<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, 1995
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, 1995, there were 11,898,467 Common Shares (par value $1.00
per share) outstanding.
==============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
(In Millions, Except Per Share Amounts)
-----------------------------------------------
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
----------------------- ---------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Product sales and services $127.1 $93.6 $281.7 $205.6
Royalties and management fees 14.4 13.8 36.2 33.3
--------- --------- --------- ---------
Total operating revenues 141.5 107.4 317.9 238.9
Investment income (securities) 2.2 3.1 6.9 5.8
Other income 0.9 0.5 2.3 0.8
--------- --------- --------- ---------
TOTAL REVENUES 144.6 111.0 327.1 245.5
COSTS AND EXPENSES:
Cost of goods sold and operating expenses 108.1 83.8 247.7 187.1
Administrative, selling and general expenses 3.9 4.4 10.7 12.9
Interest expense 1.6 1.6 4.8 4.9
Other expenses 4.3 1.8 18.4 4.2
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES 117.9 91.6 281.6 209.1
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 26.7 19.4 45.5 36.4
Income taxes (credits)
Currently payable 8.0 5.2 13.0 9.9
Deferred 1.4 (0.6) (10.7) (0.9)
--------- --------- --------- ---------
TOTAL INCOME TAXES 9.4 4.6 2.3 9.0
--------- --------- --------- ---------
NET INCOME $17.3 $14.8 $43.2 $27.4
========= ========= ========= =========
NET INCOME PER COMMON SHARE $1.45 $1.23 $3.61 $2.27
========= ========= ========= =========
</TABLE>
See notes to financial statements
2
<PAGE> 3
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
(In Millions)
----------------------------
September 30, December 31,
ASSETS 1995 1994
------ ---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $132.5 $140.6
Marketable securities 0.2 0.8
---------- ----------
132.7 141.4
Accounts receivable - net 56.7 65.9
Inventories:
Finished products 41.6 24.5
Work in process 0.7 0.6
Supplies 16.4 14.6
---------- ----------
58.7 39.7
Deferred income taxes 14.7 14.7
Other 13.5 7.4
---------- ----------
TOTAL CURRENT ASSETS 276.3 269.1
PROPERTIES 261.2 248.7
Less allowances for depreciation and depletion (143.5) (138.3)
---------- ----------
TOTAL PROPERTIES 117.7 110.4
INVESTMENTS IN ASSOCIATED COMPANIES 146.0 151.7
OTHER ASSETS
Long-term investments 20.1 27.1
Deferred income taxes 13.4 8.7
Other 48.5 41.6
---------- ----------
TOTAL OTHER ASSETS 82.0 77.4
---------- ----------
TOTAL ASSETS $622.0 $608.6
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term obligations $12.1 $5.0
Other 84.6 94.6
---------- ----------
TOTAL CURRENT LIABILITIES 96.7 99.6
LONG-TERM OBLIGATIONS 57.9 70.0
POST EMPLOYMENT BENEFITS 66.4 66.5
RESERVE FOR CAPACITY RATIONALIZATION 24.1 25.7
OTHER LIABILITIES 42.7 35.4
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 58.2 63.1
Retained income 382.4 343.8
Foreign currency translation adjustments 0.3 0.9
Net unrealized gain on marketable securities 0.2 1.5
Cost of 4,929,474 Common Shares in treasury
(1994 - 4,728,081) (121.2) (113.4)
Unearned compensation (2.5) (1.3)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 334.2 311.4
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $622.0 $608.6
========== ==========
</TABLE>
See notes to financial statements
3
<PAGE> 4
CLEVELAND-CLIFFS INC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease)
in Cash and Cash
Equivalents for
Nine Months Ended
Sept. 30,
(In Millions)
---------------------
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $43.2 $27.4
Depreciation and amortization:
Consolidated 4.5 1.7
Share of associated companies 8.4 8.2
Provision for deferred income taxes 2.6 (0.9)
Charges to capacity rationalization reserve (0.2) 1.7
Tax credit (12.2)
Change in environmental reserve 9.0 (2.4)
Other 0.9 (1.5)
-------- --------
Total Before Changes in Operating Assets and Liabilities 56.2 34.2
Changes in operating assets and liabilities
Marketable securities decrease 0.6 93.1
Other (24.4) 5.2
-------- --------
NET CASH FROM OPERATING ACTIVITIES 32.4 132.5
INVESTMENT ACTIVITIES
Northshore acquisition (97.0)
Weirton Preferred Stock redemption 25.0
Sale (purchase) of long-term investments 5.3 (2.8)
