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Item 2. Management’s Discussion and Analysis

2023-07-26 compared with 2023-04-26 · 172 added, 132 removed, 384 unchanged (44% of the section changed)

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FINANCIAL SUMMARY

The following is a summary of our consolidated results for the three months ended March 31, 2023 and 2022 (in millions, except for diluted EPS):

Total Revenue Net Income (Loss) Adjusted EBITDA Diluted EPS

See "— Non-GAAP Financial Measures" below for a reconciliation of our Net income (loss) to Adjusted EBITDA.

The following is a summary of our consolidated results for the three and six months ended June 30, 2023 and 2022 (in millions, except for diluted EPS):

Total Revenue Net Income Adjusted EBITDA Diluted EPS

See "— Non-GAAP Financial Measures" below for a reconciliation of our Net income to Adjusted EBITDA.

ECONOMIC OVERVIEW

To begin 2023, steel market conditions have been strong, driven by increased demand, extended lead times, low inventory levels at service centers and improving dynamics in the raw materials market.

The price for domestic HRC, the most significant index

impacting our revenues and profitability, averaged $875 per net ton for the first quarter of 2023, 28% lower than the first quarter of 2022, but above the prior ten-year average of $750 per net ton and $685 per net ton during the fourth quarter of 2022.

HRC prices sharply rebounded to above $1,150 per net ton by the end of the first quarter of 2023 after falling below $700 per net ton in the fourth quarter of 2022, the lowest level since October 2020.

Demand for steel from automotive manufacturers improved as supply chain issues continue to ease and light vehicle sales increase, reducing the availability of steel supply to the spot market.

Additionally, steel imports remained unattractive for the majority of the first quarter of 2023.

STEEL MARKET OVERVIEW

During the first half of 2023, we saw improving steel market conditions compared to the second half of 2022, which was led by the highest quarterly light vehicle production in North America since 2019, low inventory levels at service centers and a stronger than

historical raw materials market.

Although we have seen sequentially improved market conditions, the price for domestic HRC, the most significant index impacting our revenues and profitability, averaged $1,065 per net ton for the second quarter of 2023, 19% lower than the second quarter of 2022, but well above the prior annual ten-year average of approximately $750 per net ton and $875 per net ton during the first quarter of 2023.

Demand for steel from automotive manufacturers improved as supply chain issues continued to ease and light vehicle sales increased, reducing the availability of steel supply to the spot market.

During the second quarter of 2023, service center inventories reached their lowest level since the first quarter of 2021, with only 1.5 months of inventory on hand.

These low inventory levels should generate significant demand for steel throughout the remainder of 2023 as service centers will need to meet the continued strong demand from their end-use customers.

Additionally, steel imports remained unattractive for the majority of the first half of 2023.

Looking forward, we expect domestic steel demand to remain healthy to the extent that these conditions persist.

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The CHIPS Act promotes semiconductor manufacturing in the U.S., which should help support non-residential construction as well as machinery and equipment.

Additionally, on-shoring manufacturing in the U.S.

Additionally, the on-shoring of manufacturing in the U.S.

should reduce risk of supply chain issues in the future.

The Inflation Reduction Act provides a tax credit for consumers who buy new EVs, which further incentivizes consumers to purchase vehicles in an environment where pent-up demand is still very strong from recent supply chain issues and low dealer inventory levels.

The Inflation Reduction Act also provides incentives for the use of domestic steel for investments in clean energy projects, including wind and solar projects, which consume a substantial amount of steel.

Additional projects arising out of this recent legislation could create incremental demand for our galvanized, GOES, NOES and other steel products.

We expect to benefit from the spending related to this recently passed legislation during 2023 and beyond.

The largest market for our steel products is the automotive industry in North America, which makes light vehicle production a key driver of demand.

During the first quarter of 2023, North American light vehicle production was approximately 3.9 million units, the highest quarterly production volume since 2020.

Full-year 2023 North American light vehicle production is estimated to exceed 15 million units, which would be the highest level since 2019.

Inventory levels have recently reached the highest level since April 2021, with 1.8 million units of gross stock at the end of March 2023, but remain significantly below historical average inventory levels of 2.5 to 3.0 million units of gross stock.

During the second quarter of 2023, North American light vehicle production was approximately 4.1 million units, the highest quarterly production volume since 2019.

Full-year 2023 North American light vehicle production is estimated to exceed 15 million units, which would also be the highest level since 2019.

During the first six months of 2023, light vehicle sales in the U.S.

saw an average seasonally adjusted annualized rate of 15.4 million units sold, representing a 13% increase compared to the same period for 2022.

Additionally, the average age of cars on the road in the U.S.

reached an all-time high during 2022, which should support demand as older vehicles need to be replaced.

As the largest supplier of automotive-grade steel in the U.S., we expect to benefit from increased vehicle production in 2023 and beyond.

The ongoing conflict between Russia and Ukraine has disrupted raw material sourcing for our EAF competitors and has further increased the volatility in their steelmaking input costs.

Approximately two-thirds of all U.S.

imported pig iron, an important feedstock for flat-rolled steel producing EAFs, had historically been sourced from Russia and Ukraine.

Imported pig iron prices averaged $550 per metric ton during the first quarter of 2023, which is above the historical average of $487 per metric ton from September 2017 to December 2022.

The price continued to increase throughout the first quarter and was $593 per metric ton as of March 31, 2023.

Increases in finished steel and scrap prices since the beginning of the year have also contributed to higher pig iron pricing.

Higher than historical imported pig iron costs should continue to support a higher HRC price.

Unlike other flat-rolled steel producers, we are not reliant on imported pig iron, as we produce pig iron in-house at our blast furnaces, using our own iron ore and HBI as the primary raw materials.

