Cleveland-Cliffs (CLF 1.35%), formerly known as Cliffs Natural Resources and one of the largest steelmakers in the United States, dramatically underperformed its peers in the third quarter. To be fair, all of the steel mills faced tough operating conditions, but Cleveland-Cliffs' year-over-year earnings decline was a painful 90% or so.

Management is confident that the fourth quarter will be better. Here's what you need to know.

Some one-time events

Steelmaker Cleveland-Cliffs reported sales of $5.7 billion in the third quarter, down from $6 billion a year ago. But earnings per share came in at $0.29, way off from the $2.33 it earned in the same quarter of 2021. A number of industrywide factors influenced the weak showing, including falling demand, rising costs (notably for energy), and attenuating steel prices.

A person looking at a computer screen with an expression of unpleasant surprise.

Image source: Getty Images.

However, a number of company-specific events also affected the steelmaker's results. For example, Cleveland-Cliffs experienced elevated repair and maintenance expenses in the quarter, which both increased overall costs and impacted production. The company also worked through higher-cost inventory produced in prior periods, further increasing expenses in the quarter. Cost of goods sold, a key income statement item, rose 26% year over year. That helped to push gross margin down by a massive 81% even though revenue only dropped about 6%.

A stronger end to the year

Management said it believes the fourth quarter will be much better. For starters, the company's maintenance and repair efforts are largely finished. This means it can run its mills at higher levels, which will help to reduce costs because steel mills are more efficient when they operate at higher capacities. More directly, the extra costs associated with the maintenance and repair are in the rearview mirror.

Then there's the higher-cost inventory that the company worked through in the third quarter, which means that Cleveland-Cliffs hopes to be selling lower-cost inventory as the year comes to a close, another benefit on the expense side of the equation.

In addition, CEO Lourenco Goncalves highlighted the auto sector in the third quarter, explaining that "Shipments to our automotive clients significantly improved in Q3, achieving a level among the highest in six quarters." That's significant for two reasons. First, the strength in this business offset weakness elsewhere. Second, that trend is projected to continue into the fourth quarter, aided by "successful" contract renewals.

To be fair, Cleveland-Cliffs is facing a slowdown in the steel sector, just like all of its peers. So investors shouldn't expect the company's results to suddenly jump to record highs. However, it's also likely that the third quarter isn't really indicative of the company's true earnings potential.

One more positive

So the third quarter was really something of a one-off into which investors shouldn't read too deeply. But it wasn't all bad news, as the auto business shows.

And there was one more positive, with Cleveland-Cliffs' newly ratified labor agreements with the United Steelworkers union allowing it to reduce pension liabilities by $1.8 billion, or roughly 63%. That drop in long-term liabilities put the company on a much stronger financial footing and was a key focal point following the acquisition of assets from ArcelorMittal in 2020.

All in all, the quarter wasn't nearly as bad as the earnings decline suggests.