<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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______ .
Commission File Number:1-8944
CLEVELAND-CLIFFS INC
(Exact name of registrant as specified in its charter)
Ohio 34-1464672
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
1100 Superior Avenue, Cleveland, Ohio 44114-2589
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of November 6, 1997, there were 11,380,357 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,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ----------
REVENUES:
<S> <C> <C> <C> <C>
Product sales and services $ 133.1 $ 148.7 $ 256.3 $ 319.5
Royalties and management fees 13.7 15.0 34.4 37.6
--------- --------- --------- ---------
Total operating revenues 146.8 163.7 290.7 357.1
Investment income (securities) 1.0 2.8 4.4 6.6
Recovery of excess closedown provision 4.3
Property damage claim recovery 2.0
Other income 1.1 0.2 2.9 1.6
--------- --------- --------- ---------
TOTAL REVENUES 148.9 166.7 302.3 367.3
COSTS AND EXPENSES:
Cost of goods sold and operating expenses 118.3 126.6 235.4 279.5
Administrative, selling and general expenses 5.4 4.0 12.6 11.5
Interest expense 0.5 1.1 2.2 3.5
Other expenses 1.6 1.6 5.1 6.3
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES 125.8 133.3 255.3 300.8
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 23.1 33.4 47.0 66.5
INCOME TAXES
Currently payable 8.0 9.9 11.3 19.5
Deferred (6.0) 2.2 (1.3) 4.3
--------- --------- --------- ---------
TOTAL INCOME TAXES 2.0 12.1 10.0 23.8
--------- --------- --------- ---------
NET INCOME $ 21.1 $ 21.3 $ 37.0 $ 42.7
========= ========= ========= =========
NET INCOME PER COMMON SHARE $ 1.86 $ 1.84 $ 3.26 $ 3.66
========= ========= ========= =========
</TABLE>
See notes to financial statements
2
<PAGE> 3
<TABLE>
<CAPTION>
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
-----------------------------
September 30, December 31,
ASSETS 1997 1996
------ ------------- ------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 86.4 $ 165.4
Marketable securities 4.0
-------- ------
86.4 169.4
Accounts receivable - net 71.8 70.2
Inventories:
Finished products 63.6 28.7
Work in process 0.9 0.9
Supplies 13.9 15.4
-------- ------
78.4 45.0
Federal income taxes 4.8 4.4
Other 9.7 11.8
-------- ------
TOTAL CURRENT ASSETS 251.1 300.8
PROPERTIES 277.0 269.3
Less allowances for depreciation and depletion (143.2) (141.6)
-------- ------
TOTAL PROPERTIES 133.8 127.7
INVESTMENTS IN ASSOCIATED COMPANIES 209.4 161.9
OTHER ASSETS
Long-term investments 10.7 10.8
Deferred income taxes 12.6 11.9
Prepaid pensions 39.8 34.8
Other 23.2 25.8
-------- ------
TOTAL OTHER ASSETS 86.3 83.3
-------- ------
TOTAL ASSETS $ 680.6 $ 673.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES $ 90.2 $ 105.5
LONG-TERM OBLIGATIONS 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 70.4 67.5
RESERVE FOR CAPACITY RATIONALIZATION 6.0 15.5
OTHER LIABILITIES 47.3 44.6
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 69.1 68.8
Retained income 457.9 432.0
Foreign currency translation adjustments 0.1 0.1
Net unrealized gain (loss) on marketable securities (0.5) (1.0)
Cost of 5,448,584 Common Shares in treasury
(1996 - 5,458,224) (143.1) (142.5)
Unearned Compensation (3.6) (3.6)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 396.7 370.6
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 680.6 $ 673.7
======== ========
See notes to financial statements
3
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
CLEVELAND-CLIFFS INC
STATEMENT OF CONSOLIDATED CASH FLOWS
Increase (Decrease)
in Cash and Cash
Equivalents for
Nine Months Ended
September 30,
(In Millions)
----------------------
1997 1996
--------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 37.0 $ 42.7
Depreciation and amortization:
Consolidated 5.2 4.8
Share of associated companies 9.1 8.3
Provision for deferred income taxes 9.2 4.3
Tax credit (5.6) --
Increase (decrease) in capacity rationalization reserve (14.3) 2.5
Other 1.2 3.6
-------- --------
Total Before Changes in Operating Assets and Liabilities 41.8 66.2
Changes in operating assets and liabilities (51.1) (7.6)
-------- --------
NET CASH FROM (USED BY) OPERATING ACTIVITIES (9.3) 58.6
INVESTMENT ACTIVITIES
Capital expenditures:
Consolidated (11.0) (6.3)
Share of associated companies (35.7) (14.0)
Purchase of Wabush interest (15.0) --
Other 4.8 (4.0)
-------- --------
NET CASH USED BY INVESTMENT ACTIVITIES (56.9) (24.3)
FINANCING ACTIVITIES
Dividends (11.1) (11.4)
Repurchases of common shares (1.7) (19.5)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (12.8) (30.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 0.1
