capital to shareholders via the cash redemption of our Series B Participating Redeemable Preferred Stock during the third quarter of 2021.
In addition, we anticipate that the current strong market environment will provide us ample opportunities to reduce our debt with our own free cash flow generation. We also continue to look at the composition of our debt, as we are interested in both extending our average maturity length and increasing our ratio of unsecured debt to secured debt, which can be accomplished with cash provided by operating activities. These actions will better prepare us to navigate more easily through potentially volatile industry conditions in the future. In furtherance of these goals, we consummated the following financing transactions during the first nine months of 2021.
On February 11, 2021, we sold 20 million common shares at a price per share of $16.12. We used the net proceeds from the offering, plus cash on hand, to redeem $322 million aggregate principal amount of our outstanding 9.875% 2025 Senior Secured Notes. Prior to such use, the net proceeds were used to temporarily reduce the outstanding borrowings under our ABL Facility.
On February 17, 2021, we issued $500 million aggregate principal amount of 4.625% 2029 Senior Notes and $500 million aggregate principal amount of 4.875% 2031 Senior Notes in an offering that was exempt from the registration requirements of the Securities Act. We used the net proceeds from the notes offering to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.500% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
The application of the net proceeds to us from the February 2021 financing transactions shifted our debt horizon by providing a four-year window in which none of our long-term senior notes are due, clearing the way for us to fully focus on operational integration.
Additionally, on June 28, 2021, we redeemed the entirety of our outstanding 5.750% 2025 Senior Notes using available liquidity. Pursuant to the terms of the indenture governing the 5.750% 2025 Senior Notes, we paid $415 million, including $396 million aggregate principal amount, plus make-whole premiums and accrued and unpaid interest to, but not including, the redemption date.
Based on our outlook for the next 12 months, which is subject to continued changing demand from customers and volatility in domestic steel prices, we expect to have ample liquidity through cash generated from operations and availability under our ABL Facility sufficient to meet the needs of our operations and service our debt obligations.
The following discussion summarizes the significant items impacting our cash flows during the nine months ended September 30, 2021 and 2020 as well as expected impacts to our future cash flows over the next 12 months. Refer to the Statements of Unaudited Condensed Consolidated Cash Flows for additional information. Unless otherwise noted, the following discussion refers to our continuing operations on a stand-alone basis without giving effect to the pending FPT Acquisition.
Operating Activities
Net cash provided by operating activities was $1,648 million for the nine months ended September 30, 2021, compared to net cash used by operating activities of $51 million for the nine months ended September 30, 2020. The increase in cash provided by operating activities during the first nine months of 2021, compared to 2020, was driven by improved operating results, partially offset by changes in working capital. Changes in working capital included increases in inventory primarily related to the automotive chip shortage and increased raw material and production costs, as well as increases in receivables primarily related to rising prices. The increase in cash provided by operating activities was also offset by deferred pension contributions.
Investing Activities
Net cash used by investing activities was $414 million and $1,240 million for the nine months ended September 30, 2021 and 2020, respectively. We had capital expenditures of $473 million and $379 million for the nine months ended September 30, 2021 and 2020, respectively. We had cash outflows relating to the development of the Toledo direct reduction plant of $57 million and $273 million for the nine months ended September 30, 2021 and 2020, respectively. Additionally, we spent $416 million and $106 million primarily on sustaining capital expenditures during the nine months ended September 30, 2021 and 2020, respectively. Sustaining capital spend includes infrastructure, mobile equipment, fixed equipment, product quality, environment, health and safety.
During the first nine months of 2020, we had net cash outflows of $869 million for the acquisition of AK Steel, net of cash acquired, which included $590 million used to repay the former AK Steel Corporation revolving credit facility and $324 million used to purchase outstanding 7.500% 2023 AK Senior Notes.
We anticipate total cash used for capital expenditures during the next 12 months to be between $750 and $850 million.