The price for busheling scrap, a necessary input for flat-rolled steel production in EAFs in the U.S., has continued to average well above the historical ten-year average of $380 per long ton since 2021.

The busheling price averaged $513 per long ton during the first quarter of 2023 after it fell to $350 per long ton during the fourth quarter of 2022, as domestic steel capacity utilization rates declined below 80% and competitors worked through excess raw material inventory.

We expect the supply of busheling scrap to further tighten due to decreasing prime scrap generation from original equipment manufacturers and the growth of EAF capacity in the U.S., along with a push for expanded scrap use globally.

is at an all-time high of 12.5 years, which should support demand as older vehicles need to be replaced.

As the largest supplier of automotive-grade steel in the U.S., we expect to benefit from increased vehicle production over the coming years.

The price for busheling scrap, a necessary input for flat-rolled steel production in EAFs in the U.S., has continued to average well above the prior annual ten-year average of $380 per long ton since 2021.

The busheling price averaged $515 per long ton during the second quarter of 2023.

As we are fully integrated and have primarily a blast furnace footprint, increased prices for busheling scrap in the U.S.

bolster our competitive advantage, as we source the majority of our iron feedstock from our stable-cost mining and pelletizing operations in Minnesota and Michigan.

As for iron ore, the Platts 62% price averaged $126 per metric ton in the first quarter of 2023, which is 29% higher than the historical ten-year average.

As for iron ore, the Platts 62% price averaged $111 per metric ton in the second quarter of 2023, which is 14% higher than the prior annual ten-year average.

While higher iron ore prices play a role in increased steel prices, we also directly benefit from higher iron ore prices for the portion of iron ore pellets we sell to third parties.

OTHER FACTORS

Federal Reserve has pushed interest rates to the highest level in more than 15 years in an attempt to slow demand and reduce inflation.

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result in a recession, we believe that end-user demand for steel intensive products could be negatively impacted as a recession would likely result in higher unemployment, lower wages and less disposable income for consumers.

In January 2023, we announced that we partnered with the USW and filed antidumping and countervailing duty petitions against eight countries related to unfairly traded tin and chromium coated sheet steel products.

Tin mill products are used primarily for packaging applications, particularly canned food.

We produce tin mill products at our Weirton, West Virginia operating facility and sell approximately 300,000 net tons per year, representing approximately two percent of total Company steel sales volumes.

On June 21, 2023, the U.S.

Department of Commerce announced its preliminary affirmative determination in the countervailing duty investigation of tin mill products from China and imposed subsidy rates ranging from 89.02% to 542.55%, based on the exporter.

Favorable rulings from the U.S.

Department of Commerce will positively impact our ability to continue to produce tin mill products at our Weirton facility, which employs approximately 900 people, the majority of whom are USW-represented.

During 2022, we experienced higher costs than the prior year due to inflationary pressures on input and energy costs, as well as lower production volume and higher repair and maintenance spending.

We started to benefit from lower costs in the first quarter of 2023 and expect that to continue throughout 2023 and beyond, as most inflationary pressures have started to ease, production volume has improved, and repair and maintenance expenses have begun to normalize.

We started to benefit from lower costs in the first half of 2023 and expect that to continue throughout 2023 and beyond, as many inflationary pressures have started to ease, production volume has improved, and repair and maintenance expenses have begun to normalize.

COMPETITIVE STRENGTHS

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Our sizeable operating footprint provides us with the operational leverage and flexibility to achieve competitive margins throughout the business cycle.

We also have a unique vertically integrated profile from mined raw materials,

direct reduced iron, and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing.

We also have a unique vertically integrated profile from mined raw materials, direct reduced iron, and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing.

This positioning gives us more predictable costs throughout our supply chain and more control over both our manufacturing inputs and our end-product destination.

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We also operate EAF facilities, which gives us insight into the limitations of our competitors who predominantly operate only EAF facilities.

Companies that are primarily EAF producers are limited in their product range as their equipment is designed to utilize scrap as the main feedstock, which often contains high residual or impure content, such as copper, limiting their ability to meet certain high grades of steel that demand virgin iron.

Companies that are primarily EAF producers are limited in their product range as their equipment is designed to utilize scrap as the main feedstock, which often contains high residual or impure content, such as copper, limiting their ability to produce certain high grades of steel that demand virgin iron.

We also believe companies that primarily operate EAFs do not possess our breadth and depth of customer service, technical support, and research and development capabilities.

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In 2023, our electrical steel business is expected to post the highest profitability in over a decade.

We also expect to complete our NOES expansion at our Zanesville facility in the second half of 2023, which will increase our capacity by approximately 70,000 net tons.

We also recently commissioned our NOES expansion at our Zanesville facility, which will ultimately increase our capacity by approximately 70,000 net tons.

We are the first and the only producer of HBI in the Great Lakes region.

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These contracts reduce volatility and allow for more predictable through-the-cycle margins.

Our fixed contract values are expected to significantly improve throughout 2023 compared to 2022.

Our fixed-price contract values are expected to significantly improve throughout 2023 compared to 2022.

In addition to our fixed price contracts, we anticipate having more volumes under index-linked contracts in 2023 and beyond, which should reduce our reliance on spot sales and allow us to improve our efficiency with increased volumes.

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During 2022, we introduced our MOTOR-MAX™ product line of NOES for high frequency motors and generators.

We also recently introduced our C-STAR™ protection steel, which was developed for the purpose of providing battery support in EVs, but can be used in any type of light vehicle.

These unique product offerings and customer service capabilities enable us to remain the leading steel supplier to the automotive industry.

