<PAGE> 1
- - ----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO
--- SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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 31, 1994, there were 12,091,310 Common Shares (par value $1.00
per share) outstanding.
- - ----------------------------------------------------------------------------
<PAGE> 2
<TABLE>
PART I - FINANCIAL INFORMATION
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
(In Millions, Except Per Share Amounts)
---------------------------------------
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
---------------- -------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Product sales and services $93.6 $75.6 $205.6 $181.5
Royalties and management fees 13.8 7.9 33.3 27.2
------- ------- ------- -------
Total operating revenues 107.4 83.5 238.9 208.7
Recovery on bankruptcy claim 0.5 35.3
Investment income (securities) 3.1 2.3 5.8 6.7
Other income 0.5 1.3 0.8 1.9
------- ------- ------- -------
TOTAL REVENUES 111.0 87.6 245.5 252.6
COSTS AND EXPENSES:
Cost of goods sold and operating
expenses 83.8 71.2 187.1 173.8
Administrative, selling and general
expenses 4.4 4.1 12.9 12.4
Interest expense 1.6 1.6 4.9 4.9
Other expenses 1.8 1.4 4.2 3.1
------- ------- ------- -------
TOTAL COSTS AND EXPENSES 91.6 78.3 209.1 194.2
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 19.4 9.3 36.4 58.4
Income taxes (credits)
Currently payable 5.2 (0.3) 9.9 14.9
Deferred (0.6) 2.4 (0.9) 2.9
------- ------- ------- -------
TOTAL INCOME TAXES 4.6 2.1 9.0 17.8
------- ------- ------- -------
NET INCOME $14.8 $7.2 $27.4 $40.6
======= ======= ======= =======
INCOME PER COMMON SHARE $1.23 $0.60 $2.27 $3.38
======= ======= ======= =======
<FN>
See notes to financial statements
</TABLE>
2
<PAGE> 3
<TABLE>
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
-----------------------------
September 30, December 31,
ASSETS 1994 1993
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $110.5 $67.9
Marketable securities 93.1
------------- -------------
110.5 161.0
Accounts receivable - net 50.5 36.9
Inventories:
Finished products 43.9 27.5
Work in process 0.8
Supplies 10.4 4.2
------------- -------------
55.1 31.7
Deferred income taxes 14.1 14.1
Other 11.1 6.3
------------- -------------
TOTAL CURRENT ASSETS 241.3 250.0
PROPERTIES 250.6 172.6
Less allowances for depreciation and depletion (138.5) (137.3)
------------- -------------
TOTAL PROPERTIES 112.1 35.3
INVESTMENTS IN ASSOCIATED COMPANIES 149.4 152.3
OTHER ASSETS
Long-term investments 39.0 57.4
Deferred income taxes 5.9 6.5
Other 46.9 43.9
------------- -------------
TOTAL OTHER ASSETS 91.8 107.8
------------- -------------
TOTAL ASSETS $594.6 $545.4
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term obligations $5.0 $ -
Other 85.1 64.0
------------- -------------
TOTAL CURRENT LIABILITIES 90.1 64.0
LONG-TERM OBLIGATIONS 70.0 75.0
POST EMPLOYMENT BENEFITS 75.3 71.2
RESERVE FOR CAPACITY RATIONALIZATION 22.8 21.7
OTHER LIABILITIES 35.6 32.8
SHAREHOLDERS' EQUITY
Preferred Stock
Class A - No Par Value
Authorized - 500,000 shares; Issued - None - -
Class B - No Par Value
Authorized - 4,000,000 shares; Issued - None - -
Common Shares - Par Value $1 a share
Authorized - 28,000,000 shares 16.8 16.8
Issued - 16,827,941 shares
Capital in excess of par value of shares 61.2 61.4
Retained income 332.4 315.8
Foreign currency translation adjustments 0.4 (0.3)
Net unrealized (loss) on marketable securities 3.7 1.3
Cost of 4,736,631 Common Shares in treasury
(1993 - 4,763,824) (113.7) (114.3)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 300.8 280.7
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $594.6 $545.4
============= =============
<FN>
See notes to financial statements
</TABLE>
3
<PAGE> 4
<TABLE>
CLEVELAND-CLIFFS INC
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Increase (Decrease)
in Cash and Cash
Equivalents for