Financing Activities
Net cash used by financing activities was $1,304 million for the nine months ended September 30, 2021, compared to net cash provided by financing activities of $994 million for the nine months ended September 30, 2020. Cash outflows from financing activities for the nine months ended September 30, 2021 included the redemption of all 583,273 shares outstanding of our Series B Participating Redeemable Preferred Stock at a redemption price of $1.3 billion during the third quarter of 2021, along with $1.3 billion for repayments of debt. We used available liquidity to redeem all $396 million aggregate principal amount outstanding of our 5.750% 2025 Senior Notes. We used the net proceeds from the issuance of the 20 million common shares, and cash on hand, to redeem $322 million in aggregate principal amount of 9.875% 2025 Senior Secured Notes. We used the net proceeds from the issuances of the 4.625% 2029 Senior Notes and 4.875% 2031 Senior Notes to redeem all of the outstanding 4.875% 2024 Senior Secured Notes, 6.375% 2025 Senior Notes, 7.625% 2021 AK Senior Notes, 7.500% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes, and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
Cash inflows from financing activities for the nine months ended September 30, 2021 included the issuances of $500 million aggregate principal amount of 4.625% 2029 Senior Notes, $500 million aggregate principal amount of 4.875% 2031 Senior Notes and 20 million common shares for proceeds of $322 million, along with net borrowings of $193 million under credit facilities.
Net cash provided by financing activities for the nine months ended September 30, 2020 primarily related to the issuances of $845 million aggregate principal amount of 6.750% 2026 Senior Secured Notes, $955 million aggregate principal amount of 9.875% 2025 Senior Secured Notes and borrowings of $800 million under the ABL Facility. The net proceeds from the initial issuance of $725 million aggregate principal amount of the 6.750% 2026 Senior Secured Notes, along with cash on hand, were used to purchase $373 million aggregate principal amount of 7.625% 2021 AK Senior Notes and $367 million aggregate principal amount of 7.500% 2023 AK Senior Notes and to pay for the $44 million of debt issuance costs in the first quarter of 2020. The net proceeds from the additional issuance of $555 million aggregate principal amount of the 9.875% 2025 Senior Secured Notes were used to repurchase $736 million aggregate principal amount of our outstanding senior notes. Additionally, during the nine months ended September 30, 2020, we repaid $400 million under the ABL Facility.
We anticipate future uses of cash during the next 12 months to include repayment of our ABL balance, as well as opportunistic transactions, including other debt repayments.
Capital Resources
The following represents a summary of key liquidity measures:
|
|
|
|
|
|
|
(In Millions)
|
|
September 30,
2021
|
Cash and cash equivalents
|
$
|
42
|
|
|
|
|
|
|
|
Available borrowing base on ABL Facility1
|
$
|
3,500
|
|
Borrowings
|
(1,673)
|
|
Letter of credit obligations
|
(236)
|
|
Borrowing capacity available
|
$
|
1,591
|
|
|
|
1 As of September 30, 2021, the ABL Facility had a maximum borrowing base of $3.5 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
|
|
|
|
|
Our primary sources of funding are cash and cash equivalents, which totaled $42 million as of September 30, 2021, cash generated by our business, availability under the ABL Facility and other financing activities. The combination of cash and availability under the ABL Facility gives us $1.6 billion in liquidity entering the fourth quarter of 2021, which is expected to be adequate to fund operations, letter of credit obligations, sustaining and expansion capital expenditures and other cash commitments for at least the next 12 months.
As of September 30, 2021, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain arrangements that are not reflected on our Statements of Unaudited Condensed Consolidated Financial Position. These arrangements include minimum "take or pay" purchase commitments, such as minimum electric power demand charges, minimum coal, coke, diesel and natural gas purchase commitments, minimum railroad transportation commitments and minimum port facility usage commitments, and financial instruments with off-balance sheet risk, such as bank letters of credit and bank guarantees.