Capital expenditures (15.9) (5.6)
Other (4.8)
-------- --------
NET CASH (USED BY) INVESTMENT ACTIVITIES (15.4) (80.4)
FINANCING ACTIVITIES
Dividends (11.7) (10.8)
Repurchase of common stock (8.0)
Principal payment of long-term debt (5.0)
Other 0.2 0.6
-------- --------
NET CASH (USED BY) FINANCING ACTIVITIES (24.5) (10.2)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.6) 0.7
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8.1) 42.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 140.6 67.9
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $132.5 $110.5
======== ========
Income taxes paid $24.3 $13.0
Interest paid on debt obligations $4.8 $4.9
</TABLE>
See notes to financial statements
4
<PAGE> 5
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
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
1994 Annual Report on Form 10-K. In management's opinion, the quarterly
unaudited financial statements present fairly the Company's financial position
and results in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
References to the "Company" mean Cleveland-Cliffs Inc and consolidated
subsidiaries, unless otherwise indicated. Quarterly results are not necessarily
representative of annual results due to seasonal and other factors.
Certain prior year amounts have been reclassified to conform to
current year classifications.
NOTE B - 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 Option 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. Transactions since December 31, 1994
are summarized as follows:
5
<PAGE> 6
<TABLE>
<CAPTION>
Stock Options: 1987 Plan 1992 Plan
--------- ---------
<S> <C> <C>
Options outstanding as of 12/31/94 68,682 13,500
Granted -0- 5,000
Exercised (11,407) (2,000)
Cancelled -0- -0-
------- -------
Options outstanding as of 9/30/95 57,275 16,500
Options exercisable as of 9/30/95 57,275 11,500
Restricted Awards:
Awarded and restricted as of 12/31/94 3,996 9,268
Awarded -0- -0-
Vested (909) (562)
Cancelled -0- -0-
------- -------
Awarded and Restricted as of 9/30/95 3,087 8,706
Performance Shares:
Allocated as of 12/31/94 -0- 41,317
Allocated -0- 47,450
Forfeited -0- -0-
------- -------
Performance Shares as of 9/30/95 -0- 88,767
Reserved for future grants or awards
as of 9/30/95 4,501 464,956
</TABLE>
NOTE C - INVESTMENTS IN ASSOCIATED COMPANIES
In February, 1994, the Company reached general agreement with Algoma
Steel Inc. ("Algoma") and Stelco Inc. to restructure and simplify the Tilden
Mine operating agreement effective January 1, 1994. The principal terms of the
new agreement are (1) the participants' tonnage entitlements and cost-sharing
are 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 has increased from 33.33% to 40.0% with an
associated increase in the Company's obligation for its share of mine costs,
(3) the Company is receiving a higher royalty, (4) the Company has the right to
supply any additional iron ore pellet requirements of Algoma from Tilden or the
Company, and (5) any partner may take additional production with payment of
certain fees to the Partnership. The parties implemented the general agreement
effective January 1, 1994. The definitive agreement became final on October 17,
1995 after Algoma received a required third party consent. As part of the
restructuring, Tilden has been organized into a single limited-liability
company. The agreement has not had a material financial effect on the Company's
consolidated financial statements.
NOTE D - MCLOUTH BANKRUPTCY
On September 29, 1995, McLouth Steel Products Company ("McLouth"), a
significant customer, petitioned for protection under Chapter 11 of the U.S.
Bankruptcy Code. The Company has periodically extended financial support to
McLouth in the form of deferred payment terms and other considerations. At the
time of the bankruptcy filing, the Company had an unreserved receivable from
McLouth of $5.0 million, secured by liens on certain McLouth fixed assets. A
$2.7 million reserve against the receivable was recorded in September,
resulting in a $1.8 million after-tax charge. Sales to McLouth were .9 million
tons in the first nine months of 1995 which represented 13 percent of the
Company's sales volume and a higher percentage contribution to income before
fixed cost absorption.