Nine Months Ended
Sept. 30,
(In Millions)
------------------
1994 1993
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $27.4 $40.6
Depreciation and amortization:
Consolidated 1.7 1.6
Share of associated companies 8.2 8.7
Provision for deferred income taxes (0.9) 2.9
Charges to capacity rationalization reserve 1.7 0.3
Recovery of bankruptcy claim (35.3)
Other (3.9) 1.7
------- -------
Total Before Changes in Operating Assets and Liabilities 34.2 20.5
Changes in operating assets and liabilities
Marketable securities (increase) decrease 93.1 (92.1)
Other 5.2 20.6
------- -------
NET CASH FROM (USED BY) OPERATING ACTIVITIES 132.5 (51.0)
INVESTMENT ACTIVITIES
Northshore acquisition (97.0)
Weirton Preferred Stock redemption 25.0
Purchase of long-term investments-net (2.8) (6.4)
Capital expenditures (5.6) (3.1)
Proceeds from asset sales 0.2
------- -------
NET CASH (USED BY) INVESTMENT ACTIVITIES (80.4) (9.3)
FINANCING ACTIVITIES
Dividends (10.8) (22.8)
Other 0.6 0.6
------- -------
NET CASH (USED BY) FINANCING ACTIVITIES (10.2) (22.2)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.7
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 42.6 (82.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67.9 128.6
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $110.5 $46.1
======= =======
Income taxes paid $13.0 $14.3
Interest paid on debt obligations $4.9 $5.1
<FN>
See notes to financial statements
</TABLE>
4
<PAGE> 5
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statement footnotes and other information in the Company's
1993 Annual Report on Form 10-K. In management's opinion, the quarterly
unaudited financial statements present fairly the Company's financial position
and results. References to the "Company" mean Cleveland-Cliffs Inc and
consolidated subsidiaries, unless otherwise indicated. Quarterly results are
not necessarily representative of annual results due to seasonal and other
factors.
Certain prior year amounts have been reclassified to conform to
current year classifications.
NOTE B - NORTHSHORE MINE AND POWER PLANT
On September 30, 1994, Cliffs Minnesota Minerals Company, a subsidiary
of Cleveland-Cliffs Inc, completed the acquisition of Cyprus Amax Minerals
Company's ("Cyprus Amax") iron ore operation and power plant (renamed
Northshore Mining Company, "Northshore") in Minnesota for $66 million, plus net
working capital of $28 million. The principal Northshore assets are 4.0 million
annual tons of active capacity for production of standard pellets (equivalent
to 3.6 million tons of flux pellet capacity), supported by 6.0 million tons of
active concentrate capacity, a 115 megawatt power generation plant, and an
estimated 1.2 billion tons of magnetite crude iron ore reserves, leased mainly
from the Mesabi Trust. With this acquisition, the Company's annual North
American pellet sales capacity has increased from 5.8 to 9.8 million tons, and
the Company's managed capacity has increased to approximately 39 million tons
or 47 percent of total pellet capacity in North America.
The acquisition has been accounted for as a purchase transaction, and
the balance sheet of Northshore has been consolidated with that of the Company
effective September 30, 1994 on the basis of a preliminary allocation of the
purchase price. The purchase price consisted of:
(Millions)
----------
Cash $ 94.3
Acquisition Costs 2.7
------
Purchase Price $ 97.0
======
5
<PAGE> 6
The purchase price has been initially allocated as follows:
<TABLE>
<CAPTION>
(Millions)
----------
<S> <C>
Assets
------
Current Assets $ 36.1
Property Plant and Equipment 71.9
Other Assets 2.5
------
Total Assets 110.5
Liabilities
-----------
Current Liabilities 9.1
Long-Term Liabilities 4.4
------
Total Liabilities 13.5
------
Purchase Price $ 97.0
======
</TABLE>
The final allocation of the purchase price will be made when the evaluation of
fair values has been finalized.