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (79.0) 3.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 165.4 148.8
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86.4 $ 152.3
======== ========
Income taxes paid $ 15.2 $ 11.4
Interest paid on debt obligations $ 2.5 $ 2.4
</TABLE>
See notes to financial statements
4
<PAGE> 5
CLEVELAND-CLIFFS INC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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
1996 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 - ACCOUNTING AND DISCLOSURE CHANGES
In February, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement 128, "Earnings per Share", which simplifies the standards for
computing earnings per share and makes them comparable to international
standards. Under the new requirements, basic earnings per share is expected to
approximate currently reported earnings per share and the impact of the diluted
earnings per share calculation is not expected to be material under the
Company's present capital structure. This Statement is effective for years
ending after December 15, 1997. Early application is not permitted.
In February, 1997, the FASB issued Statement 129, "Disclosure of
Information about Capital Structure," which is effective for years ending after
December 15, 1997. It contains no change in disclosure requirements for the
Company.
In June, 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The standard is effective for years beginning after December 15, 1997.
Management is evaluating the disclosure alternatives.
In June, 1997, the FASB issued Statement 131, "Disclosures About
Segments of an Enterprise and Related Information." This Statement changes the
way that segment information is reported in annual and interim financial
statements. It is effective for years beginning after December 15, 1997.
Management is evaluating the disclosure requirements.
5
<PAGE> 6
In October, 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
96-1, "Environmental Remediation Liabilities," the purpose of which is to
improve the manner in which existing authoritative accounting literature is
applied in recognizing, measuring and disclosing environmental remediation
liabilities. The Company's adoption of this statement in the first quarter of
1997 did not have a significant effect on recorded earnings.
NOTE C - ACCOUNTING POLICY CHANGE
In June, 1997, the Company redefined its accounting policy for cash
equivalents to include highly liquid debt instruments with a put option.
Included in cash equivalents at September 30, 1997 are $1.1 million ($12.3
million at December 31, 1996 - reclassified) variable rate demand notes. These
investments are revalued every seven days and can be put with seven days notice.
The notes are guaranteed by letters of credit from highly rated financial
institutions. The carrying value of these instruments approximates fair value on
the reporting dates.
The new accounting policy is, "The Company considers investments in
highly liquid debt instruments with a put option exercisable in three months or
less or an initial maturity of three months or less to be cash equivalents."
NOTE D - ENVIRONMENTAL RESERVES
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for known
environmental problems at active mining operations, idle and closed mining
operations, and other sites have been recognized based on estimates of the cost
of investigation and remediation at each site. If the cost can only be estimated
as a range of possible amounts with no specific amount being most likely, the
minimum of the range is accrued in accordance with generally accepted accounting
principles. Estimates may change as additional information becomes available.
Actual costs incurred may vary from the estimates due to the inherent
uncertainties involved. Any potential insurance recoveries have not been
reflected in the determination of the financial reserves.
At September 30, 1997, the Company has an environmental reserve,
including its share of the environmental obligations of associated companies, of
$23.4 million, of which $2.8 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 potentially responsible party,
including Cliffs-Dow and Kipling sites in Michigan and the Rio
Tinto mine site in Nevada, all of which sites are independent
of the Company's iron mining operations. The reserves are
based on engineering studies prepared by outside consultants
engaged by the potentially responsible parties. The Company
continues to evaluate the recommendations of the studies and
other means for site clean-up. Significant site clean-up
activities have taken place at Rio Tinto and Cliffs-Dow.