6
<PAGE> 7
Since the petition, McLouth has maintained operations and has obtained
access to debtor-in-possession financing and the Company has continued pellet
shipments. Included in the Company's September 30, 1995 inventory was .1
million tons consigned to McLouth in accordance with long-standing practice.
The Company has no earnings exposure to the consigned inventory.
NOTE E - ENVIRONMENTAL MATTERS
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for defined
environmental problems at active mining operations and idle and closed mining
and other sites have been recognized based on specific estimates for known
conditions and required investigations. Any potential insurance recoveries have
not been reflected in the determination of the financial reserve.
During the first nine months of 1995, the Company provided $10.7
million of additional environmental reserves and made net payments of $1.7
million. The additional environmental provision reflected the Company's
comprehensive review of estimated restoration expense at all known sites.
Given the Company's experience with rising cost estimates as studies and work
were completed at identified sites, it was determined that a higher reserve was
prudent.
At September 30, 1995, the Company has an environmental reserve of
$21.0 million, of which $4.5 million is current. The reserve includes the
Company's obligations related to:
* Federal and State Superfund and Clean Water Act sites where the
Company is named as a potential responsible party, including
Cliffs-Dow and Kipling sites in Michigan, the 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
the Company's share of engineering study estimates prepared by
outside consultants engaged by the potential responsible parties.
The Company continues to evaluate the recommendations of the
studies and other means for site clean-up. Significant site
clean-up activities have taken place at Cliffs-Dow since late
1993. A Consent Decree has been reached among the federal and
state governments and approximately 224 individuals and companies
with respect to the Arrowhead site. Clean-up began in 1995 with
significant funding provided by the federal and state governments.
The Consent Decree has been entered by the U.S. District Court.
The Company's share of Arrowhead costs is expected to total
approximately $145,000 which includes $31,000 of funded
remediation costs and $114,000 of incurred legal and other costs.
* Wholly-owned active and idle operations, including Northshore mine
and Silver Bay power plant in Minnesota, acquired on September 30,
1994, 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.
* Other sites, including current and former operations, for which
reserves are based on the Company's estimated cost of
investigation and remediation of sites where expenditures may be
incurred.
7
<PAGE> 8
Environmental expenditures under current laws and regulations are not expected
to materially impact the Company's consolidated financial statements.
NOTE F - INVESTMENTS
On October 4, 1994, the Financial Accounting Standards Board issued
Statement 119 entitled, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments", 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 of currency fluctuations with respect to the on-going obligations of the
Company's Australian and Canadian operations denominated in those currencies.
Gains and losses are recognized in the same period as the hedged transactions.
At September 30, 1995, the Company had $14.0 million of forward exchange
contracts with a fair value, based on September 30, 1995 forward rates, of
$14.3 million.
In September, 1995, a $7.6 million Australian Government security
matured and was converted to cash and cash equivalents. The redemption of this
investment, which was previously classified as a held-to-maturity security, did
not result in the recognition of a gain or loss.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS - 1995 AND 1994
- -----------------------------------------------------------------
Net income for the third quarter was $17.3 million, or $1.45 a share.
Earnings in the third quarter of 1994 were $14.8 million, or $1.23 a share.
The $2.5 million increase in third quarter earnings was principally
due to increased North American sales volume, higher Australian earnings, and
lower costs, partially offset by a higher effective income tax rate, and a $1.8
million after-tax reserve against accounts receivable.
Net income for the first nine months of 1995 was $43.2 million, or
$3.61 a share, including two large special items recorded in the second
quarter: a $12.2 million tax credit resulting from the settlement of prior
years' tax issues, and a $6.7 million after-tax increase in the reserve for
environmental expenditures.
Excluding the special items, earnings for the first nine months of
1995 were $37.7 million, or $3.15 a share. In the first nine months of 1994,
earnings were $27.4 million, or $2.27 a share. The $10.3 million increase in
nine month earnings (excluding the special items) was mainly due to increased
North American sales volume, higher royalties and management fees, lower costs,
and higher Australian earnings, partially offset by the higher effective income
tax rate, and the reserve for accounts receivable.
Earnings in the third quarter and first nine months of 1995 were
favorably impacted by the acquisition of Northshore Mining Company
("Northshore") on September 30, 1994.
