CLEVELAND-CLIFFS INC. Annual Report - A Year in Review

Welcome to our straightforward breakdown of Cleveland-Cliffs' annual performance. As a key player in the steel industry, their operations and financial health directly impact a wide range of sectors. This summary cuts through the financial jargon, offering you a clear, investor-friendly overview of their year.

Here's what we'll cover:

1. What Cleveland-Cliffs does and how they performed this year

   • What they do: Cleveland-Cliffs stands as a leading, fully integrated steel producer. This means they manage the entire process, from mining iron ore to delivering finished steel products. They produce a diverse range of steel, including Hot Rolled, Cold Rolled, Coated, Stainless and Electrical, and Plate steel. They supply these products to a broad customer base, notably the automotive industry, infrastructure and manufacturing sectors, as well as to distributors, converters, and other steel producers. While their primary operations are in the US and Canada, they also engage in international business.
   • How they performed this year: Cleveland-Cliffs reported a solid year. Total revenue reached $22.7 billion, a slight 3% decrease from the previous year, primarily due to softening steel prices in the latter half. Despite this, their integrated business model helped them maintain strong margins. Net income totaled $1.2 billion, resulting in $2.50 earnings per share (EPS), showcasing their resilience in a fluctuating market.

2. Financial performance: Revenue, profit, and growth metrics

   • Revenue: The company generated $22.7 billion in total revenue for the year, with its Steelmaking segment contributing the vast majority at $21.5 billion. Revenue from automotive customers remained strong, accounting for approximately 35% of total steel sales, while infrastructure and manufacturing segments also showed consistent demand.
   • Profitability: Cleveland-Cliffs achieved Adjusted EBITDA of $3.5 billion, a measure of operating profit before certain non-cash expenses. This marked a decrease from $4.2 billion last year, reflecting market price adjustments. However, their EBITDA margin remained healthy at 15.4%. Net income was $1.2 billion, down from $1.8 billion in the prior year, yet still a robust performance given economic challenges. This demonstrates their effective cost management and the benefits of their integrated operations.
   • Growth Metrics: While revenue saw a slight dip, the company focused on optimizing production and improving efficiency. They generated $1.5 billion in free cash flow, a key indicator of their financial strength and ability to invest in the business or return capital to shareholders.

3. Major wins and challenges this year

   • Major Wins: A significant strategic move was the successful acquisition of Stelco Holdings Inc. for $1.5 billion, which closed in Q3. This acquisition is expected to expand their market reach in Canada, enhance their product portfolio (especially in specialized steel grades), and generate an estimated $150 million in annual synergies (cost savings or increased revenue from combining operations) within two years. This move solidifies their position as a leading North American steel producer.
   • Challenges/Adjustments: The company incurred $120 million in expenses related to employee severance and other restructuring activities as part of ongoing operational efficiency programs. Additionally, they recorded asset impairment charges of $85 million (reducing the book value of assets) related to certain older, less efficient facilities, reflecting a strategic shift towards more modern and sustainable production methods. While these adjustments impacted short-term earnings, they aim to strengthen long-term competitiveness.

4. Financial health: Cash, debt, and liquidity

   • Cash & Debt: Cleveland-Cliffs ended the year with a strong cash position of $1.8 billion in cash and equivalents. Their total long-term debt stood at $4.5 billion, primarily consisting of various Senior Notes (a type of bond) with interest rates ranging from 4.625% to 7.625% and maturity dates stretching from 2028 to 2040. The weighted average interest rate on their debt is approximately 6.5%.
   • Liquidity: They maintain a Revolving Credit Facility of $3.0 billion (a flexible loan arrangement), of which $2.5 billion remained undrawn at year-end. This provides ample flexibility for short-term needs and strategic investments. This strong liquidity, coupled with healthy cash flow, indicates their ability to comfortably meet financial obligations.
   • Assets: Their balance sheet reflects significant Property, Plant, and Equipment valued at $18.2 billion, underscoring their substantial industrial footprint. Intangible assets, including customer relationships, technology, trade names, mining permits, and supplier relationships, totaled $2.1 billion, reflecting the value of their integrated operations and market position.
   • Current Liabilities: Accounts Payable and Other Current Liabilities totaled $3.1 billion, well-covered by their current assets and strong cash position.

5. Key risks that could hurt the stock price

   • Commodity Price Volatility: Fluctuations in iron ore and steel prices, driven by global supply and demand, can significantly impact profitability.
   • Economic Downturns: A slowdown in key industries like automotive or construction could reduce demand for steel products.
   • Regulatory & Trade Policies: Changes in tariffs, environmental regulations, or trade agreements (e.g., Section 232 tariffs) could affect their cost structure and competitive landscape.
   • Interest Rate Risk: With substantial long-term debt, rising interest rates could increase borrowing costs upon refinancing.
   • Labor Relations: As a large industrial employer, labor disputes or increased labor costs could impact operations and profitability.
   • Supply Chain Disruptions: Geopolitical events or natural disasters could disrupt raw material supply or product distribution.

6. Competitive positioning

   • Cleveland-Cliffs differentiates itself through its fully integrated business model, managing everything from mining iron ore to producing high-quality finished steel. This allows for better cost control, supply chain reliability, and consistent quality compared to non-integrated competitors.
   • They hold a strong position in the automotive steel market, providing advanced high-strength steels critical for modern vehicle manufacturing. Their focus on value-added products and strategic acquisitions like Stelco further strengthens their market share and product diversification in North America.

7. Leadership or strategy changes

   • There were no significant changes in executive leadership this year. The company's strategic direction remains focused on operational excellence, vertical integration, and targeted growth through acquisitions. The Stelco acquisition exemplifies this strategy, aiming to expand geographic reach and product capabilities. The restructuring activities underscore a commitment to continuous improvement and efficiency across their operations.

8. Future outlook

   • Cleveland-Cliffs anticipates continued strong demand from the automotive sector and a resilient infrastructure market. They project capital expenditures of approximately $800 million for the upcoming year, primarily focused on modernizing facilities, enhancing environmental controls, and improving operational efficiency.
   • The company is committed to deleveraging its balance sheet (reducing its debt) while also exploring opportunities for strategic growth. They are actively pursuing initiatives to reduce their carbon footprint, aligning with global sustainability trends and aiming to be a leader in "green steel" production.

9. Market trends or regulatory changes affecting them

   • Decarbonization & Green Steel: Growing pressure for sustainable manufacturing drives demand for lower-carbon steel production methods, an area where Cliffs is investing.
   • Infrastructure Spending: Government initiatives in the US and Canada for infrastructure renewal are expected to provide a stable demand base for steel products.
   • Global Trade Dynamics: Ongoing trade tensions and tariffs, particularly with steel imports, continue to influence domestic pricing and competitive dynamics.
   • Raw Material Costs: Volatility in global iron ore and coking coal prices remains a key factor influencing their cost of goods sold, though their integrated model helps mitigate some of this risk.

Cleveland-Cliffs navigated a dynamic year with strategic acquisitions and a sharp focus on operational efficiency, positioning itself for continued strength in the North American steel market.