The terms of the acquisition also provide for future payments to
Cyprus Amax in the event of certain Northshore expansion actions.
Due to the acquisition date, the operating results of Northshore for
the nine months ended September 30 had no effect on the Company's Statement of
Consolidated Income. Pro forma results of the Company's operations, assuming
the acquisition had occurred at the beginning of 1993, are shown in the
following table.
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1994 1993*
---- ----
<S> <C> <C>
Total Revenues (Millions) $323.1 $290.3
====== ======
Net Income
----------
Amount (Millions) $ 31.6 $ 23.8
====== ======
Per Common Share $ 2.62 $ 1.98
====== ======
<FN>
* Year 1993 results exclude the Company's $35.3 million
before-tax ($23.0 million after-tax or $1.91 per share)
recovery on the settlement of the Company's bankruptcy
claim against LTV Steel Company ("LTV").
</TABLE>
The pro forma results have been prepared for illustrative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
actually been made at the beginning of 1993, or of results which may occur in
the future. Actual results could be significantly different under the Company's
ownership due to, among other matters, differences in marketing, operating and
investment actions which may be taken by the Company.
6
<PAGE> 7
NOTE C - SHAREHOLDERS' EQUITY
The 1987 Incentive Equity Plan authorizes the Company to make grants
and awards of stock options, stock appreciation rights and restricted or
deferred stock awards to officers and key employees, for up to 839,045 Common
Shares. The 1992 Incentive Equity Plan authorizes the Company to issue up to
595,000 Common Shares upon the exercise of Options Rights, as Restricted
Shares, in payment of Performance Shares or Performance Units that have been
earned, as Deferred Shares, or in payment of dividend equivalents paid with
respect to awards made under the Plan. Such shares may be shares of original
issuance or treasury shares or a combination of both. Stock option and
restricted award transactions since December 31, 1993 are summarized as
follows:
<TABLE>
<CAPTION>
Stock Options: 1987 Plan 1992 Plan
--------- ---------
<S> <C> <C>
Options outstanding as of 12/31/93 95,125 10,000
Granted -0- 5,500
Exercised (26,393) ( 1,000)
Cancelled -0- -0-
-------- --------
Options outstanding as of 09/30/94 68,732 14,500
Options exercisable as of 09/30/94 68,732 9,500
Restricted awards:
Awarded and restricted as of 12/31/93 4,941 15,277
Awarded -0- -0-
Vested (2,542) (12,003)
Cancelled -0- -0-
-------- -------
Awarded and restricted as of 09/30/94 2,399 3,274
Performance Shares:
Allocated as of 12/31/93 -0- -0-
Allocated -0- 42,067
Forfeited -0- (750)
-------- --------
Performance Shares as of 9/30/94 -0- 41,317
Reserved for future grants or awards
as of 09/30/94 6,501 522,906
</TABLE>
NOTE D - INVESTMENTS IN ASSOCIATED COMPANIES
Summarized income statement information for a significant
unconsolidated subsidiary, as defined, follows:
TILDEN MINING COMPANY
(A 60% ownership interest at September 30, 1994 and 1993 carried at equity)
STATEMENT OF COSTS AND EXPENSES CHARGED TO ASSOCIATES
<TABLE>
<CAPTION>
(In Millions)
Nine Months
Ended September 30
------------------
1994 1993
------ ------
<S> <C> <C>
EXPENSES:
Operating costs $ 9.9 $10.7
Interest -- --
------ -----
TOTAL EXPENSES $ 9.9 $10.7
====== =====
</TABLE>
7
<PAGE> 8
In February, 1994, the Company reached agreement with Algoma Steel
Inc. ("Algoma") and Stelco Inc. to restructure and simplify the Tilden Mine
entities effective January 1, 1994. The principal terms of the new agreement
are (1) the participants' tonnage entitlements and cost-sharing will be based
on a 6.0 million ton target normal production level instead of the previous 4.0
million ton base production level, (2) the Company's interest in the Tilden
Magnetite Partnership increases from 33.33% to 40.0% with corresponding
increase in the Company's obligation for mine costs, (3) the Company will
receive an increased royalty, (4) the Company has the right to supply any
additional iron ore pellet requirements of Algoma (beyond its Tilden share)
from Tilden or the Company, and (5) a partner may take additional production
with certain fees paid to the Partnership. The agreement is not expected to
have a material financial effect on the Company's consolidated financial
statements.