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In addition, our internally produced pig iron is more environmentally friendly than imported pig iron, which is often made from sintered iron ore fines and with higher coke rates, for example.

While competitors are forced to scramble for materials, we are able to take advantage of our vertically integrated footprint.

While competitors are forced to rely on suppliers who are subject to unpredictable disruptions in their ability to supply materials, we are able to take advantage of our vertically integrated footprint.

We began construction of our HBI plant in 2017, in part because of the uncertainty of the industry sourcing metallics from Russia and Ukraine.

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Our ability to optimize use of these raw materials in our blast furnaces and BOFs ultimately boosts liquid steel output, reduces coke needs and lowers carbon emissions from our operations.

As a result of the successful operational improvements, we announced the indefinite idle of the Indiana Harbor #4 blast furnace in the first quarter of 2022.

As a result of successful operational improvements, we announced the indefinite idle of the Indiana Harbor #4 blast furnace in the first quarter of 2022.

The indefinite idle reduced our operational blast furnaces from eight to seven.

Our strategic use of HBI in our blast furnaces and maximizing scrap usage in our BOFs has allowed us to achieve the same steel production with one less blast furnace in our footprint.

During the second quarter of 2023, it was announced that we entered into long-term state mineral leases for more than 2,600 acres of iron ore at the Nashwauk mine site in Itasca County, Minnesota.

The award of these leases resolved years of uncertainty regarding Hibbing Taconite’s mine life.

This ore body is intended to serve as an extension of Hibbing Taconite, as the state’s mineral leases, combined with our own private mineral holdings at Nashwauk, are expected to provide more than two decades of additional ore reserves.

We used 2022 as an opportunity to optimize our steelmaking footprint by dedicating significant resources to bring our facilities and equipment up to the standard required to maintain and improve our supply to the automotive industry.

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As this market grows, it will require more advanced steel applications to meet the needs of EV producers and consumers.

These features include the strength and formability of our flat-rolled steel used for battery enclosures in EVs.

These features include the already existing sophisticated steel supply for internal combustion engine vehicle parts, along with the

added need for steel-based battery enclosures in EVs.

With our unique technical capabilities and leadership in the automotive industry, we believe we are positioned better than any other North American steelmaker to supply the steel and parts necessary to fill these needs.

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We have continued to pursue opportunities such as carbon capture and the use of hydrogen within our facilities.

Additionally, we have started forming partnerships to develop alternative energy sources - such as wind and solar - which will benefit our own environmental footprint while combating the global impacts of climate change.

In May 2023, we completed a successful blast furnace hydrogen injection trial at Middletown Works.

During the trial, hydrogen gas was injected in all 20 tuyeres at the Middletown #3 blast furnace, facilitating the production of clean pig iron.

In this trial, hydrogen served as a partial substitute for the fossil fuels necessary for iron reduction, ultimately replacing the release of CO 2 with the release of H 2 O (water vapor) with no impact to product quality or operating efficiency.

Additionally, we support the development of alternative energy sources - such as wind and solar - which will benefit our own environmental footprint while combating the global impacts of climate change.

Our future GHG emissions reductions are expected to be driven by the use of direct reduced iron in blast furnaces, the stretching of hot metal with additional scrap, driving more productivity out of fewer blast furnaces, implementing hydrogen use where possible, utilizing carbon capture, procuring more clean energy and operating with higher energy efficiency.

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Since the acquisition of our steelmaking assets, we have demonstrated our ability to generate healthy free cash flow and use it to reduce substantial amounts of debt, return capital to shareholders through our share repurchase program and make investments to both improve and grow our business.

During 2022, we reduced outstanding debt by approximately $1.1 billion while returning $240 million in capital to shareholders via share repurchases.

In the past 12 months, we were able to take advantage of volatility in the debt markets to repurchase $351 million aggregate principal amount of assorted series of notes at an average price of 92% of par.

Given strong market conditions, we expect to have ample opportunities to reduce our debt with our own free cash flow generation through the remainder of 2023 and in the coming years.

On April 14, 2023, we issued $750 million aggregate principal amount of 6.750% 2030 Senior Notes.

The proceeds from the 6.750% 2030 Senior Notes were used to repay a portion of the borrowings under our existing ABL Facility.

During the second quarter of 2023, we reduced the principal amount of outstanding debt by $588 million while returning $94 million in capital to shareholders via share repurchases.

We have also shown our ability to take advantage of volatility in the debt markets and repurchase notes at a discount.

During 2022, we repurchased $351 million aggregate principal amount of assorted series of notes at an average price of 92% of par.

Given healthy market conditions, we expect to have ample opportunities to reduce our debt with our own free cash flow generation through the remainder of 2023 and in the coming years.

On April 14, 2023, we issued $750 million aggregate principal amount of our 6.750% 2030 Senior Notes at par.

The net proceeds from the 6.750% 2030 Senior Notes issuance were used to repay a portion of the borrowings under our ABL Facility.

The transaction increased our financial flexibility and liquidity, extended our debt maturity profile, and was effectively leverage and interest expense neutral.

Following the transaction, we maintained in excess of $1 billion in pre-payable debt on the ABL Facility and another $1.5 billion in callable debt that we expect to continue to reduce with our free cash flow generation.

As of June 30, 2023, we maintained in excess of $800 million in pre-payable debt under our ABL Facility and another $1.5 billion in callable notes that we expect to continue to reduce with our free cash flow generation.

On June 9, 2023, we announced that we amended and extended our ABL Facility pursuant to the Fourth ABL Amendment.

The Fourth ABL Amendment extends the maturity date of our ABL Facility to June 9, 2028.

The overall size of our ABL Facility was increased to $4.75 billion, which added $250 million of liquidity.