- Wholly-owned active and idle operations, including Northshore
mine and Silver Bay power plant in Minnesota. The
Northshore/Silver Bay reserve is based on an environmental
investigation conducted by the Company and an outside
consultant.
6
<PAGE> 7
- Other sites, including former operations, for which reserves
are based on the Company's estimated cost of investigation and
remediation of sites where expenditures may be incurred.
NOTE E - SAVAGE RIVER MINE CLOSEDOWN OBLIGATIONS
The remaining assets of Savage River Mines and all related
environmental and rehabilitation obligations were transferred to the Tasmanian
government on March 25, 1997. As a result of completion of the transaction, the
Company recorded a $2.8 million after-tax ($4.3 million pre-tax) credit in the
second quarter 1997 from recognition of actual Savage River Mines closedown
obligations being less than the accrual.
NOTE F - WABUSH INVESTMENT
On June 30, 1997, the Company completed its previously announced
acquisition of Inland Steel Company's 15.1 percent interest in the Wabush Mines
iron ore joint venture in Canada for $15 million, effective January 1, 1997. The
acquisition raises the Company's interest in the Company-managed venture to 22.8
percent. Depending on the magnitude of future tonnage, additional payments to
Inland may be required, but would not be expected to be material in any year.
Separately, the Company revised existing sales arrangements with Inland
to supply Inland's pellet requirements beyond its 40 percent ownership in the
Company-managed Empire Mine in Michigan and Inland's wholly-owned Minorca Mine
in Minnesota. Sales to Inland under this new 10-year contract are expected to
range between 800,000 and 900,000 tons in 1997.
NOTE G - INCOME TAXES
A reversal of prior years' tax accruals of $5.6 million was recorded in
the third quarter of 1997 as a result of settlement of issues raised during
examination of the Company's Federal income tax returns for the tax years 1991
and 1992.
NOTE H - STOCK PLANS
The 1992 Incentive Equity Plan was amended in May, 1997 to authorize
the Company to issue up to 1,150,000 Common Shares (previously 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.
Under the terms of the 1987 Incentive Equity Plan, effective April,
1997, no further grants or awards may be made from this Plan.
NOTE I - SHAREHOLDERS' EQUITY
In May, 1997, the Company's program to repurchase common shares in the
open market or in negotiated transactions was increased to 1,500,000 common
shares from the previous authorization of 1,000,000 common shares.
7
<PAGE> 8
On September 9, 1997, the Company announced the adoption of a new share
purchase rights ("Rights") plan, which became effective on September 19, 1997.
Each Right entitles the holder to acquire the Company's stock at a discounted
price if a person or group acquires 20 percent or more of the Company's common
stock and, under certain circumstances, the Rights will entitle the holder to
buy shares in an acquiring entity at a discounted price. The Rights will expire
September 19, 2007, unless redeemed, exchanged or amended by the Directors.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS - 1997 AND 1996
- -----------------------------------------------------------------
Earnings for the third quarter were $21.1 million, or $1.86 per share,
including a $5.6 million tax credit resulting from the settlement of prior
years' tax issues. Excluding the special tax credit, earnings were $15.5
million, or $1.37 per share, compared with 1996 third quarter earnings of $21.3
million, or $1.84 per share.
The $5.8 million decrease in third quarter earnings, excluding the
special tax credit, was principally due to the termination of Savage River Mine
operations in Australia in March, 1997, and higher North American mine operating
costs. Pre-tax earnings from Savage River were $4.9 million in the third quarter
of 1996.
Net income for the first nine months of 1997 was $37.0 million, or
$3.26 per share. Nine-month earnings included the $5.6 million special tax
credit recorded in the third quarter and an after-tax credit of $2.8 million
resulting from the second quarter reversal of an excess accrual for Savage River
closedown obligations recorded in prior years. In the first nine months of 1996,
earnings were $42.7 million, or $3.66 per share, including a $1.3 million
after-tax property damage insurance recovery on a 1996 ore train derailment.
Excluding the special items in both years, 1997 nine-month earnings
were $28.6 million, or $2.52 per share, compared with $41.4 million, or $3.55
per share, in 1996.