NOTE E - ENVIRONMENTAL MATTERS
The Company's policy is to conduct business in a manner that promotes
environmental quality. The Company's environmental obligations for wholly-owned
active mining operations and idle and closed mining and other sites have been
recognized based on specific estimates for known conditions and required
investigations. Environmental costs of associated companies for active
operations are included in current operating and capital costs. Any potential
insurance recoveries have not been reflected in the determination of the
reserve.
At September 30, 1994, the Company has an environmental reserve of
$10.6 million, of which $3.5 million is current. The reserve includes the
Company's obligations related to:
o Federal and State superfund and clean water act sites where the
Company is named as a potential responsible party, including the
Cliffs-Dow and Kipling sites in Michigan, the Arrowhead Refinery
site in Minnesota, the Summitville mine site in Colorado, and the
Rio Tinto mine site in Nevada, all of which sites are independent of
the Company's iron mining operations. The reserves are based on
engineering studies prepared by outside consultants engaged by the
potential responsible parties. The Company continues to evaluate the
recommendations of the studies and other means to clean-up the
sites.
Significant site clean-up activities have taken place at
Cliffs-Dow in 1993 and 1994. An agreement in principle has been
reached among the Federal and State governments and approximately 130
companies wherein clean-up at the Arrowhead site will begin in 1995
with significant funding provided by the Federal and State
governments. The agreement is expected to be filed with the U.S.
District Court by the end of 1994. The Company's share of Arrowhead
costs is expected to total approximately $145,000 which includes
approximately $31,000 of funded remediation costs and approximately
$114,000 of incurred legal and other costs.
o Wholly-owned active and idle operations include the recently
acquired Northshore mine and Silver Bay power plant in Minnesota and
the idled Republic mine and processing facilities in Michigan. The
Northshore/Silver Bay reserve is based on an environmental
investigation conducted by the Company and an outside consultant in
connection with the purchase and reflects expected future Company
expenditures, primarily for asbestos abatement and power plant fly
ash disposal. The Republic Mine reserve primarily reflects the cost
of underground fuel oil storage tank removal and related soil
remediation.
8
<PAGE> 9
o Other sites, including former operations, which reserves are based
on the Company's estimated cost of investigation and remediation of
sites where expenditures may be incurred.
Environmental expenditures under current laws and regulations are not expected
to materially impact the Company's consolidated financial statements.
NOTE F - ACCOUNTING CHANGES
In November, 1992, the Financial Accounting Standards Board issued
Statement 112, "Employers' Accounting for Postemployment Benefits." Statement
112 requires accrual accounting for benefits provided to former or inactive
employees after employment but before retirement. Although Statement 112 is
effective for years beginning after December 15, 1993, the Company elected to
adopt the provisions of this standard for the year ended December 31, 1993. The
effect of adopting this statement was not material to the consolidated
financial statements.
In May, 1993, the Financial Accounting Standards Board issued
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities," which establishes standards of financial accounting and reporting
investments in equity securities that have readily determinable fair values and
for investments in debt securities. This statement, which is effective for
years beginning after December 15, 1993, has been adopted for the year ended
December 31, 1993. The effect of adopting this statement was not material to
the consolidated financial statements.
Prior year financial statements have not been restated for adoption of
the two standards. However, certain prior year amounts have been reclassified
to conform to current year classifications.
NOTE G - INVESTMENTS
In October, 1991, the Company invested $25 million in a special
nonmarketable redeemable preferred stock of Weirton Steel Corporation
("Weirton"). On September 30, 1994, Weirton exercised its right to redeem the
preferred stock for $25 million plus accrued dividends. The redemption of this
investment, previously classified as a held-to-maturity security, did not
result in the recognition of a gain or loss. The stock paid quarterly dividends
totaling $3.1 million per year. In conjunction with the preferred stock
redemption, agreement was reached to extend the Company's iron ore sales
contract with Weirton by two years through 2005. The contract calls for the
Company to supply Weirton with approximately 1.0 million tons of pellets
annually.
On October 4, 1994, the Financial Accounting Standards Board issued
Statement 119 entitled, "Disclosure of Information about Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with Concentration of
Credit Risk," which requires expanded footnote disclosure about certain
financial instruments. Presently, the Company's exposure to risk associated
with derivative instruments is limited to forward foreign exchange contracts.
These forward exchange contracts are hedging transactions that have been
entered into with the objective of managing the risk associated with currency
fluctuations with respect to the on-going obligations of the Company's
Australian operation denominated in Australian currency. At September 30, 1994,
the Company had $6.0 million of forward exchange contracts with a fair value,
based on the September 30, 1994 forward rate, of $6.6 million.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS - 1994 AND 1993
- - -----------------------------------------------------------------
Net income for the third quarter of 1994 was $14.8 million, or $1.23
per share. Comparable earnings in the strike-impacted third quarter of 1993
were $7.2 million, or $.60 per share.
Net income for the first nine months of 1994 was $27.4 million or
$2.27 per share. Earnings in the first nine months of 1993 were $17.6 million,
or $1.47 a share, before recognizing a $23 million after-tax gain on the
settlement of the Company's bankruptcy claim against LTV.
The increases of $7.6 million and $9.8 million in third quarter and
nine months earnings, respectively, were mainly due to the six-week strike by
the United Steelworkers of America in the third quarter of 1993 at three of the
Company managed mines in the United States. Also contributing to the earnings
gains were higher sales realization and volume in North America and increased
royalties and management fees, partially offset by higher operating costs.
* * *
On September 30, 1994, the acquisition of Northshore Mining Company
was completed (See Note B). The addition of Northshore will increase the the
Company's annual North American iron ore pellet sales capacity by 4.0 million
tons. Northshore has multi-year sales agreements covering most of its pellet
capacity. In addition, Northshore in 1991 entered into a 20-year contract to
sell 40 megawatts of excess capacity to an electric utility. Due to the timing
of the acquisition, it had no impact on the Company's operating results through
September 30, 1994.
* * *
The Company's North American pellet sales in the third quarter of 1994
were 2.2 million tons, versus 1.8 million tons in 1993. Sales for the first
nine months of 1994 were 4.6 million tons compared to 4.1 million tons in 1993.
Pellet inventory at September 30, 1994 was 1.5 million tons (including
inventory acquired with the Northshore purchase, .5 million tons) versus 1.3
million tons one year ago.
The Company's managed mines in North America produced 9.3 million tons
of iron ore in the third quarter of 1994 versus 6.7 million tons in 1993. Nine
month production was 25.7 million tons in 1994 compared with 23.5 million tons
in 1993. The 1993 strike resulted in the loss of 1.6 million tons of
production. Operating costs in 1994 have been substantially higher than one
year ago, primarily due to lower ore grades mined and higher employment costs.
Capital and leasing outlays for mining and processing equipment are
being significantly increased in 1995 budgets to respond to operating needs and
reduce costs. Mine development expenditures are also being increased to
maintain crude ore production rates and provide desired ore quality. Other cost
reduction and productivity improvement efforts are continuing.
10
<PAGE> 11
Northshore's pellet sales in the fourth quarter are expected to exceed
1.0 million tons. The Company's full year 1994 sales in North America,
including inventory reduction and resale of purchased ore, are expected to be
approximately 8.0 million tons. The Company's full year sales in 1993 were 6.4
million tons. The year-end 1994 inventory is projected to be .6 million tons,
which is near minimum levels.
Northshore's pellet production in the fourth quarter is expected to
approximate 900,000 tons, raising full year 1994 production at the Company's
managed mines in North America to about 35.4 million tons. The Company's full
year production in 1993 was 32.3 million tons.