* * *
The Company's managed mines in North America produced 10.6 million
tons of iron ore in the third quarter of 1995 compared with 9.3 million tons in
1994. Nine month production was 29.4 million tons in 1995 versus 25.7 million
tons in 1994. Full year production is expected to be approximately 40.0 million
tons, a 4.8 million ton increase from 1994. The Company's share of scheduled
production is approximately 10.0 million tons in 1995 compared with 6.8 million
tons in 1994. Higher production in 1995 principally reflects the acquisition of
Northshore.
The Company's North American pellet sales in the third quarter of 1995
were 3.2 million tons compared with 2.2 million tons in 1994. Nine month sales
were 7.0 million tons in 1995 versus 4.6 million tons in 1994. Higher sales in
1995 reflect the acquisition of Northshore and shipment timing. The Company's
pellet sales for the year 1995 are estimated to be approximately 10.5 million
tons versus 8.2 million tons in 1994. Sales volume in both years includes
resale of purchased ore. Pellet inventory at September 30, 1995 was 1.3 million
tons versus 1.0 million tons one year ago.
LIQUIDITY
- ---------
At September 30, 1995, the Company had cash and marketable securities
of $132.7 million, including $13.3 million dedicated to fund Australian mine
obligations.
9
<PAGE> 10
Since December 31, 1994, cash and marketable securities have decreased
$8.7 million due to capital expenditures, $15.9 million, dividends, $11.7
million, repurchase of common stock $8.0 million, and debt payment, $5.0
million, partially offset by cash flow from operating activities, $31.8
million.
A $5.0 million annual payment on the Company's $75.0 million,
medium-term, unsecured senior notes was made on May 1, 1995. Scheduled payments
of principal are $12.1 million in each of years 1996 and 1997.
Effective March 1, 1995, the Company terminated its $75 million
three-year revolving credit agreement, which was scheduled to expire on April
30, 1995, and entered into a five-year, $100 million agreement. No borrowings
are outstanding under the agreement.
As announced in January, 1995, the Company commenced the periodic
repurchase of up to 600,000 shares of its common stock. Through October 23,
1995, the Company has repurchased 214,300 shares.
On September 29, 1995, McLouth Steel Products Company ("McLouth"),
a significant customer, petitioned for protection under Chapter 11 of the U.S.
Bankruptcy Code. At the time of the filing, the Company had an unreserved
receivable from McLouth of $5.0 million, secured by liens on certain McLouth
fixed assets. A $2.7 million reserve against the receivable was recorded in
September, resulting in a $1.8 million after-tax charge.
Since the petition, McLouth has maintained operations and obtained
debtor-in-possession financing and the Company has continued pellet shipments.
The Company's total expected shipments for 1995 have not been affected by
developments at McLouth.
The Company continues to project that its Savage River Mines in
Tasmania, Australia will terminate operations as scheduled in the first quarter
of 1997, the exhaustion date of the economically recoverable iron ore from
surface mining. Mine closure costs have previously been provided in the
Capacity Rationalization Reserve.
Pursuant to the Coal Industry Retiree Health Benefit Act of 1992
("Benefit Act"), the Trustees of the UMWA Combined Benefit Fund have assigned
responsibility to the Company for premium payments with respect to retirees,
dependents and "orphans" (unassigned beneficiaries), representing less than
one-half of one percent of all "assigned beneficiaries". The Company is making
premium payments under protest and is contesting the assignments that it
believes were incorrect. At September 30, 1995, the Company continues to pay
premiums on 338 assigned retirees and dependents and 116 "orphans".
Additionally, 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 against
the Company demanding the payment of premiums on additional beneficiaries
related to two formerly operated joint venture coal mines. The Company is
actively contesting the complaint. Monthly premium payments on 81 assigned
beneficiaries 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, 1995, the coal
retiree reserve maintained by the Company is $11.0 million, of which $.9
million is current. In the third quarter of 1995, the Company increased its
coal retiree reserve by $.2 million (reflecting accretion of discount), and
made payments of $.2 million. The reserve is reflected at present value,
utilizing an assumed discount rate of 8.5%. Constitutional and other legal
challenges to various provisions of the Benefit Act by other former coal
producers are pending in the Federal Courts.
10
<PAGE> 11
In the second quarter, the Company and the Internal Revenue Service
("IRS") reached agreement settling issues raised during the examination of the
Company's Federal income tax returns for the tax years 1986 through 1988. As a
result of the settlement and its related impact on the tax years 1989 through
1993, the Company made additional tax and interest payments of $11.8 million in
the third quarter of 1995 and is entitled to tax and interest refunds of $5.3
million. Additional cash benefits of the tax settlement will be realized for
tax years 1994 and thereafter. Accordingly, a tax credit of $12.2 million was
recorded in the second quarter of 1995.
The income tax settlement favorably resolved a number of difficult IRS
audit issues primarily arising from the Company's restructuring program in the
late 1980s when mining partnerships were reorganized to cope with steel company
bankruptcies and non-core businesses were divested. During that period, the
Company had reserved the potential tax liabilities.
CAPITALIZATION
- --------------
Long-term obligations effectively serviced by the Company at September
30, 1995, including the current portion, totalled $80.0 million. The Company
guarantees Empire mine debt obligations of LTV Steel Company, Inc. ("LTV") and
Wheeling-Pittsburgh Steel Corporation ("Wheeling") which totalled $13.7 million
at September 30, 1995. The following table sets forth information concerning
long-term obligations guaranteed and effectively serviced by the Company.
<TABLE>
<CAPTION>
(Millions)
-----------------------------------------------------------------
September 30, 1995 December 31, 1994
---------------------------- ---------------------------
Total Total
Long-Term Long-Term
Obligations Obligations Obligations Obligations
Effectively and Effectively and
Serviced Guarantees Serviced Guarantees
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consolidated $ 70.0 $ 70.0 $ 75.0 $ 75.0
Share of Unconsolidated
Affiliates 10.0 23.7* 9.2 22.9*
------ ------- ------- -------
Total $ 80.0 $ 93.7 $ 84.2 $ 97.9
====== ======= ======= =======
Ratio to Shareholders'
Equity .2:1 .3:1 .3:1 .3:1
<FN>
* Includes $13.7 million of Empire Mine debt obligations which are
serviced by LTV and Wheeling.
</TABLE>
At September 30, 1995, the Company was in compliance with all
financial covenants and restrictions related to its medium-term, unsecured
senior note agreement.
The fair value of the Company's long term debt (which had a carrying
value of $70.0 million) at September 30, 1995, was estimated at $74.3 million
based on a discounted cash flow analysis and estimates of current borrowing
rates.
Due to the current level of interest rates, the Company is evaluating
refinancing the outstanding $70.0 million unsecured senior notes. At present
interest rates, a make-whole payment to current lenders would be recorded as an
extraordinary after-tax charge of approximately $2.5 million in the period
refinancing occurs.
11
<PAGE> 12
Following is a summary of common shares outstanding:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
March 31 12,031,392 12,079,885 11,992,804
June 30 11,892,092 12,080,560 12,008,065
September 30 11,898,467 12,091,310 12,038,092
December 31 12,099,860 12,064,117
</TABLE>
ACTUARIAL ASSUMPTIONS
- ---------------------
As a result of decreases in long-term interest rates during 1995, 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 rates used to calculate the actuarial
present value of such benefits reflect the market rate of interest on high
quality fixed income securities. A discount rate of 8.5% was used to calculate
the Company's pension and OPEB obligations as of December 31, 1994. A decrease
in the discount rate assumption would not affect 1995 financial results;
however, in 1996 and subsequent years, the Company would recognize a non-cash
increase in pension and OPEB expense. The Company does not anticipate changing
the long-term rate of return assumption on pension assets (currently 8.5%) in
the near-term.
Additionally, as a result of recent experience, the Company is
reviewing the medical cost trend rate assumption used in the calculation of its
OPEB obligation. The current assumption reflects a medical cost trend increase
of 7% in 1996 decreasing to 5% in 1997 and thereafter. A decision to utilize an
assumption which projects a slower rate of decline in the medical trend would
not affect 1995 financial results; however in 1996 and subsequent years, the
Company would recognize a non-cash increase in OPEB expense.
OUTLOOK
- -------
North American steel producers continue to operate at high levels and
analysts' forecasts of 1995 shipments approximate the 110 million tons shipped
in 1994. The North American iron ore industry is scheduled to produce 85
million tons of pellets in 1995 which is 6 million tons or 8 percent more than
1994, and the highest output since 1981. The higher production has resulted
from integrated producers maximizing blast furnace hot metal production, and
from increased exports to Europe by eastern Canadian mines.