Additionally, the Fourth ABL Amendment enables us to increase our borrowing base by including assets of Ferrous Processing and Trading Company.

Following the transaction, we extended our debt maturity runway and have no debt maturities until 2026.

Our liquidity as of June 30, 2023 is the highest in our Company’s history.

STEELMAKING RESULTS

The following is a summary of our Steelmaking segment operating results for the three months ended March 31, 2023 and 2022 (dollars in millions, except for average selling price and shipments in thousands of net tons):

The following is a summary of our Steelmaking segment operating results for the three and six months ended June 30, 2023 and 2022 (dollars in millions, except for average selling price and shipments in thousands of net tons):

Total Revenue Gross Margin Adjusted EBITDA Steel Shipments (nt)

2023 2022 2023 2022 2023 2022 2023 2022

Q2 2023 Q2 2022 YTD 2023 YTD 2022 Q2 2023 Q2 2022 YTD 2023 YTD 2022 Q2 2023 Q2 2022 YTD 2023 YTD 2022 Q2 2023 Q2 2022 YTD 2023 YTD 2022

STEEL PRODUCT REVENUE:

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$ 5,274 $ 5,414 $ 9,883 $ 10,673 11% 16% 7% 18% 13% 18% 9% 21% $1,255 $1,487 $1,193 $1,466

The following tables represent our steel shipments by product and total sales by market:

Three Months Ended March 31,

2023 2022 Variance

(In thousands of net tons) Volume % Volume % Volume %

The following tables represent our steel shipments by product and total revenues by market:

Three Months Ended

June 30, Six Months Ended

(In thousands of net tons) 2023 2022 % Change 2023 2022 % Change

Steel shipments by product:

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Total steel shipments by product 4,202 3,641 15 % 8,287 7,278 14 %

Three Months Ended March 31,

2023 2022 Variance

(In millions) Revenue % Revenue % Revenue %

Three Months Ended

June 30, Six Months Ended

(In millions) 2023 2022 % Change 2023 2022 % Change

Steelmaking revenues by market:

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Total Steelmaking revenues by market $ 5,808 $ 6,176 (6) % $ 10,934 $ 11,970 (9) %

Revenues decreased by 12% during the three months ended March 31, 2023, as compared to the prior-year period, primarily due to:

• A decrease of $816 million, or 24%, in revenues from the infrastructure and manufacturing and distributors and converters markets, predominantly due to the average HRC price declining $340 per net ton, or 28%, which was partially offset by increased hot-rolled steel shipments.

• These decreases were partially offset by an increase in the direct automotive market of $263 million, or 16%, predominantly due to increases in selling prices as a result of favorable renewals of annual fixed price contracts.

Gross margin decreased by $1,128 million, or 92%, during the three months ended March 31, 2023, as compared to the prior-year period, primarily due to:

• A decrease in selling prices (approximately $1.2 billion impact) predominantly due to lower spot prices.

Revenues decreased by 6% during the three months ended June 30, 2023, as compared to the prior-year period, primarily due to:

• A decrease of $399 million, or 22%, in revenues from the distributors and converters market, predominantly due to the average HRC price declining $245 per net ton, which was partially offset by increased hot-rolled steel shipments.

• A decrease of $281 million, or 26%, in revenues from the steel producers markets, predominantly due to the decrease in pricing indices for slabs and busheling scrap.

• These decreases were partially offset by an increase in the direct automotive market of $336 million, or 20%, primarily due to increases in selling prices as a result of favorable renewals of annual fixed-price contracts and an increase in shipments.

Revenues decreased by 9% during the six months ended June 30, 2023, as compared to the prior-year period, primarily due to:

• A decrease of $970 million, or 26%, in revenues from the distributors and converters market, predominantly due to the average HRC price declining $292 per net ton, which was partially offset by increased hot-rolled steel shipments.

• A decrease of $396 million, or 21%, in revenues from the steel producers markets, predominantly due to the decrease in pricing indices for slabs and busheling scrap.

• These decreases were partially offset by an increase in revenues from the direct automotive market of $599 million, or 18%, predominantly due to increases in selling prices as a result of favorable renewals of annual fixed-price contracts and an increase in shipments.

Gross margin decreased by $338 million, or 35%, during the three months ended June 30, 2023, as compared to the prior-year period, primarily due to:

• A decrease in selling prices (approximately $800 million impact) predominantly due to lower spot prices, which was partially offset by favorable renewals of annual fixed price contracts.

• This decrease was partially offset by an increase in sales volume (approximately $200 million impact);

• A decrease in costs of production (approximately $300 million) driven by lower raw materials and utilities costs, including natural gas, coal, coke, alloys and scrap, coupled with decreased maintenance costs.

Gross margin decreased by $1,466 million, or 67%, during the six months ended June 30, 2023, as compared to the prior-year period, primarily due to:

• A decrease in selling prices (approximately $2.0 billion impact) predominantly due to lower spot prices, which was partially offset by favorable renewals of annual fixed price contracts.

• This decrease was partially offset by an increase in sales volume (approximately $500 million impact).

ADJUSTED EBITDA

Adjusted EBITDA from our Steelmaking segment for the three months ended March 31, 2023, decreased by $1,184 million, as compared to the three months ended March 31, 2022, primarily due to the decreased gross margin from our operations.

Additionally, our Steelmaking Adjusted EBITDA included $119 million and $114 million of Selling, general and administrative expenses for the three months ended March 31, 2023 and 2022, respectively.

Adjusted EBITDA from our Steelmaking segment for the three months ended June 30, 2023, decreased by $344 million, as compared to the three months ended June 30, 2022, primarily due to the decreased gross margin from our operations.