LIQUIDITY
- - ---------
At September 30, 1994, the Company had cash and marketable securities
of $110.5 million, including $12.3 million dedicated to fund Australian mine
obligations.
No borrowings are outstanding under the Company's $75 million
revolving credit facility. The Company may convert amounts outstanding at April
30, 1995 to a three-year term loan. The Company was in compliance with all
financial covenants and restrictions of the revolving credit agreement at
September 30, 1994. The facility expires on April 30, 1995, and the Company
expects to enter into a new credit facility for at least $75 million.
Since December 31, 1993, cash and marketable securities have decreased
$50.5 million due to the Company's acquisition of Northshore on September 30,
1994, $97.0 million, dividends, $10.8 million, capital expenditures, $5.6
million, and purchase of long-term investments, $2.8 million, partially offset
by cash flow from operating activities, $34.2 million, Weirton preferred stock
redemption, $25 million, and decreased working capital, $5.2 million.
At the regularly scheduled meeting on November 8, 1994, the Company's
Board of Directors approved an 8.3 percent increase in the quarterly dividend
to $.325 per share from the previous rate of $.30 per share. This is the third
increase in quarterly dividends since the Company resumed common dividends in
1989. The increased dividend will be payable on December 27, 1994 to
shareholders of record as of December 12, 1994. Based on the current number of
common shares outstanding, the quarterly dividend will total approximately $3.9
million.
In October, 1994, the Company decided that its wholly-owned Savage
River Mines in Tasmania, Australia, with a pellet capacity of 1.5 million tons
per year, will terminate operations in the first quarter of 1997, the
exhaustion date of the economically recoverable iron ore from surface mining.
This is two years beyond the original exhaustion schedule established when
Cliffs acquired sole ownership in 1990. A mine life extension study was
conducted to evaluate underground mining of additional ore. However, the
projected financial results did not justify the substantial investment and
mining risks that would be required. Mine closure costs have been provided for
in the Capacity Rationalization Reserve and have been funded.
Pursuant to the Coal Industry Retiree Health Benefit Act of 1992, the
Trustees of the UMWA Combined Benefit Fund have assigned responsibility to the
Company for premium payments with respect to 338 retirees and dependents and
116 "orphans" (unassigned beneficiaries), representing less than one-half of
one percent of all "assigned beneficiaries." The Company has evaluated each
assignment, has contested those it believes were incorrectly assigned, and is
paying premiums under protest. In December, 1993, a complaint was filed in
U.S. District Court by the Trustees of the United Mine Workers of America 1992
Benefit Plan (a separate fund from the Combined Benefit Fund) against the
Company demanding the payment of premiums on 78 beneficiaries
11
<PAGE> 12
related to two formerly operated joint venture coal mines. The Company is
actively contesting the complaint. Monthly premium payments are being paid into
an escrow account (80% by a former joint venture participant and 20% by the
Company) by joint agreement with the Trustees, pending outcome of the
litigation. At September 30, 1994, the coal retiree reserve maintained by the
Company is $10.8 million, of which $1.0 million is current. In the third
quarter 1994, the Company increased its coal retiree reserve by $.3 million
(reflecting accretion of discount), and made payments of $.4 million. The
reserve is reflected at present value, utilizing an assumed discount rate of
7.25%. Constitutional and other legal challenges to various provisions of the
Benefit Act by other former coal producers are pending in the Federal Courts.
CAPITALIZATION
- - --------------
Long-term obligations effectively serviced by the Company at September
30, 1994, including the current portion, totalled $88.5 million. The Company
guarantees Empire mine debt obligations of LTV and Wheeling-Pittsburgh Steel
Corporation ("Wheeling") which totalled $20.8 million at September 30, 1994.
The following table sets forth information concerning long-term obligations
guaranteed and effectively serviced by the Company.