Following is a summary of results:
<TABLE>
<CAPTION>
(In Millions, Except Per Share)
-------------------------------------------
Third Quarter Nine Months
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Before Special Items:
Amount $15.5 $21.3 $28.6 $41.4
Per Share 1.37 1.84 2.52 3.55
Special Items:
Amount 5.6 -- 8.4 1.3
Per Share .49 -- .74 .11
Net Income:
Amount 21.1 21.3 37.0 42.7
Per Share 1.86 1.84 3.26 3.66
</TABLE>
The $12.8 million decrease in nine-month earnings before special items
was mainly due to the Savage River termination, lower North American sales
volume, and higher mine operating costs.
* * *
The Company's North American iron ore pellet sales in the third quarter
of 1997 were 3.5 million tons compared with 3.8 million tons in 1996. Nine-month
sales were 6.6 million tons versus 7.7 million tons in 1996.
9
<PAGE> 10
The Company's managed mines in North America produced 10.0 million tons
of pellets in the third quarter of 1997 compared with 10.6 million tons in 1996.
Nine-month production was 29.2 million tons in 1997 versus 29.4 million tons in
1996. Third quarter and nine-month 1997 production volumes were impacted by a
six-week (June 25 to August 1) shutdown at the Tilden Mine to accommodate a 1.0
million ton reduction of 1997 production requirements of the Company and its
Tilden partners, Algoma Steel Inc. and Stelco Inc.
LIQUIDITY
- ---------
At September 30, 1997, the Company had cash and short-term marketable
securities of $86.4 million. Since December 31, 1996, cash and marketable
securities have decreased $83.0 million, primarily due to project investments
and capital expenditures, $61.7 million (including investment in a reduced iron
joint venture in Trinidad and Tobago, $32.2 million, and the Wabush Mines
investment, $15.0 million), increased working capital, $51.1 million, payments
associated with closing Savage River Mines and transferring related assets and
liabilities, $11.6 million, dividends, $11.1 million, and repurchases of common
shares, $1.7 million, partially offset by cash flow from operations, $53.4
million.
Iron ore pellet inventory of 2.3 million tons at September 30, 1997
exceeds the inventory level at the same time last year by 1.0 million tons.
Product inventories of $63.6 million at September 30, 1997 have increased by
$34.9 million during the year and are $21.1 million above the level at the same
time last year. Product inventories are expected to approximate 1.5 million tons
at year-end 1997.
Capital additions and replacements at the Company and the six Company-
managed mines in North America are projected to total approximately $63 million
in 1997. The Company's share of such 1997 expenditures is expected to
approximate $23 million.
In 1996, the Company announced an international joint venture (with LTV
Corporation and Lurgi AG of Germany), located in Trinidad and Tobago, to produce
and market premium quality reduced iron briquettes to the steel industry. All
definitive project documents were subsequently signed on May 8, 1996. The
Company's share of capital expenditures is estimated to be $76 million, of which
$38 million has been spent through September 30, 1997, and $12 million is
expected to be spent in the remainder of 1997. No project financing will be
used. While some construction difficulties are being experienced, the planned
fourth quarter 1998 start-up date is still intact.
Cliffs and Associates Limited, the venture company, has entered into
forward currency exchange contracts to hedge the Deutsche Mark as part of the
construction project. The purpose of the contracts is to manage the risk of
exchange rate fluctuation with respect to a portion of project construction
costs denominated in the Deutsche Mark. The Company's share of outstanding
contracts, which have varying maturity dates to June 1, 1998, have an aggregate
contract value of $3.8 million and an aggregate estimated fair value of $3.2
million at September 30, 1997.
The Company anticipates further investment in reduced iron projects.
Under the Company's program to repurchase up to 1,500,000 of its common
shares (increased from 1,000,000 common shares in May, 1997) in the open market
or in negotiated transactions, the Company has repurchased 821,900 shares
through November 6, 1997, at a total cost of $32.0 million.
10
<PAGE> 11
The UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan have
assigned responsibility to the Company for premium payments with respect to
retirees, dependents, and "orphans" (unassigned beneficiaries) under the Coal
Industry Retiree Health Benefit Act of 1992. The Company is making premium
payments under protest and is contesting the assignments that it believes are
incorrect. At September 30, 1997, the Company's coal retiree reserve was $10.2
million, of which $.9 million is expected to be paid in 1997 ($1.3 million to be
spent, less $.4 million received in April, 1997 as a refund of contested
premiums).