Additionally, our Steelmaking Adjusted EBITDA included $141 million and $100 million of Selling, general and administrative expenses for the three months ended June 30, 2023 and 2022, respectively.

Adjusted EBITDA from our Steelmaking segment for the six months ended June 30, 2023, decreased by $1,528 million, as compared to the six months ended June 30, 2022, primarily due to the decreased gross margin from our operations.

Additionally, our Steelmaking Adjusted EBITDA included $260 million and $214 million of Selling, general and administrative expenses for the six months ended June 30, 2023 and 2022, respectively.

RESULTS OF OPERATIONS

REVENUES & GROSS MARGIN

During the three months ended March 31, 2023, our consolidated Revenues decreased by $660 million, compared to the prior-year period.

The decrease was primarily due to the decrease in the average steel product selling price of $318 per net ton, partially offset by the increase of 0.4 million net tons of steel shipments from our Steelmaking segment.

During the three months ended March 31, 2023, our consolidated gross margin decreased by $1,150 million, as compared to the prior-year period.

During the three and six months ended June 30, 2023, our consolidated Revenues decreased by $353 million and $1,013 million, respectively, compared to the prior-year periods.

The decrease for the three months ended June 30, 2023, was primarily due to the decrease in the average steel product selling price of $232 per net ton, partially offset by the increase of 0.6 million net tons of steel shipments from our Steelmaking segment.

The decrease for the six months ended June 30, 2023, was primarily due to the decrease in the average steel product selling price of $273 per net ton, partially offset by the increase of 1.0 million net tons of steel shipments from our Steelmaking segment.

During the three and six months ended June 30, 2023, our consolidated gross margin decreased by $337 million and $1,487 million, respectively, as compared to the prior-year periods.

See "— Steelmaking Results" above for further detail on our operating results.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

During the three and six months ended June 30, 2023, Selling, general and administrative expenses increased by $42 million and $47 million, respectively, as compared to the prior-year periods.

The increases were primarily related to higher employment-related costs and outside legal fees.

MISCELLANEOUS - NET

During the three months ended March 31, 2023, Miscellaneous – net decreased by $30 million, as compared to the prior-year period.

The decrease in miscellaneous expense was primarily related to an impairment expense in 2022, which was not repeated during 2023.

During the three and six months ended June 30, 2023, Miscellaneous – net decreased by $22 million and $52 million, respectively, as compared to the prior-year periods.

The decrease in miscellaneous expense for the three months ended June 30, 2023, was primarily related to the expense in 2022 related to our asset retirement obligation, which was caused by rising electricity costs associated with water management systems at our closed coal mines in Pennsylvania, which was not repeated during 2023.

The decrease in miscellaneous expense for the six months ended June 30, 2023 was also impacted by an impairment expense in 2022, which was not repeated during 2023.

Our effective tax rate is impacted by state income tax expense and permanent items, primarily depletion.

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The following represents a summary of our tax provision and corresponding effective rates:

Three Months Ended March 31,

Three Months Ended

June 30, Six Months Ended

(In millions) 2023 2022 2023 2022

Income tax benefit (expense) $ 13 $ (237)

Income tax expense $ (102) $ (157) $ (89) $ (394)

Effective tax rate 22 % 21 % 22 % 22 %

The change from income tax expense to income tax benefit for the three months ended March 31, 2023, as compared to the prior-year period, is directly related to the change in pre-tax income (loss).

Our 2023 estimated annual effective tax rate before discrete items at March 31, 2023 is 22%.

The decrease in income tax expense for the three and six months ended June 30, 2023, as compared to the prior-year periods, is directly related to the change in pre-tax income.

Our 2023 estimated annual effective tax rate before discrete items at June 30, 2023 is 22%.

This estimated annual effective tax rate exceeds the U.S.

statutory rate of 21%, as state income tax expense exceeds the percentage depletion in excess of cost depletion.

The 2022 estimated annual effective tax rate before discrete items at March 31, 2022 was 22%.

The 2022 estimated annual effective tax rate before discrete items at June 30, 2022 was 22%.

LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES

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The following table provides a summary of our cash flows:

Three Months Ended March 31,

Six Months Ended

(In millions) 2023 2022

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Free cash flow 1

$ (227) $ 297

1 See "— Non-GAAP Financial Measures" for a reconciliation of our free cash flows.

Given the recently improving market conditions at the end of the first quarter of 2023, we expect to have opportunities to reduce our debt and return capital to shareholders with our own free cash flow generation during the remainder of 2023.

As of March 31, 2023, we had principal long-term debt of $4,613 million with maturities starting in 2025.

As of March 31, 2023, there was $760 million remaining under the authorization of our share repurchase program.

On April 14, 2023, we issued $750 million aggregate principal amount of 6.750% 2030 Senior Notes in an offering exempt from the registration requirements of the Securities Act.

The proceeds from the 6.750% 2030 Senior Notes were used to repay a portion of the borrowings under our existing ABL facility.

The recent market environment has provided us opportunities to reduce our debt and return capital to shareholders with our free cash flow generation.

We also continue to look at the composition of our debt, as we are interested in both extending our average maturity length and increasing our ratio of unsecured debt to secured debt, which can be accomplished with cash provided by operating activities.

During the first six months of 2023, we took action in alignment with our capital allocation priorities, as follows:

• We issued $750 million aggregate principal amount of our 6.750% 2030 Senior Notes.

The net proceeds from the 6.750% 2030 Senior Notes issuance were used to repay a portion of the borrowings under our existing ABL Facility.

The transaction increased our financial flexibility and liquidity, extended our debt maturity profile, and was effectively leverage and interest expense neutral.