The six North American mines managed by the Company are operating at
nearly full capacity and will produce approximately 40 million tons of iron
ore. The Company's North American sales are expected to approximate 10.5
million tons, including 8.1 million tons under multi-year contracts. Australian
production and sales are projected to be about 1.5 million tons.
Industry analysts are generally predicting that domestic steel
shipments in 1996 will remain level or increase slightly from 1995 due to lower
net imports of steel. Under this scenario, North American iron ore mines would
operate at or near capacity levels again in 1996.
12
<PAGE> 13
BUSINESS RISK
- -------------
The North American steel industry has experienced high operating rates
and improved financial results over the past three years. The Company's steel
company partners and customers (with the exception of McLouth) have generally
improved their financial condition as a result of higher earnings and increased
equity capital.
The improvement in most steel companies' financial positions has
reduced the major near-term business risk faced by the Company, i.e., the
potential financial failure and shutdown of one or more of its significant
customers or partners, with the resulting loss of ore sales or royalty and
management fee income. However, if any such shutdown were to occur without
mitigation through replacement sales or cost reduction, it would represent a
significant adverse financial development to the Company. The iron mining
business has high operating leverage because "fixed" costs are a large portion
of the cost structure. Therefore, loss of sales or other income due to failure
of a customer or partner would have an adverse income effect proportionately
greater than the revenue effect.
OTHER DEVELOPMENTS
- ------------------
* In June, the announced $6 million pellet expansion project at
Northshore Mining Company was completed on schedule. On an
annualized basis, the expansion added about 900,000 tons of
pellets, a 25 percent expansion of Northshore production.
* The Company continues to pursue development of a business segment
to produce and supply reduced iron to steelmakers and has an
agreement with a leading technology supplier to evaluate its
process for the production of a premium grade briquetted iron
product. The first two phases of a three-stage technical testing
program have produced satisfactory results and the third stage is
expected to be scheduled in the near future. The Company is in
discussions with potential partners, customers, and ore suppliers
for the project. If these discussions and our technical and
economic analyses prove favorable, an initial plant to produce
500,000 tons per year would likely be sited in Trinidad.
The Company is also investigating other reduced iron technologies
and discussing possible projects with various interested
companies.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) List of Exhibits - Refer to Exhibit Index on page 15.
(b) There were no reports on Form 8-K filed during the three
months ended September 30, 1995.
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 2, 1995
------------------------- By /s/ J. B. Brinzo
--------------------------
J. B. Brinzo,
Executive Vice President-Finance and
Principal Financial Officer
14
<PAGE> 15
EXHIBIT INDEX
-------------
<TABLE>
Exhibit
Number Exhibit
- ------- ------- -----------
<S> <C> <C>
11 Statement re computation of earnings per share Filed
Herewith
27 Consolidated Financial Data Schedule submitted for Filed
Securities and Exchange Commission information only Herewith
</TABLE>
15
<PAGE> 1
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
(In Millions, Except
Per Share Amounts)
Nine Months Ended
September 30
--------------------
1995 1994
-------- --------
<S> <C> <C>
Primary and fully diluted earnings per share:
Average shares outstanding 12.0 12.1
Net effect of dilutive stock options -
based on treasury stock method using
average market price -- --
---- ----
Average shares and equivalents 12.0 12.1
==== ====
Net income applicable to average
share and equivalents $43.2 $27.4
===== =====
Income per share $3.61 $2.27
===== =====
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 133
<SECURITIES> 0
<RECEIVABLES> 57
<ALLOWANCES> 20
<INVENTORY> 59
<CURRENT-ASSETS> 276
<PP&E> 261
<DEPRECIATION> (144)
<TOTAL-ASSETS> 622
<CURRENT-LIABILITIES> 97
<BONDS> 0
<COMMON> 17
0
0
<OTHER-SE> 317
<TOTAL-LIABILITY-AND-EQUITY> 622
<SALES> 282
<TOTAL-REVENUES> 327
<CGS> 245
<TOTAL-COSTS> 248
<OTHER-EXPENSES> 18
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 45
<INCOME-TAX> 2
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> 3.61
<EPS-DILUTED> 3.61
</TABLE>