In the third quarter, the Company and the Internal Revenue Service
reached agreement settling issues raised during the examination of the Company's
Federal income tax returns for the tax years 1991 and 1992. As a result of the
settlement and its related impact on the tax years 1993 through 1995, the
Company made additional tax and interest payments of $3.3 million in the third
quarter of 1997 and is entitled to tax and interest refunds of $.8 million.
Additional cash benefits of the tax settlement will be realized for tax years
1996 and thereafter. A reversal of prior years' tax accruals of $5.6 million was
recorded in the third quarter of 1997.
CAPITALIZATION
- --------------
The Company has $70.0 million of senior unsecured notes outstanding
with a group of private investors. The notes which have a fixed interest rate of
7.0 percent are due in December, 2005. In addition, the Company has a $100
million revolving credit agreement. No borrowings are outstanding under this
agreement which expires March 1, 2002. The Company was in compliance with all
financial covenants and restrictions of the agreements.
The fair value of the Company's long-term debt (which had a carrying
value of $70.0 million) at September 30, 1997 was estimated at $69.1 million
based on a discounted cash flow analysis and estimates of current borrowing
rates.
Following is a summary of common shares outstanding:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
March 31 11,377,322 11,832,767 12,031,392
June 30 11,374,448 11,614,517 11,892,092
September 30 11,379,357 11,367,717 11,898,467
December 31 11,369,717 11,829,267
</TABLE>
AUSTRALIAN OPERATIONS
- ---------------------
On March 25, 1997, the remaining assets (including $8.6 million in
cash) of Savage River Mines and all related environmental and rehabilitation
obligations were transferred to the Tasmanian government. The release from these
obligations includes not only release from previously identified environmental
and rehabilitation obligations but also release from any such obligations that
may be asserted in the future, whether presently known or unknown.
Estimated costs associated with the planned closure of Savage River
Mines, including estimates of previously agreed environmental and rehabilitation
obligations, had been fully provided for in the Capacity Rationalization
Reserve. In light of the completion of the transaction with the Tasmanian
government, the Company has recorded a $2.8 million after-tax ($4.3 million
pre-tax) credit in the second quarter 1997 resulting from reversal of an excess
accrual for Savage River Mines closedown obligations.
11
<PAGE> 12
OTHER DEVELOPMENTS
- ------------------
On June 30, 1997, the Company completed its previously announced
acquisition of Inland Steel Company's 15.1 percent interest in the Wabush Mine
in Canada, retroactive to January 1, 1997. The acquisition, which adds 900,000
tons to the Company's share of production capacity, raises the Company's total
sales capacity in North America to 11.5 million tons and provides increased
access to international markets.
Separately, the Company revised existing sales arrangements with Inland
to supply Inland's pellet requirements beyond its 40 percent ownership in the
Company-managed Empire Mine in Michigan and Inland's wholly-owned Minorca Mine
in Minnesota. Sales to Inland under this new 10-year contract are expected to
range between 800,000 and 900,000 tons in 1997.
IRON ORE OUTLOOK
- ----------------
Steel producers in the U.S. and Canada continue to realize strong steel
demand from nearly all markets, and steel inventories at producers and service
centers are low by historical measures.
Industry analysts generally expect steel production and shipment
volumes to remain strong in 1998, with operating rates declining slightly as new
minimill production capacity and restarted Wheeling-Pittsburgh operations
increase steel supplies. Steel imports, which have remained at stubbornly high
levels throughout 1997, are expected by analysts to decline in 1998 as steel
prices in North America weaken due to the added capacity.
The six North American mines managed by the Company are expected to
produce 39.5 million tons of iron ore pellets in the year 1997, a slight
decrease from the 39.9 million tons produced in 1996. The Company's share of
expected production is 10.9 million tons in 1997 versus 10.4 million tons in
1996, which reflects the Company's increased equity interest in the Wabush Mine
in Canada, partly offset by the production cutback at Tilden.
The Company's North American iron ore pellet sales for the full year
1997 are expected to approximate 10.4 million tons, which is unchanged from the
Company's previous expectation but trails 1996 record sales of 11.0 million
tons. Lower sales in 1997 are primarily due to certain customers reducing
purchases to correct inventories.