Following the transaction, we maintained in excess of $1 billion in pre-payable debt on our ABL Facility and another $1.5 billion in callable debt that we expect to continue to reduce with our free cash flow generation.

These actions give us additional financial flexibility and will better prepare us to navigate more easily through potentially volatile industry conditions in the future.

• We entered into the Fourth ABL Amendment, which, among other things, extended the maturity date of our ABL Facility to June 9, 2028 and increased the overall size of our ABL Facility to $4.75 billion, which added $250 million of liquidity.

• Additionally, we returned capital to shareholders through our share repurchase program, repurchasing 6.5 million common shares at a cost of $94 million in the aggregate.

These actions with respect to our debt give us additional financial flexibility and liquidity, along with extending our average maturity date, which will better prepare us to navigate more easily through potentially volatile industry conditions in the future.

Additionally, we expect to have opportunities to continue to reduce our debt and return capital to shareholders with our free cash flow generation during the remainder of 2023.

As of June 30, 2023, we maintained in excess of $800 million in pre-payable debt under our ABL Facility and another $1.5 billion in callable notes.

As of June 30, 2023, there was $666 million remaining under the authorization of our share repurchase program.

OPERATING ACTIVITIES

Three Months Ended March 31,

Six Months Ended

(In millions) 2023 2022 Variance

Net income (loss) $ (42) $ 814 $ (856)

Non-cash adjustments to net income (loss) 237 399 (162)

Net income $ 314 $ 1,415 $ (1,101)

Non-cash adjustments to net income 500 812 (312)

Working capital:

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Total working capital 34 (829) 863

Net cash provided (used) by operating activities $ (39) $ 533 $ (572)

Net cash provided by operating activities $ 848 $ 1,398 $ (550)

The variance was driven by:

• A $1,018 million decrease in net income (loss) after adjustments for non-cash items primarily due to lower gross margins from lower steel sales prices.

• A $1,413 million decrease in net income after adjustments for non-cash items primarily due to lower gross margins from lower steel sales prices.

See "— Steelmaking Results" above for further detail on our operating results.

• A $863 million decrease in cash used for working capital.

This was primarily due to a decrease in inventories, as a result of higher sales volumes and lower costs during the three months ended March 31, 2023, as compared to the prior-year period, where we had an increase in inventory costs due to increased raw material and production costs.

During the three months ended March 31, 2023, we also experienced lower increases in accounts receivable due to lower pricing, as compared to the prior-year period.

This was primarily due to a decrease in inventories, as a result of higher sales volumes and lower production costs during the six months ended June 30, 2023, as compared to the prior-year period.

Additionally, working capital was impacted by a decrease in repair and maintenance costs during the six months ended June 30, 2023.

INVESTING ACTIVITIES

Three Months Ended March 31,

Six Months Ended

(In millions) 2023 2022 Variance

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We anticipate total cash used for capital expenditures during the next 12 months to be between $675 and $725 million, which primarily consists of sustaining capital spend.

With our facilities and equipment in the best shape since our 2020 transformational acquisitions, we do not expect any major investments until at least 2025.

With our facilities and equipment in the best shape since the acquisition of our steelmaking assets, we do not expect any major investments until at least 2026.

FINANCING ACTIVITIES

Three Months Ended March 31,

Six Months Ended

(In millions) 2023 2022 Variance

Repayments of debt $ — $ (360) $ 360

Borrowings under credit facilities, net 307 106 201

Proceeds (repayments) of debt $ 750 $ (1,319) $ 2,069

Net borrowings (repayments) under credit facilities (1,031) 636 (1,667)

Repurchase of common shares (94) (176) 82

Other (155) (73) (82)

Net cash provided (used) by financing activities $ 257 $ (311) $ 568

Net cash used by financing activities $ (530) $ (932) $ 402

The variance was driven by:

• A $561 million decrease in cash used resulting from higher net repayments of debt during the three months ended March 31, 2022, along with increased borrowings on our ABL Facility during the three months ended March 31, 2023, as compared to the prior-year period.

• A $402 million decrease in cash used during the six months ended June 30, 2023, resulting from lower net repayments of debt, partially offset by increased repayments on our ABL Facility, as compared to the prior-year period.

LIQUIDITY AND CAPITAL RESOURCES

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We generally maintain minimal cash balances and utilize our access to our ABL Facility to cover fluctuations in our cash requirements.

Cash and cash equivalents, which totaled $59 million as of March 31, 2023, include cash on hand and on deposit.

The combination of cash and availability under our ABL Facility gives us $2.2 billion in liquidity as of March 31, 2023.

Subsequent to the three months ended March 31, 2023, we issued $750 million in aggregate principal amount of 6.750% 2030 Senior Notes.

Cash and cash equivalents, which totaled $34 million as of June 30, 2023, include cash on hand and on deposit.

The combination of cash and availability under our ABL Facility gives us $3.83 billion in liquidity as of June 30, 2023.

During the second quarter of 2023, we issued $750 million in aggregate principal amount of our 6.750% 2030 Senior Notes.

We used the net proceeds from the offering to repay a portion of the borrowings under our ABL Facility, increasing our liquidity.

Additionally, we entered into the Fourth ABL Amendment to our ABL Facility, increasing our liquidity by $250 million.

We believe our liquidity and access to capital markets will be adequate to fund our cash requirements for the next 12 months and for the foreseeable future.

Our ABL Facility, which matures in March 2025, has a maximum borrowing base of $4.5 billion, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.

Our ABL Facility, which now matures in June 2028, has a maximum borrowing base of $4.75 billion, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.

Our ABL Facility includes a $555 million sublimit for the issuance of letters of credit and a $200 million sublimit for swingline loans.