Information about our Guarantors and the Issuer of our Guaranteed Securities
The accompanying summarized financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” and Rule 13-01 "Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralized a Registrant's Securities." Certain of our subsidiaries (the "Guarantor subsidiaries") have fully and unconditionally, and jointly and severally, guaranteed the obligations under (a) the 5.875% 2027 Senior Notes, the 7.000% 2027 Senior Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes issued by Cleveland-Cliffs Inc. on a senior unsecured basis and (b) the 6.750% 2026 Senior Secured Notes and the 9.875% 2025 Senior Secured Notes on a senior secured basis. See NOTE 8 - DEBT AND CREDIT FACILITIES for further information.
The following presents the summarized financial information on a combined basis for Cleveland-Cliffs Inc. (parent company and issuer of the guaranteed obligations) and the Guarantor subsidiaries, collectively referred to as the obligated group. Transactions between the obligated group have been eliminated. Information for the non-Guarantor subsidiaries was excluded from the combined summarized financial information of the obligated group.
Each Guarantor subsidiary is consolidated by Cleveland-Cliffs Inc. as of September 30, 2021. Refer to Exhibit 22, incorporated herein by reference, for the detailed list of entities included within the obligated group as of September 30, 2021.
The guarantee of a Guarantor subsidiary with respect to Cliffs' 6.750% 2026 Senior Secured Notes, the 5.875% 2027 Senior Notes, the 7.000% 2027 Senior Notes, the 9.875% 2025 Senior Secured Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the related indentures (the “Indentures”) will be automatically and unconditionally released and discharged, upon the occurrence of any of the
following, along with the delivery to the trustee of an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable Indenture relating to the release and discharge of such Guarantor subsidiary’s guarantee have been complied with:
(a) any sale, exchange, transfer or disposition of such Guarantor subsidiary (by merger, consolidation, or the sale of) or the capital stock of such Guarantor subsidiary after which the applicable Guarantor subsidiary is no longer a subsidiary of the Company or the sale of all or substantially all of such Guarantor subsidiary’s assets (other than by lease), whether or not such Guarantor subsidiary is the surviving entity in such transaction, to a person which is not the Company or a subsidiary of the Company; provided that (i) such sale, exchange, transfer or disposition is made in compliance with the applicable Indenture, including the covenants regarding consolidation, merger and sale of assets and, as applicable, dispositions of assets that constitute notes collateral, and (ii) all the obligations of such Guarantor subsidiary under all debt of the Company or its subsidiaries terminate upon consummation of such transaction;
(b) designation of any Guarantor subsidiary as an “excluded subsidiary” (as defined in the Indentures); or
(c) defeasance or satisfaction and discharge of the Indentures.
Each entity in the summarized combined financial information follows the same accounting policies as described in the consolidated financial statements. The accompanying summarized combined financial information does not reflect investments of the obligated group in non-Guarantor subsidiaries. The financial information of the obligated group is presented on a combined basis; intercompany balances and transactions within the obligated group have been eliminated. The obligated group's amounts due from, amounts due to, and transactions with, non-Guarantor subsidiaries and related parties have been presented in separate line items.
Summarized Combined Financial Information of the Issuer and Guarantor Subsidiaries:
The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Financial Position of the obligated group:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
September 30, 2021
|
|
December 31, 2020
|
Current assets
|
$
|
6,513
|
|
|
$
|
4,903
|
|
Non-current assets
|
10,094
|
|
|
10,535
|
|
Current liabilities
|
(3,099)
|
|
|
(2,767)
|
|
Non-current liabilities
|
(10,104)
|
|
|
(10,563)
|
|
|
|
|
|
The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group:
|
|
|
|
|
|
|
(In Millions)
|
|
Nine Months Ended
|
|
September 30, 2021
|
Revenues
|
$
|
14,875
|
|
Cost of goods sold
|
(11,691)
|
|
Income from continuing operations
|
2,084
|
|
Net income
|
2,090
|
|
Net income attributable to Cliffs shareholders
|
2,090
|
|
As of September 30, 2021 and December 31, 2020, the obligated group had the following balances with non-Guarantor subsidiaries and other related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
September 30, 2021
|
|
December 31, 2020
|
Balances with non-Guarantor subsidiaries:
|
|
|
|
Accounts receivable, net
|
$
|
165
|
|
|
$
|
69
|
|
Accounts payable
|
(118)
|
|
|
(17)
|
|
|
|
|
|
Balances with other related parties:
|
|
|
|
Accounts receivable, net
|
$
|
4
|
|
|
$
|
2
|
|
|
|
|
|
Accounts payable
|
(7)
|
|
|
(6)
|
|
|
|
|
|
Additionally, for the nine months ended September 30, 2021, the obligated group had Revenues of $123 million and Cost of goods sold of $104 million, in each case with other related parties.
Market Risks
We are subject to a variety of risks, including those caused by changes in commodity prices and interest rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control.
Pricing Risks
In the ordinary course of business, we are exposed to market risk and price fluctuations related to the sale of our products, which are impacted primarily by market prices for HRC, and the purchase of energy and raw materials used in our operations, which are impacted by market prices for electricity, natural gas, ferrous and stainless steel scrap, chrome, coal, coke, nickel and zinc. Our strategy to address market risk has generally been to obtain competitive prices for our products and services and allow operating results to reflect market price movements dictated by supply and demand; however, we make forward physical purchases and enter into hedge contracts to manage exposure to price risk related to the purchases of certain raw materials and energy used in the production process.
Our financial results can vary for our operations as a result of fluctuations in market prices. We attempt to mitigate these risks by aligning fixed and variable components in our customer pricing contracts, supplier purchasing agreements and derivative financial instruments.
Some customer contracts have fixed-pricing terms, which increase our exposure to fluctuations in raw material and energy costs. To reduce our exposure, we enter into annual, fixed-price agreements for certain raw materials. Some of our existing multi-year raw material supply agreements have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed our needs. Absent exceptions for force majeure and other circumstances affecting the legal enforceability of the agreements, these minimum purchase requirements may compel us to purchase quantities of raw materials that could significantly exceed our anticipated needs or pay damages to the supplier for shortfalls. In these circumstances, we would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that we would not be successful in reducing
purchase quantities, either through negotiation or litigation. If that occurred, we would likely be required to purchase more of a particular raw material in a particular year than we need, negatively affecting our results of operations and cash flows.
Certain of our customer contracts include variable-pricing mechanisms that adjust selling prices in response to changes in the costs of certain raw materials and energy, while other of our customer contracts exclude such mechanisms. We may enter multi-year purchase agreements for certain raw materials with similar variable-price mechanisms, allowing us to achieve natural hedges between the customer contracts and supplier purchase agreements. Therefore, in some cases, price fluctuations for energy (particularly natural gas and electricity), raw materials (such as scrap, chrome, zinc and nickel) or other commodities may be, in part, passed on to customers rather than absorbed solely by us. There is a risk, however, that the variable-price mechanisms in the sales contracts may not necessarily change in tandem with the variable-price mechanisms in our purchase agreements, negatively affecting our results of operations and cash flows.
Our strategy to address volatile natural gas rates and electricity rates includes improving efficiency in energy usage, identifying alternative providers and utilizing the lowest cost alternative fuels. If we are unable to align fixed and variable components between customer contracts and supplier purchase agreements, we use cash-settled commodity price swaps and options to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. Additionally, we routinely use these derivative instruments to hedge a portion of our natural gas, electricity and zinc requirements. Our hedging strategy is designed to protect us from excessive pricing volatility. However, since we do not typically hedge 100% of our exposure, abnormal price increases in any of these commodity markets might still negatively affect operating costs.
The following table summarizes the negative effect of a hypothetical change in the fair value of our derivative instruments outstanding as of September 30, 2021, due to a 10% and 25% change in the market price of each of the indicated commodities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
Commodity Derivative
|
|
10% Change
|
|
25% Change
|
Natural gas
|
|
$
|
28
|
|
|
$
|
71
|
|
Electricity
|
|
—
|
|
|
1
|
|
Zinc
|
|
4
|
|
|
10
|
|
Any resulting changes in fair value would be recorded as adjustments to AOCI, net of income taxes or recognized in net earnings, as appropriate. These hypothetical losses would be partially offset by the benefit of lower prices paid for the related commodities.