<TABLE>
<CAPTION>
(Millions)
-----------------------------------------------------------------
September 30, 1994 December 31, 1993
----------------------------- -----------------------------
Total Total
Long-Term Long-Term
Obligations Obligations Obligations Obligations
Effectively and Effectively and
Serviced Guarantees Serviced Guarantees
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED $ 75.0 $ 75.0 $ 75.0 $ 75.0
SHARE OF UNCONSOLIDATED
AFFILIATES 13.5 34.3* 13.6 34.4*
------ ------- ------- -------
TOTAL $ 88.5 $ 109.3 $ 88.6 $ 109.4
====== ======= ======= =======
RATIO TO SHAREHOLDERS'
EQUITY .3:1 .4:1 .3:1 .4:1
<FN>
* Includes $20.8 million of Empire Mine debt obligations which are
serviced by LTV and Wheeling.
</TABLE>
At September 30, 1994, the Company was in compliance with all
financial covenants and restrictions related to its $75.0 million, medium-term,
unsecured senior note agreement.
The fair value of the Company's long term debt (which had a carrying
value of $75.0 million) at September 30, 1994, was estimated at $75.2 million
based on a discounted cash flow analysis and estimates of current borrowing
rates.
Following is a summary of common shares outstanding:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
March 31 12,079,885 11,992,804 11,979,764
June 30 12,080,560 12,008,065 11,985,804
September 30 12,091,310 12,038,092 11,987,554
December 31 12,064,117 11,988,554
</TABLE>
12
<PAGE> 13
ACTUARIAL ASSUMPTIONS
- - ---------------------
As a result of the increasing trend in long-term interest rates during
1994, the Company is re-evaluating the interest rates used to calculate its
pension and other post-retirement benefit ("OPEB") obligations. Financial
accounting standards require that the discount rate used to calculate the
actuarial present value of such benefits reflect the rate of interest on high
quality fixed income securities (approximately 8.7% at October 31, 1994). A
discount rate of 7.25% was used to calculate the Company's pension and OPEB
obligations as of December 31, 1993. Accordingly, the Company anticipates
increasing the discount rate assumption. The Company does not anticipate
changing the long-term rate of return assumption on pension assets (currently
8%). An increase in interest rate assumption would not affect 1994 financial
results; however, in 1995 and subsequent years, the Company would recognize a
non-cash increase in pension credits and a non-cash decrease in OPEB expense.
POTENTIAL INVESTMENTS
- - ---------------------
The status of the Company's activities toward development of a
"reduced iron" business segment is outlined as follows:
o The most advanced project is a Trinidad venture with several
steelmakers to produce iron carbide, a premium form of reduced
iron for the growing electric furnace market in the United
States. The project is expected to be located in Trinidad in
order to obtain satisfactory natural gas and ore supplies.
Negotiations on project arrangements with suppliers and other
parties are proceeding. While significant issues need first
be resolved, a go-ahead decision is targeted for early 1995
with production targeted for late 1996. A plant with capacity
of 460,000 tons per year would cost approximately $100
million. Cliffs would own a 30 percent interest and be the
operating manager and sales agent. The Company began
its iron carbide project development effort in 1990.
o The Company continues to investigate technology for the
production of hot briquetted iron ("HBI") using a coal-based
process and to assess the growing blast furnace market for
this lower grade form of reduced iron. Coal-based technology,
although unproven, is potentially attractive because of its
applicability to the Northshore ore reserves in Minnesota and
the Company's Republic Mine ore reserves in Michigan.
Gas-based processes are not feasible for most North American
orebodies due to the high cost of gas and the characteristics
of the ore.
Earlier this year, MIDREX Corporation, supplier of
the process technology for a Republic Mine project, withdrew
support until further pilot plant testing could be completed.
Therefore, a commercial plant utilizing that process appears
unlikely before mid-1998. Northshore also considered the same
process, but has since been studying the installation of a
coal-based facility using technology supplied by Inmetco and
licensed to Mannesmann Demag of Germany. Northshore's excess
concentrating capacity, captive power, and waterfront location
are attractive features for potential production of HBI.
A coal-based plant in either Michigan or Minnesota,
with annual production capacity of 450,000 tons, is estimated
to cost approximately $75 million. If studies are favorable,
a commercial decision could be made in 1995, which would allow
production to commence in 1997.
13
<PAGE> 14
o Cliffs and Mitsubishi Corporation have a joint option for a
license to produce iron carbide in four areas in the Pacific
Rim, Australia, Malaysia, Indonesia, and Mainland China. Ore
feeds from Australia and Brazil are being tested and locations
studied for a commercial plant to serve the Pacific Rim market
for iron carbide. A decision to move forward with a pilot
plant or a commercial plant could be made in early 1995, and
production could begin by the end of 1997. However, the
Company's participation would depend, among other factors, on
defining a satisfactory ongoing role for the Company.
o A related effort has been the technical assistance work that
we have provided to CVG Ferrominera Orinoco, C.A., the
Venezuelan government iron ore company. Venezuela is the
largest producer of reduced iron in the world, and CVG
Ferrominera is interested in directing its efforts toward this
market. This work is assisting the Company's evaluation of
possible participation in a reduced iron facility in
Venezuela.
On July 26, 1994, the Company significantly enhanced its Utah oil
shale holdings when it agreed to purchase the oil shale mineral rights on
16,000 acres which the Company previously held under a long-term lease. The
$700,000 purchase gave the Company title "in fee" to one of the most attractive
oil shale properties in the United States, containing up to an estimated one
billion barrels of recoverable shale oil. While commercialization of oil shale
is currently uneconomical, the Company's holding costs are minimal.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 5. Other Information
- - -------------------------
Mr. G. H. Lamphere, a Director of the Company, resigned from the Board
of Directors for personal business reasons, effective November 7,
1994.
Item 6. Exhibits and Reports on Form 8-K
- - ----------------------------------------
(a) List of Exhibits - Refer to Exhibit Index on page 16.
(b) During the quarter for which this Form 10-Q Report is filed,
the Company filed a Current Report on Form 8-K, dated October 13, 1994,
covering information reported under ITEM 2. ACQUISITION OR DISPOSITION OF
ASSETS. There were no financial statements filed as part of the Current Report
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 November 14, 1994 By /s/ J. S. Brinzo
--------------------- ---------------------------------
J. S. Brinzo
Senior Executive-Finance
and Principal Financial Officer
15
<PAGE> 16
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit Page
Number Exhibit Number
- - ------- ------------------------------------------------------- ------
<S> <C> <C>
11 Statement re computation of earnings per share 17
27 Consolidated Financial Data Schedule submitted for
Securities and Exchange Commission information
</TABLE>
16
<PAGE> 1
Exhibit 11
<TABLE>
COMPUTATION OF EARNINGS PER SHARE
CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
<CAPTION>
(In Millions, Except
Per Share Amounts)
Nine Months Ended
September 30
--------------------
1994 1993
-------- --------
<S> <C> <C>
Primary and fully diluted earnings per share:
Average shares outstanding 12.1 12.0
Net effect of dilutive stock options -
based on treasury stock method using
average market price -- --
---- ----
Average shares and equivalents 12.1 12.0
==== ====
Net income (loss) applicable to average
share and equivalents $27.4 $40.6
===== =====
Income (loss) per share $2.27 $3.38
===== =====
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from statements
of consolidated income, consolidated financial position and computation of
earnings per share and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000764065
<NAME> CLEVELAND-CLIFFS INC
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 111
<SECURITIES> 0
<RECEIVABLES> 51
<ALLOWANCES> 20
<INVENTORY> 55
<CURRENT-ASSETS> 241
<PP&E> 251
<DEPRECIATION> (139)
<TOTAL-ASSETS> 595
<CURRENT-LIABILITIES> 90
<BONDS> 0
<COMMON> 0
0
17
<OTHER-SE> 284
<TOTAL-LIABILITY-AND-EQUITY> 595
<SALES> 206
<TOTAL-REVENUES> 246
<CGS> 187
<TOTAL-COSTS> 200
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 36
<INCOME-TAX> 9
<INCOME-CONTINUING> 27
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.27
</TABLE>