As of March 31, 2023, outstanding letters of credit totaled $147 million, which reduced availability.

We issue standby letters of credit with certain financial institutions in order to support business obligations, including, but not limited to, workers' compensation, employee severance, insurance, operating agreements and environmental obligations.

As of June 30, 2023, outstanding letters of credit totaled $117 million, which reduced availability.

We issue standby letters of credit with certain financial institutions in order to support business obligations, including, but not limited to, workers' compensation, operating agreements, employee severance, environmental obligations and insurance.

Our ABL Facility agreement contains various financial and other covenants.

As of March 31, 2023, we were in compliance with all of our ABL Facility covenants.

We have the capability to issue additional unsecured notes and, subject to the limitations set forth in our existing senior notes indentures and ABL Facility, additional secured debt, if we elect to access the debt capital markets.

As of June 30, 2023, we were in compliance with all of our ABL Facility covenants.

We have the capability to issue additional unsecured notes and, subject to the limitations set forth in our existing senior notes indentures and ABL Facility, additional secured notes, if we elect to access the debt capital markets.

However, our ability to issue additional notes could be limited by market conditions.

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In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.

The following table provides a reconciliation of our Net income (loss) to Adjusted EBITDA:

Three Months Ended March 31,

The following table provides a reconciliation of our Net income to Adjusted EBITDA:

Three Months Ended

June 30, Six Months Ended

(In millions) 2023 2022 2023 2022

Net income (loss) $ (42) $ 814

Net income $ 356 $ 601 $ 314 $ 1,415

Interest expense, net (79) (64) (156) (141)

Income tax benefit (expense) 13 (237)

Income tax expense (102) (157) (89) (394)

Depreciation, depletion and amortization (247) (250) (489) (551)

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EBITDA of noncontrolling interests 1

$ 17 $ 13 $ 40 $ 35

Loss on extinguishment of debt — (66) — (80)

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The following table provides a summary of our Adjusted EBITDA by segment:

Three Months Ended March 31,

Three Months Ended

June 30, Six Months Ended

(In millions) 2023 2022 2023 2022

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The following table provides a reconciliation of our operating cash flows to free cash flows:

Three Months Ended March 31,

Six Months Ended

(In millions) 2023 2022

Net cash provided (used) by operating activities $ (39) $ 533

Net cash provided by operating activities $ 848 $ 1,398

Purchase of property, plant and equipment (319) (468)

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INFORMATION ABOUT OUR GUARANTORS AND THE ISSUER OF OUR GUARANTEED SECURITIES

The accompanying summarized financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” and Rule 13-01 "Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralized a Registrant's Securities." Certain of our subsidiaries (the "Guarantor subsidiaries") as of March 31, 2023 have fully and unconditionally, and jointly and severally, guaranteed the obligations under (a) the 5.875% 2027 Senior Notes, the 7.000% 2027 Senior Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes issued by Cleveland-Cliffs Inc.

The accompanying summarized financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” and Rule 13-01 "Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralized a Registrant's Securities." Certain of our subsidiaries (the "Guarantor subsidiaries") as of June 30, 2023 have fully and unconditionally, and jointly and severally, guaranteed the obligations under (a) the 5.875% 2027 Senior Notes, the 7.000% 2027 Senior Notes, the 4.625% 2029 Senior Notes, the 6.750% 2030 Senior Notes, and the 4.875% 2031 Senior Notes issued by Cleveland-Cliffs Inc.

on a senior unsecured basis and (b) the 6.750% 2026 Senior Secured Notes issued by Cleveland-Cliffs Inc.

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Each Guarantor subsidiary is consolidated by Cleveland-Cliffs Inc.

as of March 31, 2023.

Refer to Exhibit 22 , incorporated herein by reference, for the detailed list of entities included within the obligated group as of March 31, 2023.

As of March 31, 2023, the guarantee of a Guarantor subsidiary with respect to Cliffs' 6.750% 2026 Senior Secured Notes, the 5.875% 2027 Senior Notes, the 7.000% 2027 Senior Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the related indentures (the “Indentures”) will be automatically and unconditionally released and discharged, upon the occurrence of any of the following, along with the delivery to the trustee of an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable Indenture relating to the release and discharge of such Guarantor subsidiary’s guarantee have been complied with:

as of June 30, 2023.

Refer to Exhibit 22 , incorporated herein by reference, for the detailed list of entities included within the obligated group as of June 30, 2023.

As of June 30, 2023, the guarantee of a Guarantor subsidiary with respect to Cliffs' 6.750% 2026 Senior Secured Notes, the 5.875% 2027 Senior Notes, the 7.000% 2027 Senior Notes, the 4.625% 2029 Senior Notes, the 6.750% 2030 Senior Notes and the 4.875% 2031 Senior Notes will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the related indentures (the “Indentures”) will be automatically and unconditionally released and discharged, upon the occurrence of any of the following, along with the delivery to the trustee of an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable Indenture relating to the release and discharge of such Guarantor subsidiary’s guarantee have been complied with:

(a) any sale, exchange, transfer or disposition of such Guarantor subsidiary (by merger, consolidation, or the sale of) or the capital stock of such Guarantor subsidiary after which the applicable Guarantor subsidiary is no longer a subsidiary of the Company or the sale of all or substantially all of such Guarantor subsidiary’s assets (other than by lease), whether or not such Guarantor subsidiary is the surviving entity in such transaction, to a person which is not the Company or a subsidiary of the Company;

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The accompanying summarized combined financial information does not reflect investments of the obligated group in non-Guarantor subsidiaries.

The financial information of the obligated group is presented on a combined basis;

The financial information of the obligated group is presented on a combined

intercompany balances and transactions within the obligated group have been eliminated.