Based on the projected steel industry operating rates in 1998, we
expect our 1998 sales volume to increase over 1997 as the reductions experienced
in customer requirements in 1997 are not expected to repeat. We are also
encouraged by improved mine operating results in recent months.
BUSINESS RISK
- -------------
The North American integrated steel industry has continued to
experience relatively high operating rates in 1997 and recent years. Although
steel prices have been volatile and subject to intense competition, most steel
company partners and customers of the Company have improved their financial
condition during the current extended general business expansion. However, the
integrated steel industry continues to have relatively high fixed costs and
obligations, including substantial "legacy" costs.
12
<PAGE> 13
The improvement in most integrated steel companies' financial positions
has reduced the major 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 full mitigation
through replacement sales or cost reduction, it would represent a significant
adverse financial development to the Company.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. In addition to historical information,
this report contains forward-looking statements that are subject to risks and
uncertainties which could cause future results to differ materially from
expected results. Such statements are based on management's beliefs and
assumptions made on information currently available to it.
The Company's dominant business is the production and sale of iron ore
pellets, which is subject to the cyclical nature of the integrated steel
industry. Factors that could cause the Company's actual results to be materially
different from projected results include the following:
- Changes in the financial condition of integrated steel company
partners and customers;
- Domestic or international economic and political conditions;
- Unanticipated geological conditions or ore processing changes;
- Changes in imports of steel or iron ore;
- Development of alternative steel-making technologies;
- Displacement of integrated steel production by electric furnace
production;
- Displacement of steel by competitive materials;
- Energy costs and availability;
- Labor contract negotiations;
- Changes in individual customers' iron ore requirements;
- Changes in tax laws affecting corporate income and deductions;
- Changes in laws, regulations or enforcement practices governing
environmental site remediation requirements and safety standards;
and
- Accounting principles or policies imposed by the Financial
Accounting Standards Board or the Securities and Exchange
Commission.
The Company is under no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 5. Other Information
- -------------------------
Mr. M. Thomas Moore retired as Chairman, President and Chief Executive Officer
of the Company, effective November 9, 1997. Mr. Moore remains a Director of the
Company. Mr. John S. Brinzo became President and Chief Executive Officer, and a
Director of the Company and Mr. John C. Morley became non-executive Chairman of
the Board of the Company, effective November 10, 1997.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) List of Exhibits - Refer to Exhibit Index on page 15.
(b) During the quarter for which this 10-Q Report is filed, the
Company filed a Current Report on Form 8-K, dated September
19, 1997, covering information reported under ITEM 5. OTHER
EVENTS. 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 12, 1997 By /s/ C. B. Bezik
-------------------------- -------------------------------------
C. B. Bezik
Senior Vice President-Finance and
Principal Financial Officer
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit
- ------ ------------------------------------------------- ------------
<S> <C> <C>
11 Statement re computation of earnings per share Filed
Herewith
27 Consolidated Financial Data Schedule submitted for
Securities and Exchange Commission information only
</TABLE>
15
<PAGE> 1
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE Exhibit 11
CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
(In Millions, Except
Per Share Amounts)
Nine Months Ended
September 30
------------------------
1997 1996
---- ----
<S> <C> <C>
Primary and fully diluted earnings per share:
Average shares outstanding 11.4 11.7
Net effect of dilutive stock options
and performance shares based on
treasury stock method using
average market price -- --
---- ----
Average shares and equivalents 11.4 11.7
==== ====
Net income applicable to average
share and equivalents $37.0 $42.7
===== =====
Income per share $3.26 $3.66
===== =====
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FIANCIAL 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 72
<ALLOWANCES> 1
<INVENTORY> 78
<CURRENT-ASSETS> 251
<PP&E> 277
<DEPRECIATION> 143
<TOTAL-ASSETS> 681
<CURRENT-LIABILITIES> 90
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 380
<TOTAL-LIABILITY-AND-EQUITY> 681
<SALES> 256
<TOTAL-REVENUES> 302
<CGS> 235
<TOTAL-COSTS> 248
<OTHER-EXPENSES> 5
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 47
<INCOME-TAX> 10
<INCOME-CONTINUING> 37
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37
<EPS-PRIMARY> 3.26
<EPS-DILUTED> 0
</TABLE>