Valuation of Goodwill and Other Long-Lived Assets
We assign goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. Goodwill is tested on a qualitative basis for impairment at the reporting unit level on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. As necessary, should our qualitative test indicate that it is more likely than not that the fair value of a reporting unit is less than its carry amount, we perform a quantitative test to determine the amount of impairment, if any, to the carrying value of the reporting unit and its associated goodwill.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and if a quantitative assessment is deemed necessary in determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology, which considers forecasted cash flows discounted at an estimated weighted average cost of capital. Assessing the recoverability of our goodwill requires significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of a reporting unit, including, among other things, estimates related to forecasts of future revenues, expected Adjusted EBITDA, expected capital expenditures and working capital requirements, which are based upon our long-range plan estimates. The assumptions used to calculate the fair value of a reporting unit may change from year to year based on operating results, market conditions and other factors. Changes in these assumptions could materially affect the determination of fair value for each reporting unit.
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. Such indicators may include: a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated statements of operations and statement of financial position.
A comparison of each asset group's carrying value to the estimated undiscounted net future cash flows expected to result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected future cash flows reflect management's best estimate of economic and market conditions over the projected period, including growth rates in revenues and costs, and estimates of future expected changes in operating margins and capital expenditures. If the carrying value of the asset group is higher than its undiscounted net future cash flows, the asset group is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value using a market approach, an income approach or a cost approach. For the nine months ended September 30, 2021, we concluded that an event triggering the need for an impairment assessment did not occur.
Interest Rate Risk
Interest payable on our senior notes is at fixed rates. Interest payable under our ABL Facility is at a variable rate based upon the applicable base rate plus the applicable base rate margin depending on the excess availability. As of September 30, 2021, we had $1,673 million outstanding under the ABL Facility. An increase in prevailing interest rates would increase interest expense and interest paid for any outstanding borrowings from the ABL Facility. For example, a 100 basis point change to interest rates under the ABL Facility at the current borrowing level would result in a change of $17 million to interest expense on an annual basis.
Supply Concentration Risks
Many of our operations and mines rely on one source each of electric power and natural gas. A significant interruption or change in service or rates from our energy suppliers could materially impact our production costs, margins and profitability.
Forward-Looking Statements
This report contains statements that constitute "forward-looking statements" within the meaning of the federal securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather than historical matters. Forward-looking statements are subject to uncertainties and factors relating to our operations and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These statements speak only as of the date of this report, and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Investors are cautioned not to place undue reliance on forward-looking statements. Uncertainties and risk factors that could affect our future performance and cause results to differ from the forward-looking statements in this report include, but are not limited to:
•our ability to successfully complete the FPT Acquisition;
•disruptions to our operations relating to the COVID-19 pandemic, including the heightened risk that a significant portion of our workforce or on-site contractors may suffer illness or otherwise be unable to perform their ordinary work functions;
•continued volatility of steel and iron ore market prices, which directly and indirectly impact the prices of the products that we sell to our customers;
•uncertainties associated with the highly competitive and cyclical steel industry and our reliance on the demand for steel from the automotive industry, which has been experiencing a trend toward light weighting and supply chain disruptions, such as the microchip shortage, that could result in lower steel volumes being consumed;
•potential weaknesses and uncertainties in global economic conditions, excess global steelmaking capacity, oversupply of iron ore, prevalence of steel imports and reduced market demand, including as a result of the COVID-19 pandemic;
•severe financial hardship, bankruptcy, temporary or permanent shutdowns or operational challenges, due to the COVID-19 pandemic or otherwise, of one or more of our major customers, including customers in the automotive market, key suppliers or contractors, which, among other adverse effects, could lead to reduced demand for our products, increased difficulty collecting receivables, and customers and/or suppliers asserting force majeure or other reasons for not performing their contractual obligations to us;
•our ability to reduce our indebtedness or return capital to shareholders within the expected timeframes or at all;
•risks related to U.S. government actions with respect to Section 232, the USMCA and/or other trade agreements, tariffs, treaties or policies, as well as the uncertainty of obtaining and maintaining effective antidumping and countervailing duty orders to counteract the harmful effects of unfairly traded imports;
•impacts of existing and increasing governmental regulation, including climate change and other environmental regulation that may be proposed under the Biden Administration, and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorizations of, or from, any governmental or regulatory authority and costs related to implementing improvements to ensure compliance with regulatory changes, including potential financial assurance requirements;
•potential impacts to the environment or exposure to hazardous substances resulting from our operations;
•our ability to maintain adequate liquidity, our level of indebtedness and the availability of capital could limit cash flow necessary to fund working capital, planned capital expenditures, acquisitions, and other general corporate purposes or ongoing needs of our business;
•adverse changes in credit ratings, interest rates, foreign currency rates and tax laws;
•limitations on our ability to realize some or all of our deferred tax assets, including our net operating loss carryforwards;
•our ability to realize the anticipated synergies and benefits of the FPT Acquisition and to successfully integrate the business of FPT into our existing businesses, including uncertainties associated with maintaining relationships with customers, vendors and employees;
•additional debt we will incur in connection with the FPT Acquisition, as well as additional debt we incurred in connection with enhancing our liquidity during the COVID-19 pandemic and the 2020 Acquisitions, may negatively impact our credit profile and limit our financial flexibility;
•known and unknown liabilities we will assume in connection with the FPT Acquisition;
•the ability of our customers, joint venture partners and third-party service providers to meet their obligations to us on a timely basis or at all;
•supply chain disruptions or changes in the cost or quality of energy sources or critical raw materials and supplies, including iron ore, industrial gases, graphite electrodes, scrap, chrome, zinc, coke and coal;
•liabilities and costs arising in connection with any business decisions to temporarily idle or permanently close a mine or production facility, which could adversely impact the carrying value of associated assets and give rise to impairment charges or closure and reclamation obligations, as well as uncertainties associated with restarting any previously idled mine or production facility;
•problems or disruptions associated with transporting products to our customers, moving products internally among our facilities or suppliers transporting raw materials to us;
•uncertainties associated with natural or human-caused disasters, adverse weather conditions, unanticipated geological conditions, critical equipment failures, infectious disease outbreaks, tailings dam failures and other unexpected events;
•our level of self-insurance and our ability to obtain sufficient third-party insurance to adequately cover potential adverse events and business risks;
•disruptions in, or failures of, our information technology systems, including those related to cybersecurity;
•our ability to successfully identify and consummate any strategic investments or development projects, cost-effectively achieve planned production rates or levels, and diversify our product mix and add new customers;
•our actual economic iron ore and coal reserves or reductions in current mineral estimates, including whether we are able to replace depleted reserves with additional mineral bodies to support the long-term viability of our operations;
•the outcome of any contractual disputes with our customers, joint venture partners, lessors, or significant energy, raw material or service providers, or any other litigation or arbitration;
•our ability to maintain our social license to operate with our stakeholders, including by fostering a strong reputation and consistent operational and safety track record;
•our ability to maintain satisfactory labor relations with unions and employees;
•availability of workers to fill critical operational positions and potential labor shortages caused by the COVID-19 pandemic, as well as our ability to attract, hire, develop and retain key personnel;
•unanticipated or higher costs associated with pension and OPEB obligations resulting from changes in the value of plan assets or contribution increases required for unfunded obligations; and
•potential significant deficiencies or material weaknesses in our internal control over financial reporting.
For additional factors affecting our business, refer to Part II – Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. You are urged to carefully consider these risk factors.
|
|
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Information regarding our market risk is presented under the caption "Market Risks," which is included in our Annual Report on Form 10-K for the year ended December 31, 2020, and Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.
|
|
|
|
|
|
Item 4.
|
Controls and Procedures
|
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based solely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.