The obligated group's amounts

due from, amounts due to, and transactions with, non-Guarantor subsidiaries and related parties have been presented in separate line items.

The obligated group's amounts due from, amounts due to, and transactions with, non-Guarantor subsidiaries and related parties have been presented in separate line items.

SUMMARIZED COMBINED FINANCIAL INFORMATION OF THE ISSUER AND GUARANTOR SUBSIDIARIES:

The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Financial Position of the obligated group:

(In millions) March 31, 2023 December 31, 2022

(In millions) June 30, 2023 December 31, 2022

Current assets $ 7,568 $ 7,063

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The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group:

Three Months Ended

(In millions) March 31, 2023

Six Months Ended

(In millions) June 30, 2023

Revenues $ 10,462

Cost of goods sold (9,792)

Loss from continuing operations (73)

Net loss (73)

Net loss attributable to Cliffs shareholders (73)

Income from continuing operations 254

Net income 255

Net income attributable to Cliffs shareholders 255

The obligated group had the following balances with non-Guarantor subsidiaries and other related parties:

(In millions) March 31, 2023 December 31, 2022

(In millions) June 30, 2023 December 31, 2022

Balances with non-Guarantor subsidiaries:

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Accounts payable (12) (13)

Additionally, for the three months ended March 31, 2023, the obligated group had Revenues of $32 million and Cost of goods sold of $24 million, in each case, with other related parties.

Additionally, for the six months ended June 30, 2023, the obligated group had Revenues of $71 million and Cost of goods sold of $52 million, in each case, with other related parties.

We are subject to a variety of risks, including those caused by changes in commodity prices and interest rates.

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If we are unable to align fixed and variable components between customer contracts and supplier purchase agreements, we use cash-settled commodity price swaps to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements.

Additionally, we routinely use these derivative instruments to hedge a portion of our natural gas, electricity, tin and zinc requirements.

Additionally, we routinely evaluate the use of these derivative instruments to hedge a portion of our natural gas, electricity, tin and zinc requirements.

Our hedging strategy is designed to protect us from excessive pricing volatility.

However, since we do not typically hedge 100% of our exposure, abnormal price increases in any of these commodity markets might still negatively affect operating costs.

The following table summarizes the negative effect of a hypothetical change in the fair value of our derivative instruments outstanding as of March 31, 2023, due to a 10% and 25% change in the market price of each of the indicated commodities:

The following table summarizes the negative effect of a hypothetical change in the fair value of our derivative instruments outstanding as of June 30, 2023, due to a 10% and 25% change in the market price of each of the indicated commodities:

Commodity Derivative (In millions) 10% Change 25% Change

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Changes in these assumptions could materially affect the determination of fair value for each reporting unit.

Our Tooling and Stamping reporting unit fair value was not substantially in excess of its carrying values as of March 31, 2023.

Our Tooling and Stamping reporting unit fair value was not substantially in excess of its carrying values as of June 30, 2023.

A slower than anticipated resolution of the supply chain issues related to the global semiconductor shortages that have hampered the automotive industry, higher than expected capital requirements, and/or an increase in the discount rate could result in future impairment indicators.

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We estimate fair value using a market approach, an income approach or a cost approach.

For the three months ended March 31, 2023, we concluded that there were no additional triggering events resulting in the need for an impairment assessment.

For the six months ended June 30, 2023, we concluded that there were no additional triggering events resulting in the need for an impairment assessment.

INTEREST RATE RISK

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Interest payable under our ABL Facility is at a variable rate based upon the applicable base rate plus the applicable base rate margin depending on the excess availability.

As of March 31, 2023, we had $2,171 million outstanding under our ABL Facility.

As of June 30, 2023, we had $833 million outstanding under our ABL Facility.

An increase in prevailing interest rates would increase interest expense and interest paid for any outstanding borrowings under our ABL Facility.

For example, a 100 basis point change to interest rates under our ABL Facility at the March 31, 2023 borrowing level would result in a change of $22 million to interest expense on an annual basis.

For example, a 100 basis point change to interest rates under our ABL Facility at the June 30, 2023 borrowing level would result in a change of $8 million to interest expense on an annual basis.

SUPPLY CONCENTRATION RISKS

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• uncertainties associated with the highly competitive and cyclical steel industry and our reliance on the demand for steel from the automotive industry, which has been experiencing supply chain disruptions, such as the semiconductor shortage, and higher consumer interest rates, which could result in lower steel volumes being demanded;

• potential weaknesses and uncertainties in global economic conditions, excess global steelmaking capacity, oversupply of iron ore, prevalence of steel imports and reduced market demand, including as a result of inflationary pressures, the COVID-19 pandemic, conflicts or otherwise;

• severe financial hardship, bankruptcy, temporary or permanent shutdowns or operational challenges of one or more of our major customers, including customers in the automotive market, key suppliers or contractors, which, among other adverse effects, could disrupt our operations or lead to reduced demand for our products, increased difficulty collecting receivables, and customers and/or suppliers asserting force majeure or other reasons for not performing their contractual obligations to us;

• disruptions to our operations relating to an infectious disease outbreak or the COVID-19 pandemic, including workforce challenges and the risk that novel variants will prove resistant to existing vaccines or that new or continuing pandemic lockdowns in China will impact our ability to source certain critical supplies in a timely and predictable manner;

• disruptions to our operations relating to an infectious disease outbreak, including workforce challenges and the risk that novel variants will prove resistant to existing vaccines or that new or continuing pandemic lockdowns in China will impact our ability to source certain critical supplies in a timely and predictable manner;

• risks related to U.S.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis